-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FIvZ5F0SsLSUzIH1m8zEw0ibBDKkfcnGchCJLZIabmBJXBtNoiPrjL47NYzCWiar ZW8idPpEh6Gj6oGuIAE8tA== 0000950149-01-000421.txt : 20010410 0000950149-01-000421.hdr.sgml : 20010410 ACCESSION NUMBER: 0000950149-01-000421 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010405 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRITICAL PATH INC CENTRAL INDEX KEY: 0001060801 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 911788300 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25331 FILM NUMBER: 1595728 BUSINESS ADDRESS: STREET 1: 320 FIRST STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4158088800 MAIL ADDRESS: STREET 1: 320 FIRST STREET CITY: SAN FRNACISCO STATE: CA ZIP: 94105 10-K 1 f70514e10-k.txt FORM 10-K DATED DECEMBER 31, 2000 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER: 000-25331 ------------------------ CRITICAL PATH, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 911788300 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 532 FOLSOM STREET, 94105 SAN FRANCISCO, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 808-8800 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK (TITLE OF CLASS) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $153,619,078 as of March 15, 2001, based on the closing price of the Common Stock as reported on The Nasdaq Stock Market for that date. There were 74,294,434 shares of the Registrant's Common Stock issued and outstanding on March 15, 2001. DOCUMENTS INCORPORATED BY REFERENCE Certain sections of Critical Path, Inc.'s definitive Proxy Statement for the 2001 Annual Meeting of Shareholders anticipated to be held on June 6, 2001, are incorporated by reference in Part III of this Form 10-K to the extent stated herein. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 CRITICAL PATH, INC. INDEX
PAGE ---- PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 16 Item 3. Legal....................................................... 16 Item 4. Submission of Notes to a Vote of Security Holders........... 17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 18 Item 6 Selected Financial Data..................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 21 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 39 Item 8. Financial Statements and Supplemental Data.................. 39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 42 PART III Item 10. Directors and Executive Officers of the Registrant.......... 42 Item 11. Executive Compensation...................................... 44 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 44 Item 13. Certain Relationships and Related Party Transactions........ 44 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 45
2 3 PART I ITEM 1. BUSINESS This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements that are based on current expectation, estimates and projections about our industry, management's beliefs, and certain assumptions made by management. The words "anticipate," "expect," "intend," "plan," "believe," "seek" and "estimate" and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and actual actions or results may differ materially. These statements are subject to certain risks, uncertainties and assumptions that are difficult to predict, including those discussed below in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Additional Factors That May Affect Future Operating Results" and noted in the documents incorporated herein by reference. We undertake no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise, unless required by law. Readers should, however, carefully review the risk factors included in other reports or documents filed by us from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q. This Annual Report on Form 10-K includes trademarks and registered trademarks of Critical Path. Products or service names of other companies mentioned in this Annual Report on Form 10-K may be trademarks or registered trademarks of their respective owners. COMPANY OVERVIEW Critical Path is a leading global provider of Internet messaging infrastructure products and services for corporate enterprises and service providers around the world. Our Internet messaging infrastructure, which includes messaging, directory and security products and services, allows our customers to benefit from the rapidly increasing number of messaging applications that are driving the complexity and scale of messaging. Our integrated portfolio of messaging services enables our customers to provide messaging solutions to their customers and employees via desktop, wireline or wireless medium. As messaging becomes increasingly directory-centric, Critical Path's mission-critical directory products provide unified identity and security management across our customers' new and existing messaging and eBusiness initiatives. We believe our Internet messaging infrastructure products and services position us to serve our customers with highly scalable, mission critical messaging, directory and security. Our Internet messaging infrastructure integrates a rich selection of messaging products and services, including email messaging, wireless messaging and secure file delivery services, calendaring, and directory and meta-directory components providing a framework for unified user profile management and secure access control. We offer our messaging solutions through both outsourced services, where we host the software on our servers, and insourced server software packages, where the customer licenses software to run on its own servers. In addition, a customer may choose to midsource, a combination of outsourced and insourced solutions. We believe our combination of outsourcing, midsourcing and insourcing options provides our customers with continuity of relationship and technology across a variety of offerings and user populations. We provide products and services, both on a licensed and hosted basis, to customers located around the world. We have offices, operations and customers in North America, Europe, Latin America and Asia. Examples of customers across our major target markets include: CORPORATE ENTERPRISES: AFLAC, Bechtel, BNP Paribas SA, Bristol-Myers Squibb, Circuit City, EDS, Federal Express, PricewaterhouseCoopers, Promus Hotel Corporation, and Texas Instruments. WIRELESS AND TELECOMMUNICATIONS PROVIDERS: Aether Systems, British Telecom, Comverse Technology, Corio, Debitel, France Telecom, Global Crossings, i3 Mobile, Liberty Surf, Logica, MCI WorldCom, Motient, OmniSky, Omnitel, SK Telecom, Tiscali, and Verizon. 3 4 INTERNET-CENTRIC COMPANIES: Amazon.com, eBay, E*TRADE, ICQ, Intuit, Netian, Network Solutions (VeriSign), Yahoo!, and ZipNet. POSTAL AUTHORITIES: AnPost, Deutsche Post, Dutch Post, Finland Post, La Poste, Posta Hungary, PosteCom Italia, Royal Mail ViaCode, and Swedish Post. We have a number of distribution channel relationships with companies, including British Telecom, Bull and MCI WorldCom. Our directory services are leveraged through partnerships with the leading Internet security and access management vendors including Entrust and Verisign. In June 2000, we formed a joint venture, Critical Path Pacific, with Mitsui, NTT Communications, and NEC to serve the Japanese and other Asian markets. As a result of our global focus, more than 38% of our revenue in 2000 came from outside the United States. We believe email is pervasive as a communications tool and is shifting from being simply an application to a delivery platform, or infrastructure, for mission-critical messaging and transactions. As message volumes, complexity and security requirements of transactions increase, and as mobile users demand access and seamless identity management across laptops, cell phones, hand held devices and pagers, corporations struggle to keep pace with the rapid rate of change with a scarcity of skilled technology resources. Service providers also serve increasingly mobile customers and seek to grow their business models beyond basic connectivity and email with value-added services and commerce opportunities. Anticipating these trends, we have expanded our range of products and services and the delivery options we offer domestic and international customers. Our Internet messaging infrastructure delivers carrier-class standards-based messaging with rich extensions for wireless device support, collaborative applications and secure delivery. Additionally, through the acquisitions of ISOCOR and PeerLogic, we built and solidified our position as a leading directory services provider, able to help our customers unify identity management and security access across multiple platforms, devices, and enterprises. Carrier-class reliability, scalability and security are fundamental as global organizations move an increasing percentage of business communications and transactions to the standards-based Internet. Our messaging infrastructure is designed to support the scalability and performance demands of hundreds of millions of mailboxes, transactions and users with the "uptime" and reliability metrics required for mission-critical eBusiness. We currently are servicing widespread, global organizations with the most demanding messaging needs. Many companies attempting to manage expanding and increasingly sophisticated messaging systems lack the resources and expertise to cost-effectively implement, maintain, scale, enhance and service the hardware and software components of their messaging infrastructure. Our flexible deployment or "allsourcing" strategy provides flexibility and value to our customers by giving them the option of using our hosted services, licensing our software to run on their own hardware, or selecting a combination of both. Our product and service solutions enable customers to improve messaging performance, ensure security and reliability in their messaging, reduce the cost of providing messaging services and focus on other aspects of their businesses. As the Internet continues to grow and profoundly change the way people conduct business and communicate, we believe we are positioned to participate in and benefit from the rapidly evolving communications and messaging environment. We believe our category leadership, mega-scale technology, proven customer benefits, flexible deployment, strategic partnerships and strong customer relationships provide us with our competitive edge. We were incorporated as a California corporation in 1997. Our principal executive offices are located at 532 Folsom Street, San Francisco, California 94105. Our telephone number is (415) 808-8800 and our web site is located at www.cp.net. RECENT DEVELOPMENTS Restatement and Revision of Unaudited Financial Results and Litigation. On February 2, 2001, we issued a press release announcing that we believed that our previously announced unaudited financial results for the fourth quarter of 2000 may have been materially misstated, the Board of Directors had formed a 4 5 special committee to conduct an investigation into the matter, and our president and vice president of worldwide sales had been placed on administrative leave related to the matter. On February 15, 2001, we announced that, based on the preliminary results of the investigation being conducted, we would revise our previously announced unaudited financial results for the fourth quarter of 2000 and were reviewing certain specific transactions that were reported as revenue during the third quarter of 2000. During February and March 2001, the investigation by the special committee of the Board of Directors was completed, we completed our internal review, and our auditors completed the annual audit. Beginning on February 2, 2001, a number of securities class action complaints were filed against us, certain of our current and former officers and directors, and our independent accountants, in the United States District Court for the Northern District of California. Additionally, beginning on February 5, 2001, we were named as a nominal defendant in a number of derivative actions, purportedly brought on our behalf, filed in the Superior Court of the State of California. In February 2001, the Securities and Exchange Commission issued a formal order of investigation of our company and certain unidentified individuals associated with us with respect to non-specified accounting matters, financial reports, other public disclosures and trading activity in our securities. While we do not know the current status of the investigation or any possible actions that may be taken against us as a result, any SEC action against us could harm our business. Shareholder Rights Plan. In March 2001, the Board of Directors adopted a Shareholder Rights Plan. Under this plan, certain Rights will be distributed as a dividend at the rate of one Right for each share of Critical Path common stock held by shareholders of record as of the close of business on May 15, 2001. The Rights Plan is designed to prevent an acquirer from gaining control of Critical Path without offering a fair and adequate price and terms to all of our shareholders. The Rights Plan is intended to increase our ability to negotiate with potential acquiring companies to maximize shareholder value and is not intended to interfere with takeover offers or other strategic alternatives that our Board of Directors believes are in the best interests of our shareholders. The Rights Plan was not adopted in response to any attempt to acquire the Company. CP Italia. In March 2001, we purchased the outstanding 27.13% minority interest in CP Italia for approximately $4.2 million and CP Italia became a wholly owned subsidiary of Critical Path. At December 31, 2000, we owned a 72.87% interest in CP Italia. Management Changes. In February 2001, we announced a series of changes in Critical Path management. David Hayden, our Chairman and a founder, was appointed Executive Chairman of the Board of Directors and was asked to take a greater role in the day-to-day operations of the company. A search for a new Chief Executive Officer currently is ongoing, following the resignation of Doug Hickey. Diana Whitehead, formerly our Vice President of Engineering and Operations, was promoted to President, following David Thatcher's resignation from Critical Path. Additionally, Mari Tangredi, formerly our Vice President of Corporate Development, was named Executive Vice President of Business Development, Sales and Professional Services following William Rinehart's resignation from Critical Path. Amended Articles of Incorporation. In January 2001, we amended our Articles of Incorporation to increase our authorized shares of common stock from 150 million to 500 million shares. This increase had been previously approved by our shareholders at the Annual Meeting of Shareholders held on June 13, 2000. THE CRITICAL PATH SOLUTION We deliver Internet messaging infrastructure products and services to corporate enterprises, wireless and telecommunications providers, Internet-centric companies and postal authorities. Our technology gives our customers the ability to better utilize their physical, human and information assets, by providing feature-rich email, messaging, directory and security solutions to their customers, partners and employees. 5 6 Our products and services are designed to provide a superior return on our customers' technology budgets through the following key benefits: Flexibility and Depth of Offerings. Our customers benefit from Critical Path's depth of expertise in many areas of Internet messaging infrastructure, including messaging, directory and security services. Critical Path delivers access to an entire suite of solutions, leveraged across an integrated platform. Our customers can deploy Critical Path's products and services regardless of whether they choose to outsource their messaging needs to us or license our software to manage their messaging needs internally or a combination of both. Broad, Standards-based Infrastructure. Our messaging infrastructure supports industry standards at the messaging, directory and security services levels. This standards-based approach allows our customers ease of integration as they deploy Critical Path's solutions around their existing environments, as well as the ability to augment and change their use of our solutions with future developments in their wireless strategies, all within one centrally managed and administered infrastructure. Anytime, Anywhere Accessibility. Critical Path's services are designed to allow administrators and end users to access their email system at any time anywhere and provide end users with the means to send and receive messages to and from cellular phones, personal digital assistants, pagers and other wireless devices. Critical Path's services are compatible with leading desktop software, and we have developed a web-based email interface that is compatible with leading web browsers. Carrier-Class Scalability, Reliability and Security. As messaging evolves from email as an application to messaging infrastructure that supports multi-faceted communications and business transactions, we have designed our hosted and licensed systems for high levels of scalability, reliability and security. Critical Path has designed its hosted architecture to support its service over hundreds of millions of mailboxes across millions of domains. Our hardware and software infrastructure consists of multiple servers running software in a manner that balances the use of the servers and eliminates single points of failure by not dedicating any server or hardware or network component to a specific domain or mailbox. This infrastructure allows multiple domain hosting while reducing the amount of required equipment and capacity. The scalability of our directory and meta-directory capabilities enables us to provide identity management and access security to many of the world's largest corporations for intranet and extranet user populations, and many of the world's largest service providers, including postal authorities servicing entire countries of users. Our high performance standards-based directory is used to house digital certificates in some of the world's largest public key infrastructure installations where sub-second response times across thousands of simultaneous queries are demanded. Our design methodology reduces the number of computer instructions required to perform common operations, which in turn reduces the risk that messages will be lost or will not be duplicated in the event of external system breakdowns such as loss of power or hardware failures. This promotes high reliability of the electronic information exchange. In addition, we have network and data center surveillance 24 hours a day, seven days a week to identify and curtail potential service issues or security breaches. Critical Path currently maintains six data centers in the United States, two data centers in Europe and one in Asia. Lower Total Cost of Ownership. Customers can reduce the total cost of ownership of their messaging infrastructures through the ability of our products and services to interoperate with changing standards and scale with our customers regardless of how they plan to deploy our product and service solutions. By using our hosted and outsourced solutions, our customers can avoid the need to lease, buy or continually upgrade existing hardware and software, or recruit and retain systems engineers and administrative personnel for their messaging services. Our service is designed to reduce customers' administrative burden by eliminating the cycle of purchasing, installing, testing, debugging and deploying messaging systems. Allsourcing. We provide customers with great flexibility to solve their messaging, directory and security infrastructure challenges through our "allsourcing" strategy, allowing customers access to 6 7 outsource, midsource or insource solutions. Our outsourced messaging solutions eliminate the need for customers and partners to maintain a core competency in advanced messaging. Midsourcing and insourcing allow our customers to choose among the best of Critical Path's offerings, while taking advantage of their own internal capabilities where appropriate, to maximize their technology budgets. Branding and Customer Control. Critical Path's messaging service solution enables our customers to maintain brand control by allowing graphical user interfaces to be branded uniquely for each customer. Critical Path's fully customized web-based "brandable" email product interface enables our customers to present their messaging solutions in their own brand image. PRODUCTS AND SERVICES Messaging Solutions. Critical Path offers a wide range of email, wireless and secure delivery messaging solutions for corporate enterprises and service providers. Our primary messaging products and services are described below: - InScribe(TM) Email Messaging is an outsourced messaging service for corporate enterprises and service providers. Customers can easily layer other value added services around messaging, including security related add-ons, such as spam-blocking, anti-virus and secure-socket-layer or SSL, and collaborative applications such as calendaring and scheduling. Critical Path's all-inclusive service model pricing includes all enhancements, upgrades and new standard features. Pricing for email and other hosted messaging services generally is based on a per mailbox, per month charge that varies depending on functionality and volume. - InScribe(TM) Messaging Server, or IMS, provides robust message management, administrative control and support for the secure message transfer and access standards as an insourced product for corporate enterprises and service providers. The architecture is optimized for corporate enterprises and service provider environments and delivers superior cost performance at scale as well as easy deployment for faster time to market. The IMS management center provides the high level of service necessary for implementing mission-critical messaging systems. The management center performs remote management of components over TCP/IP, allowing the administrator to manage multiple sites centrally, including remote configuration, routing configuration, fault notification, performance monitoring, system management and message tracking. - InScribe(TM) Secure File Services enables large and/or sensitive documents as well as Internet transactions, to be transported in a secure, trackable and guaranteed manner using open Internet protocols rather than via closed value-added networks. Critical Path supports a broad range of secure delivery environments. - InOne(TM) Groupware Messaging is a bundled service offering that delivers a groupware integration of email messaging, address book and calendaring, which is accessible from web browsers, email clients and wireless devices. - InSchedule(TM) Calendaring is designed for corporate enterprises and service providers and supports both personal calendaring, group scheduling and public events and programs. InSchedule Calendaring creates a single source of program and event information for more-informed planning and streamlined coordination. - InVoke(TM) Wireless. Cellular network operators, network service providers and corporations are faced with increasing demands to provide Internet messaging, business applications and information services to mobile users. InVoke Wireless provides a broad platform for anytime, anywhere access across a diverse array of wireless devices and protocols. - InVoke(TM) Wireless Services. - WAP Access. Developed to be wireless protocol and device agnostic, InVoke Wireless allows access over WAP-enabled devices to InScribe Email Messaging, personal address books, user 7 8 directories and InSchedule(TM) Calendaring. The same information is also accessible via a web browser or desktop client. - Wireless Notifications. When email messages are received or when specific events occur, such as a meeting reminder or inbound fax, users can choose to be notified via their wireless device. This notification service also includes a filtering feature, which allows the user to specify, through a web-based interface, which messages generate notifications to the wireless device. - Email Aggregation automatically checks multiple mailboxes for messages at specified intervals. Copies of all Internet messages are then forwarded to a single Critical Path mailbox. - InVoke(TM) SMS Server provides a feature-rich gateway between the short message service or SMS, of mobile networks and the Internet mail protocol, SMTP. Direct mapping enables users to send and receive email messages as well as information services like stock quotes, traffic reports, sports results and online banking on a wireless device using the cost-effective SMS service. Directory Products. As messaging systems and business environments increase in size and complexity, organizations increasingly need to implement a unified approach to user profile management and security access across intranet and extranet applications. Our primary directory products are described below: - InJoin(TM) Directory Server, our directory product, is designed to store and disseminate information on both a wide area and local area network basis. This information may include user or device profile information including name, location, email address, fax numbers, telephone numbers, physical mail address and pictures as well as personal digital certificates. The directory provides a general purpose, standards-based repository for authentication and authorization information that can be accessed across the enterprise and extranet, supporting varying levels of access control to suit the customer's requirements. - InJoin(TM) Meta-Directory works alongside the InJoin Directory Server and other directory servers, databases and applications to form a unified user profile management framework across heterogeneous systems, which can be updated in real-time. Changes in one system are propagated to other systems based on policy management rules defined by the system administrator. For example, an entry in a human resources system that signals an employee's departure can facilitate the automatic de-provisioning of the employee's email box and security card access. Meta-directory saves internal technology departments from the task of manually updating information such as user profile information and status changes in disparate systems, as well as significantly reduces security risks associated with inaccurate and out of date user profile information. Professional Services and Customer Support. Our professional services group provides technical consulting, training, customer support and product maintenance to assist our customers in maximizing the utilization and functionality of our messaging, directory and security products. - InTouch(TM) Professional Services. Critical Path's worldwide professional services team helps to design customer solutions around Critical Path products and hosted service offerings. Our creativity, experience and timely delivery of solutions provides a competitive edge and affords opportunities to upsell additional services and products to our customer base. We offer a comprehensive range of migration, installation and training services. Our professional services consultants design complex messaging, directory and security infrastructures and work closely with each customer to deploy optimal solutions based on unique business and messaging demands. Additionally, our training services group delivers education and training to our customers and partners. We offer a comprehensive series of classes and on-line training to provide the knowledge and skills to successfully deploy, use and maintain our products and services. - InTouch(TM) Customer Support and Product Maintenance. Critical Path believes customer satisfaction is essential for our long-term success and offers multiple levels of customer assistance 24 hours a day, 7 days a week. Our technical support provides dependable and timely resolution of customer technical inquiries and is available by telephone, the web or email. Critical Path leverages customer support's 8 9 regular interaction with our expanding customer base to identify new market opportunities and provide product development guidance. In addition to the technical support, we offer product maintenance to our midsource and insource customers. Customers are entitled to receive software updates, upgrades and technical support for an annual maintenance fee. We notify customers about the availability of regular maintenance and enhancement software releases via the web, email and our account management group. Other Product and Services. Critical Path offers several other products and services which complement our suite of core products. Our primary complementary products are detailed below: - InJoin(TM) TRANS enables companies to re-host their existing legacy and batch applications to Unix or NT platforms with little or no change to the application code or data files while incurring cost reductions from the re-hosting. - InLine(TM) Project Collaboration enables corporate project teams to manage, collaborate and track complex projects anytime and anywhere using a standard web browser. - InLine(TM) Resource Management helps customers reduce costs and increase efficiency through the automated scheduling of shared corporate resources such as conference rooms, audio-visual equipment and services. - InScribe(TM) Fax Messaging supports the integration of fax sending and delivery into corporate messaging environments and eBusiness web-based applications. - InScribe(TM) Message Boards enable discussion communities to be built into corporate extranets and intranets and service provider community sites. - InScribe(TM) Usenet Service enables customers to provide access to Usenet newsgroups without hardware and software investments or significant administrative resources, through our hosted Usenet servers. TARGET MARKETS, CUSTOMERS AND STRATEGIC PARTNERS Target Markets We target corporate enterprises and service providers in the corporate enterprises, wireless and telecommunications providers, Internet-centric and postal authority markets. - Corporate Enterprises. Messaging infrastructure products and services have become an important concern for businesses. As the workforce mobilizes, as enterprises become increasingly global, and as critical business information is leveraged outside the physical building of an enterprise in eBusiness applications, the need for reliable messaging and security access controls has expanded significantly. - Wireless and Telecommunications Providers. Much debate exists over which wireless platforms, devices and applications will survive over the next few years. Regardless of the outcome of these debates, wireless users require a way to access the Internet and send and receive messages via their application over their chosen platform and through their chosen device. We believe we provide the necessary access and messaging capability to provide wireless service providers' customers with superior performance. Additionally, to increase the value of their own service, and to grow the value of and retain their customers, telecommunications providers often add advanced Internet messaging solutions to their connectivity and data management offerings. - Internet-Centric Companies. Within the Internet-centric market, we focus on Internet service providers, or ISPs, application service providers, or ASPs, and web portals. Internet service providers are companies that provide access to the Internet via dial-up, ISDN, DSL or broadband connections. Email and other messaging services have become an integral part of ISP service offerings. As basic connection services have become increasingly commoditized, ISPs are aggressively expanding value-added services, including wireless messaging, unified messaging and mobile commerce. Application service providers offer application hosting services and custom application development for corporate customers. Many ASPs offer email messaging as one of their core applications and can take advantage 9 10 of Critical Path's outsourced offering and brand-behind-the-brand strategy to get to market quickly. Portal web sites are attempting to develop a sense of community to draw large online audiences, encourage repeat visits, and keep users engaged. Portals are attempting this by providing users with value-rich content and services, including search engines, access to applications and services, email and other forms of advanced messaging. - Postal Authorities. Postal authorities worldwide use our email solutions to provide country-wide "email for life" and our directory and meta-directory products to serve as central repositories of user profile information that provide security and access control for trusted third party services for hundreds of millions of postal customers. Postal authorities including France's La Poste, Germany's Deutsche Post, Ireland's AnPost and the United Kingdom's Royal Mail ViaCode, have based their eBusiness platform on Critical Path's products. By leveraging our highly scalable directory products, countries are able to build an eBusiness infrastructure capable of extending physical mail delivery services to the electronic world, while reducing business costs, creating new revenue streams, and delivering the trackability, security, and reliability people have come to trust for mission critical information exchange. 10 11 Customers and Strategic Partners We currently offer our products and services to millions of end users across our target markets. The following is a list of various representative companies with whom Critical Path has service, product or strategic agreements within their respective categories. CORPORATE ENTERPRISES WIRELESS AND TELECOMMUNICATIONS PROVIDERS AFLAC Access360 Amdahl Aether Systems APL British Telecom Bechtel Comverse Technology BNP Paribas SA Corio Bristol-Myers Squibb Debitel Canadian Department of National Defense Ericsson Chevron France Telecom Circuit City Global Crossings Cisco Systems i3 Mobile Continental Airlines Korea Telecom Deloitte & Touche Liberty Surf The Dow Chemical Company Logica EDS MCI WorldCom Ernst & Young Motient Federal Express OmniSky JCPenney Omnitel KPMG QUALCOMM Macy's SK Telecom Exxon Mobil Tiscali New York Life Verizon PepsiCo PricewaterhouseCoopers INTERNET-CENTRIC COMPANIES Promus Hotel Corporation SmithKline Beecham 123 India -- Intersoft Technologies Sun Microsystems Alta Vista Texas Instruments Amazon.com Ariba POSTAL AUTHORITIES eBay E*TRADE AnPost ICQ Deutsche Post Infostrada Dutch Post Intuit Finland Post KataWeb La Poste Netian Posta Hungary Network Solutions (VeriSign) PosteCom Italia PSINet Royal Mail ViaCode SatyamOnline Swedish Post Yahoo! ZipNet
A key element of Critical Path's strategy is to expand our distribution channels through strategic relationships and entities with which we have contractual reseller or joint sales relationships. Current partners fall into three categories: telecommunications and Internet infrastructure providers, wireless infrastructure and service providers, and Internet security and privilege management infrastructure partners. The following are examples of the existing strategic relationships that we believe will position Critical Path to increase market presence and penetration. 11 12 - Telecommunications and Internet Infrastructure Providers. We have sought reseller relationships with leading telecommunications and Internet infrastructure providers as a means to develop the growing market for outsourced messaging. We believe these relationships provide our partners with vital, value-added services that enable them to retain customers, grow into new business areas, and increase revenue from their installed base. Partners in this space include Comverse Technology, Corio, Critical Path Pacific, ICQ, Network Solutions, and MCI WorldCom. - Wireless Infrastructure and Service Providers. Critical Path's technology supports one-way and two-way messaging services to millions of wireless devices and is one of few companies able to provide end users with the means to send and receive messages to and from mobile phones, paging and other wireless devices. We are aggressively targeting the wireless market across all major segments including ISPs, web portals, wireless original equipment manufacturers, or OEMs, and other cellular and paging companies. Partners in this space include Aether, i3 Mobile, Logica, Motient and Verizon. - Internet Security and Privilege Management Infrastructure Partners. Critical Path has established relationships with major public key infrastructure and Internet security vendors. Our InJoin Directory Server is included in several of our customers' security solutions. Additionally, our InJoin Meta-Directory plays a growing role in large corporation's efforts to develop comprehensive privilege management systems. By working with leading public key infrastructure, password management, and provisioning vendors as well as systems integrators that specialize in this area, we are expanding our channel of large corporations and enterprises. Partners in this space include Access 360 and Entrust. SALES AND MARKETING Sales Strategies Direct Sales. We maintain our own direct sales force to introduce and educate prospective customers and partners about our products and services. The world-wide direct sales group targets the Fortune 1000 and other corporate customers, telecommunications companies, larger ISPs, large web hosting companies and high-trafficked web portals. Critical Path currently has members of its sales group in domestic offices in San Francisco, Los Angeles, Phoenix, Boston, New York, Atlanta, and other cities throughout the United States. Internationally, we have members of our sales group in Argentina, Australia, Brazil, Canada, Denmark, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Korea, Malaysia, Sweden, Switzerland and the United Kingdom. Within Critical Path's direct sales group, a subgroup is responsible for retaining and increasing use by existing customers. This group is critical to ensuring customer satisfaction and selling existing customers new add-on services as they become available in our products and services offerings. Telesales. Our telesales group conducts sales activities over the phone. The target markets of the telesales group are small to medium-sized businesses, ISPs, and portals. The majority of the activity generated through this group results from phone calls that we initiate to prospective customers. The telesales group also handles outbound calls to a specific list of contacts provided by our marketing organization. In addition, the telesales group follows up on leads resulting from web and telephone communication initiated by prospective customers and qualifies those leads by placing additional calls or referring them to the direct sales group. Indirect sales. The indirect sales group uses the sales forces of Critical Path's partners to offer our products and services to their end users. To gain market presence and market share overseas, Critical Path teams with leading distributors, OEM suppliers, resellers, complementary software makers, and system integrators that have strong industry backgrounds and market presence in their respective markets and geographic regions. These partners include Access360, Ameritech, British Telecom, Comverse Technology, Corio, Entrust and MCI WorldCom. In addition, Critical Path uses partners to resell its products throughout most of Asia and Latin America. Marketing Strategy Marketing. We are focused on media relations and public relations in order to develop a reputation as an industry leader for Internet messaging infrastructure products and services. Critical Path intends to continue 12 13 to focus on print and online advertising campaigns for lead generation. We use event, forum and trade show participation to promote our business-to-business brand presence. Unlike many Internet related companies, we are not fully dependent on developing our own brand, as many of our customers frequently want their own name and branding associated with the Critical Path products or services we provide them. As such, Critical Path's capital requirements for brand building are lower than many companies in the Internet space. TECHNOLOGY Our core technology expertise is in messaging, directory and security. This allows us to deliver highly scalable Internet messaging infrastructure composed of messaging and directory software. Anchored by our messaging server software, we have a range of highly scalable, standards-based, messaging software including calendaring and short message service. Our InScribe Messaging Server is designed for corporate enterprises and service providers and is capable of serving millions of end users with email, accessible through our web mail application, wireless application protocol or WAP, and through standard desktop software using POP or IMAP protocols. Our web mail application is highly customizable and feature rich with our own address book. Our InScribe Messaging Server has a distributed architecture, allowing single or multiple domains to be split over multiple servers, geographically distributed and setup as clusters. Our InScribe Messaging Server also has support for security features including secure-socket-layer, anti-virus and anti-spam. Directory. Our InJoin Directory Server software includes both directory and meta-directory products. Our directory software is useful in providing a common store of user or resource information that can be accessed via standard lightweight directory access or LDAP and X.500 protocols. With two-phase commit technology, the directory is reliable, mission critical software that can be used to store user profiles, digital certificates from public key infrastructure or PKI software, and eBusiness information. The directory is a distributed database, meaning that it can be partitioned both logically and physically, and in order to provide improved performance, replicas can be made and updated according to replication agreements. Our InJoin Meta-Directory software keeps user and resource profile information consistent between disparate messaging and business systems, to improve security, data integrity and reduce overall administration cost. At the core of meta-directory technology is the join engine, with plug-ins that connect to various business systems. Meta-directory is valuable as an integration tool in large organizations to propagate data between disparate directories, databases, network operating systems, applications and messaging systems. Meta-directory is also a valuable provisioning tool for corporate enterprises and service providers, allowing services to be provisioned across multiple disparate systems. Additionally, both directory and meta-directory incorporate security technology like secure-socket-layer for secure transport and authentication. Hosted Messaging. With our deep technical expertise in messaging, directory and security, we also have developed a hosted messaging service that employs our Critical Path Internet messaging infrastructure to offer messaging applications and services to a broad range of customers, reaching tens of millions of accounts and over one million domains. This includes services such as our InScribe Email Messaging, InOne Groupware Messaging and InScribe Secure File Services. Our hosted messaging service can handle high-volume loads for complex and diverse messaging environments including those required by Internet service providers, telecommunications providers, web hosting companies, web portals and corporate enterprises providing accounts to their end-users for activities such as trading securities, shopping or participating in online communities. We have developed proprietary load-balancing and messaging software, and uses Oracle databases for account provisioning and management. Our hosted messaging service is comprised of multiple groups of servers and routers acting as a single, virtual point of contact to customers for messaging services. Our hosted messaging service hardware and software consists of Sun Microsystems servers running Solaris, Cisco routers, EMC redundant storage arrays, Veritas software and rack-mounted Intel processor-based servers. 13 14 All aspects of our hosted messaging service are deployed in a redundant configuration with the goal of ensuring that if any process or system goes down, another will be available to handle customer traffic seamlessly. This behavior is called "transparent failover" and is designed to increase the availability of messaging services to the customer. Our hosted messaging service also includes a dynamic load-balancing system that acts as proxy servers for firewall safety. The load balancers are configured in parallel to ensure that if one goes down, the load is transferred to the remaining systems. We have created a proprietary account provisioning protocol for account creation and maintenance. This enables account transitioning from other services or legacy systems to be bulk-loaded, tested, replicated and deployed on our service automatically. This protocol addresses a critical time to market issue by enabling organizations to quickly transition to the new standards-based email service with minimal down-time and degradation to their existing internal systems. In addition, it can be used by customers and partners to facilitate automatic account sign-ups from web sites, typically in less than three minutes. Data Centers. Our hardware for operating production services currently is located throughout nine data centers across three continents. With multiple high-speed connections to diverse backbone providers and a robust network architecture, we aim to eliminate single points of failure, thus reducing the likelihood that our customers will suffer downtime as a result of network outages. Our backbone architecture and interconnect strategy consists of multiple clear channel OC-3 and DS-3 circuits. We currently have bilateral peering arrangements in place with over 35 networks. Our data centers feature redundant systems for power, raised floors, HVAC temperature control systems, seismically braced racks, fire protection, and physical security and surveillance 24 hours a day, seven days a week. Security. We have a diverse set of firewall solutions that are specifically tailored for each of our hosted services, reducing the likelihood of security breaches. To enhance security for our network, our staff members monitor the network hardware 24 hours a day, seven days a week. Suspicious activity is reported and investigated immediately. Spam and Viruses. Our messaging services include comprehensive content filtering including InCase(TM) Spam Blocking to guard against unsolicited commercial email and InCase(TM) Virus Scanning. Our message filtering technology has been enhanced with partnerships with Brightmail and Symantec, allowing our hosted messaging customers to benefit from new spam and virus filters as they are created in response to attacks worldwide. RESEARCH AND DEVELOPMENT Our products and services are mostly based on systems which were internally developed or acquired through acquisitions. We must continually improve these systems to accommodate the level of use of our products and services. In addition, we may add new features and functionality to our products and services that could result in the need to develop, license or integrate additional technologies. Our inability to add additional software and hardware or to upgrade our technology or network infrastructure could have adverse consequences, which include service interruptions, impaired quality of the users' experience and the diversion of development resources. Our failure to provide new features or functionality to our products and services also could result in these consequences. We may not be able to effectively upgrade and expand our systems in a timely manner or to integrate smoothly any newly developed or purchased technologies with our existing systems. These difficulties could harm or limit our ability to improve our business. We invested $2.1 million in research and development expenses in 1998, $7.7 million in 1999 and $31.0 million in 2000. Additionally, we incurred $3.7 million of in-process research and development expense in 2000 related to technologies acquired through two of our acquisitions. We anticipate that we will continue to devote significant resources to product development in the future as we add new features and functionality to our products and services. The market in which we compete is characterized by rapidly changing technology, evolving industry standards, frequent new service and product announcements, introductions and enhancements and changing customer demands. Accordingly, our future success will depend on our ability to adapt to rapidly changing technologies, to adapt our services to evolving industry standards and to continually improve the performance, features and reliability of our products and services. The failure to adapt to such 14 15 changes would harm our business. In addition, the widespread adoption of new Internet, networking or telecommunications technologies or other technological changes could require us to undertake substantial expenditures to modify or adapt our services or infrastructure. EMPLOYEES At December 31, 2000, we had 1,041 employees, including 340 in operations, 305 in sales and marketing, 252 in research and development and 144 in general corporate and administration. Our future success depends, in significant part, upon the continued service of our key technical and senior management personnel and our continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, and we cannot guarantee that we can retain our key technical and managerial employees or that we will be able to attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good. COMPETITION Because we have numerous Internet messaging infrastructure products and services, we are not aware of a single enterprise that competes across all of our products and services. However, we encounter different competitors at each level of our products and services. For corporate customers seeking outsourced hosted messaging solutions, we compete with email service providers, including Commtouch, mail.com, USA.NET and application service providers offering hosted exchange services. For service providers seeking insourced or outsourced product-based solutions we compete with iPlane and OpenWave. For secure delivery services, competitors include Tumbleweed for product-based solutions and SlamDunk for service-based solutions. In the directory and meta-directory market, we encounter primarily iPlanet, Microsoft and Novell in the enterprise/eBusiness directory category, and iPlanet, Microsoft, Novell, and Siemens are among our competitors in the meta-directory market. While these competitors exist in each of our individual product markets, we believe our complete solution of products and services serves as a competitive advantage, because our customers can easily integrate their infrastructure with our broad product line, selecting multiple Critical Path products and services as their requirements demand. We believe that competitive factors affecting the market for Internet messaging infrastructure solutions include: - Breadth of platform features and functionality; - Ease of integration into customers' existing systems; - Ease of expansion and upgrade; - Flexibility to enable customers to manage certain aspects of their systems internally and leverage outsourced services in other cases when resources, costs and time to market reasons favor an outsourced offering; - Cost of ownership and operation; - Scalability, reliability and performance; and - Ability to enhance customers' brand identities by allowing them to maintain brand control. The relative importance of each of these factors depends upon the specific customer environment. Although we believe that our products and services currently compete favorably with respect to such factors, we may not be able to maintain our competitive position against current and potential competitors. We believe competition will increase as current competitors increase the sophistication of their offerings and as new participants enter the market. Many current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and 15 16 other resources than we do and may enter into strategic or commercial relationships with larger, more established and better-financed companies. Any delay would also allow competitors additional time to improve their service or product offerings, and provide time for new competitors to develop Internet messaging infrastructure products and services and solicit prospective customers within our target markets. Increased competition could result in pricing pressures, reduced operating margins and loss of market share, any of which could cause our business to suffer. GOVERNMENT REGULATION Although there are currently few laws and regulations directly applicable to the Internet and commercial messaging services, it is possible that a number of laws and regulations may be adopted with respect to the Internet or commercial email services covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust and characteristics and quality of products and services. Further, the growth and development of the market for online email may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. The adoption of any additional laws or regulations may impair the growth of the Internet or commercial online services, which could, in turn, decrease the demand for our products and services and increase our cost of doing business, or otherwise harm our business, operating results and financial condition. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any such new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the Internet could harm our business, operating results and financial condition. ITEM 2. PROPERTIES Our corporate headquarters and primary operations and development facilities are located in two office buildings in San Francisco, California. We occupy approximately 64,500 square feet in these two office buildings. There are two leases which relate to our initial San Francisco location, one of which will be expiring on June 30, 2002 but has a five-year renewal option and the second of which is a sublease that will expire on March 31, 2002. The lease for the second location will expire on February 1, 2011, but has a five-year renewal option. In addition to these locations, we currently occupy a 24,300 square foot building in Dublin, Ireland under a lease expiring on July 14, 2014. We lease additional facilities in Argentina, Brazil, Canada, Denmark, France, Germany, Ireland, Italy, Malaysia, Sweden, Switzerland, the United Kingdom and several cities throughout the United States. We continually evaluate the adequacy of our existing facilities, and we believe that the current facilities will be suitable for our needs for the next 12 months, or that additional space will be available on commercially reasonable terms, if necessary. ITEM 3. LEGAL We are a party to lawsuits in the normal course of our business. Litigation in general, and securities and intellectual property litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Other than as described below, we are not a party to any other material legal proceedings. Securities Class Actions Beginning on February 2, 2001, a number of securities class action complaints were filed against us, certain of our current and former officers and directors and our independent accountants in the United States District Court for the Northern District of California. The complaints have been filed as purported class actions by individuals who allege that they purchased our common stock during a purported class period; the alleged class periods vary among the complaints and are in the process of being consolidated into a single action. The complaints generally allege that, in differing periods from April 2000 to February 1, 2001, we and other named the defendants made false or misleading statements of material fact about our financial statements, including our revenues, revenue recognition policies, business operations and prospects for the year 16 17 2000 and beyond. The complaints seek an unspecified amount in damages on behalf of persons who purchased Critical Path stock during certain periods. Derivative Actions Beginning on February 5, 2001, we have been named as a nominal defendant in a number of derivative actions, purportedly brought on our behalf, filed in the Superior Court of the State of California. The derivative complaints allege that certain of our current and former officers and directors breached their fiduciary duties to us, engaged in abuses of their control of us, were unjustly enriched by their sales of our common stock, engaged in insider trading in violation of California law or published false financial information in violation of California law. The plaintiffs seek unspecified damages on our behalf from each of the defendants. Because of the nature of derivative litigation, any recovery in the action would inure to our benefit. SEC Investigation In February 2001, the Securities and Exchange Commission issued a formal order of investigation of Critical Path and certain unidentified individuals associated with Critical Path with respect to non-specified accounting matters, financial reports, other public disclosures and trading activity in our securities. While we do not know the current status of the investigation or any possible actions that may be taken against us as a result, any SEC action against us could harm our business. The uncertainty associated with substantial unresolved lawsuits and the SEC investigation could seriously harm our business and financial condition. In particular, the lawsuits or the investigation could harm our relationships with existing customers and our ability to obtain new customers. The continued defense of the lawsuits and conduct of the investigation could also result in the diversion of our management's time and attention away from business operations, which could harm our business. Negative developments with respect to the lawsuits or the investigation could cause our stock price to decline significantly. In addition, although we are unable to determine the amount, if any, that we may be required to pay in connection with the resolution of these lawsuits or the investigation by settlement or otherwise, the size of any such payment could seriously harm our financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no submissions of matters to a vote of security holders during the quarter ended December 31, 2000. 17 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock has been quoted on the Nasdaq National Market under the symbol "CPTH" since March 29, 1999. The following table presents, for the periods indicated, the high and low sales prices per share of our common stock as reported on the Nasdaq National Market.
HIGH LOW ------- ------ YEAR ENDED DECEMBER 31, 1999 First Quarter (from March 29, 1999 to March 31, 1999)..... $ 77.00 $65.88 Second Quarter (from April 1, 1999 to June 30, 1999)...... $134.88 $36.88 Third Quarter (from July 1, 1999 to September 30, 1999)... $ 53.88 $30.94 Fourth Quarter (from October 1, 1999 to December 31, 1999).................................................. $ 94.38 $35.06 YEAR ENDED DECEMBER 31, 2000 First Quarter (from January 1, 2000 to March 31, 2000).... $119.50 $60.00 Second Quarter (from April 1, 2000 to June 30, 2000)...... $ 87.00 $26.00 Third Quarter (from July 1, 2000 to September 30, 2000)... $ 79.38 $46.13 Fourth Quarter (from October 1, 2000 to December 31, 2000).................................................. $ 59.75 $19.38
As of March 15, 2001, there were approximately 1,265 holders of record of our common stock. Most shares of our common stock are held by brokers and other institutions on behalf of shareholders. DIVIDEND POLICY We have never declared or paid any dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and the expansion of our business. Any future determination to pay cash dividends will be at the discretion of the board of directors and will depend upon our financial condition, operating results, capital requirements and other factors the board of directors deems relevant. RECENT SALES OF UNREGISTERED SECURITIES 1. On September 26, 2000, in connection with the acquisition of all of the outstanding capital stock of PeerLogic Inc., we issued 6,120,000 shares of common stock to the former shareholders of PeerLogic. The securities issued were exempt from the registration requirements of the Securities Act by virtue of Section 3(a)(10) thereof. The terms and conditions of the share exchange were approved by the Commissioner of Corporations of the State of California after a public hearing upon the fairness of such terms and conditions. 2. On June 26, 2000, in connection with the acquisition of all of the outstanding capital stock of Netmosphere, Inc., we issued 1,007,835 shares of common stock to the former shareholders of Netmosphere. The securities issued were exempt from the registration requirements of the Securities Act by virtue of Section 3(a)(10) thereof. The terms and conditions of the share exchange were approved by the Commissioner of Corporations of the State of California after a public hearing upon the fairness of such terms and conditions. 3. On March 30, 2000, in connection with the acquisition of all of the outstanding capital stock of RemarQ Communities, Inc., we issued 3,868,450 shares of common stock to the former shareholders of RemarQ. The securities issued were exempt from the registration requirements of the Securities Act by virtue of Section 3(a)(10) thereof. The terms and conditions of the share exchange were approved by the Commissioner of Corporations of the State of California after a public hearing upon the fairness of such terms and conditions. 4. On March 30, 2000, we issued $300.0 million of 5.75% Convertible Subordinated Notes due April 2005 to qualified institutional buyers within the meaning of Rule 144A under the Securities Act. The Notes are 18 19 subject to a conversion rate of 9.8546 shares per $1,000 principal amount and may be converted into approximately 2,956,000 shares of Critical Path common stock, subject to adjustment in certain circumstances. We issued the Notes in reliance on the exemptions from the registration requirements of the Securities Act provided in Section 4(2) thereof and Rule 144A promulgated thereunder. 5. On March 8, 2000, in connection with the acquisition of all of the outstanding capital stock of The docSpace Company, we issued one share of special voting stock to Montreal Trust Company of Canada as exchange agent for the former Canadian shareholders of docSpace. In addition, we agreed to issue from time to time an aggregate of 3,805,820 shares of Critical Path common stock to the former shareholders of docSpace. This transaction was made in reliance on the exemption from the registration requirements of the Securities Act provided in Section 4(2) thereof. 19 20 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The selected consolidated balance sheet data as of December 31, 1997, 1998, 1999 and 2000, and the selected consolidated statement of operations data for the period from February 19, 1997 (our inception) to December 31, 1997, and during the years ended December 31, 1998, 1999 and 2000, have been derived from our Consolidated Financial Statements. The data set forth below should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this document.
YEAR ENDED DECEMBER 31, -------------------------------------------- 1997 1998 1999 2000 ------- -------- --------- ----------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues....................................... $ -- $ 897 $ 16,157 $ 135,653 Gross profit (loss)................................ -- (1,449) (5,400) 13,732 Operating expenses(1).............................. (1,056) (9,999) (117,850) (1,831,449) Loss from operations............................... (1,056) (11,448) (123,250) (1,817,717) Non-operating income (expense), net................ (18) (13) 6,309 (28,235) Loss before income taxes........................... (1,074) (11,461) (116,941) (1,845,952) Provision for income taxes......................... -- -- -- (6,513) ------- -------- --------- ----------- Net loss........................................... $(1,074) $(11,461) $(116,941) $(1,852,465) ======= ======== ========= =========== Net loss per share -- basic and diluted............ $ (0.54) $ (2.94) $ (3.93) $ (30.67) ======= ======== ========= =========== Weighted average shares -- basic and diluted.......................................... 1,994 3,899 29,770 60,399 ======= ======== ========= ===========
AT DECEMBER 31, -------------------------------------------- 1997 1998 1999 2000 ------- -------- --------- ----------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.......................... $ 1 $ 14,791 $ 75,932 $ 216,542 Working capital (deficit).......................... (1,524) 12,524 76,060 186,777 Total assets....................................... 550 20,663 673,805 450,855 Convertible subordinated notes payable............. -- -- -- 300,000 Capital lease and other obligations, long-term..... 42 2,454 5,669 4,687 Shareholders' equity (deficit)..................... (1,021) 15,358 616,992 66,349
(1) Operating expenses for the year ended December 31, 2000, include a $1.31 billion charge related to impairment of intangible assets including the deferred costs associated with its ICQ and Qwest relationships (see Note 9 of Notes to Consolidated Financial Statements -- Intangible Assets). 20 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto of Critical Path, Inc. appearing elsewhere in this Annual Report. The following discussion contains forward-looking statements. Our actual results may differ significantly from those projected in these forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, difficulties of forecasting future results due to our limited operating history, evolving business strategy and the emerging nature of the market for our products and services, pending litigation and SEC investigation, turnover of senior management and other key personnel, difficulties of integrating acquired businesses, failure to expand our sales and marketing activities, potential difficulties associated with strategic relationships, investments and uncollected bills, risks associated with our international operations, foreign currency fluctuations, unplanned system interruptions and capacity constraints, software defects, and those discussed in "Additional Factors That May Affect Future Operating Results" and elsewhere in this report. Readers are cautioned not to place undue reliance on these forward- looking statements. We have no obligation to publicly release the results of any revisions to these forward-looking statements to reflect events or circumstances after the date of this filing. OVERVIEW Critical Path, Inc. is a leading global provider of Internet messaging infrastructure products and services. We provide solutions to manage the flow of mission-critical information through an integrated portfolio of messaging, directory, and security solutions. Our technology provides the messaging infrastructure that fuels customers' new and existing eBusiness initiatives. Critical Path was founded in 1997 and is headquartered in San Francisco, with offices worldwide. From inception through 1999, our primary source of revenue came from service fees related to hosted messaging. Through a series of acquisitions during 1999 and 2000, we expanded our product offerings to include a wide range of messaging and collaboration licensed products and services. In total, we acquired ten companies, all of which were accounted for using the purchase method of accounting (see Note 2 of Notes to Consolidated Financial Statements -- Acquisitions). 1999 ACQUISITIONS. On May 26, 1999, we acquired substantially all the operating assets of the Connect Service business of Fabrik Communications, including the ongoing business operations as well as nearly 500 customer relationships for a total purchase price of approximately $20.1 million. On July 21, 1999, we acquired dotOne Corporation, a corporate email messaging service provider for a total purchase price of approximately $57.0 million. On August 31, 1999, we acquired Amplitude Software Corporation, a provider of business-to-business Internet calendaring and resource scheduling solutions for a total purchase price of approximately $214.4 million. On November 24, 1999, we acquired Xeti, Inc., a developer of standards-based public key infrastructure solutions for a total purchase price of approximately $23.8 million. On December 6, 1999, we acquired FaxNet Corporation, a outsource supplier of carrier-class enhanced fax and integrated messaging solutions for a total purchase price of approximately $187.6 million. 2000 ACQUISITIONS. On January 19, 2000, we acquired ISOCOR Corporation, a supplier of Internet messaging, directory and meta-directory software solutions for a total purchase price of approximately $277.4 million. On March 8, 2000, we acquired The docSpace Company, a provider of web-based services for secure file delivery, storage and collaboration for a total purchase price of approximately $258.0 million. On March 30, 2000, we acquired RemarQ Communities, Inc., a provider of Internet collaboration services for corporations, web portals and Internet service providers for a total purchase price of approximately $267.6 million. On June 26, 2000, we acquired Netmosphere, Inc., a provider of e-Business solutions for project collaboration and communications for a total purchase price of approximately $41.3 million. On September 26, 2000, we acquired PeerLogic, Inc., a provider of directory and enterprise application integration software for a total purchase price of approximately $445.1 million. We are currently evaluating our various products, services, facilities and the business plan under which we are operating. As part of this evaluation, we are reviewing the products and services we sell to customers, the locations in which we operate, and the manner in which we go to market with our core product and service 21 22 offerings. Many alternatives are currently being considered but as of the current date no decisions have been made. Ultimately, we may decide to continue to operate as we do today, sustain certain products and services where customer commitments prevent us from eliminating the offering all together, or eliminate the offering through termination, sale or other disposition. The results of these decisions will likely vary, depending on the product or service offering being considered and the decision that is ultimately made. If a decision is made to eliminate any product or service, it will most likely involve the receipt or outlay of capital, realization of gains or losses, a reduction in workforce, facility consolidation, and the elimination of revenue streams and any related costs. We currently have offices in Argentina, Brazil, Canada, Denmark, France, Germany, Ireland, Italy, Malaysia, Sweden, Switzerland, the United Kingdom, and several cities throughout the United States. We have incurred significant losses since our inception, and as of December 31, 2000, had an accumulated deficit of approximately $2.0 billion, inclusive of a $1.31 billion charge for impairment of certain long-lived assets recorded in the fourth quarter of 2000. We intend to continue to invest in sales and marketing, continued development of our network infrastructure, and continued technology enhancements. We expect to continue to incur substantial operating losses for the foreseeable future. In view of the rapidly evolving nature of our business, recent acquisitions, and limited operating history, we believe that period-to-period comparisons of revenues and operating results, including gross profit margin and operating expenses as a percentage of total net revenues, are not meaningful and should not be relied upon as indications of future performance. At December 31, 2000, we had 1,041 employees, in comparison with 488 employees at December 31, 1999 and 93 employees at December 31, 1998. We do not believe that our historical growth rates for revenue, expenses, or personnel are indicative of future results. RESULTS OF OPERATIONS On February 2, 2001, we issued a press release announcing that we believed that our previously announced unaudited financial results for the fourth quarter of 2000 may have been materially misstated, that the Board of Directors had formed a special committee to conduct an investigation into the matter, and that our president and vice president of worldwide sales had been placed on administrative leave related to the matter. On February 15, 2001, we announced that, based on the preliminary results of the investigation being conducted, we would revise our previously announced unaudited financial results for the fourth quarter of 2000 and were reviewing certain specific transactions that were reported as revenue during the third quarter of 2000. During February and March 2001, the investigation by the special committee of the Board of Directors was completed, we completed our internal review, and our auditors completed the annual audit. As a result, our financial results for certain periods within the year 2000 were materially restated or revised (see Note 22 of Notes to Consolidated Financial Statements -- Quarterly Financial Data (Unaudited)). 22 23 The following table presents the historical results of Critical Path's operations during 1998, 1999 and 2000 and the relative composition of net revenues and selected statement of operations data as a percentage of net revenues during 1998, 1999 and 2000.
AS A PERCENTAGE OF TOTAL NET REVENUES ------------------ YEAR ENDED DECEMBER 31 1998 1999 2000 1998 1999 2000 ---------------------- -------- --------- ----------- ---- ---- ---- (IN THOUSANDS) Net revenues License............................. $ -- $ -- $ 51,607 0% 0% 38% Service............................. 897 16,157 84,046 100 100 62 -------- --------- ----------- ---- --- --- Total net revenues.......... 897 16,157 135,653 100 100 100 -------- --------- ----------- ---- --- --- AS A PERCENTAGE OF RELATED NET REVENUES ------------------ Cost of net revenues License............................. -- -- 2,731 0% 0% 5% Service............................. 2,153 16,505 73,109 240 102 87 Amortization of purchased technology....................... -- -- 18,140 Acquisition-related retention bonuses.......................... -- 520 1,040 Stock-based expenses................ 193 4,532 1,586 Impairment of long-lived assets..... -- -- 25,315 -------- --------- ----------- ---- --- --- Total cost of net revenues.................. 2,346 21,557 121,921 262 133 90 -------- --------- ----------- ---- --- --- Gross profit (loss)................... (1,449) (5,400) 13,732 (162) (33) 10 -------- --------- ----------- ---- --- --- AS A PERCENTAGE OF TOTAL NET REVENUES ------------------ Operating expenses Sales and marketing................. 1,687 13,811 66,125 188% 85% 49% Research and development............ 2,098 7,682 31,022 234 48 23 General and administrative.......... 3,814 14,051 30,444 425 87 22 Amortization of intangible assets... -- 32,259 355,868 Acquisition-related retention bonuses.......................... -- 3,587 8,294 Stock-based expenses................ 2,400 46,460 47,151 Acquired in-process research and development...................... -- -- 3,700 Employee severance expenses......... -- -- 6,695 Impairment of long-lived assets..... -- -- 1,282,150 -------- --------- ----------- Total operating expenses.... 9,999 117,850 1,831,449 -------- --------- ----------- Loss from operations.................. (11,448) (123,250) (1,817,717) Interest and other income, net........ 375 7,061 12,970 Interest expense...................... (388) (752) (15,948) Equity in net loss of joint venture... -- -- (1,019) Minority interest in net income of consolidated subsidiary............. -- -- (649) Loss on investments................... -- -- (23,589) -------- --------- ----------- Loss before income taxes.............. (11,461) (116,941) (1,845,952) Provision for income taxes............ -- -- (6,513) -------- --------- ----------- Net loss.............................. $(11,461) $(116,941) $(1,852,465) ======== ========= ===========
23 24 Net Revenues We derive most of our revenues through the sale of our Internet messaging infrastructure solutions. These solutions include both licensed software products and hosted messaging and collaboration services. In addition, we receive revenues from professional services and post-contract customer support. Agreements with some of our customers require minimum performance standards regarding the availability and response time of our messaging services. If we fail to meet these standards, customers could terminate their relationships and we could be subject to contractual monetary penalties. License revenue is derived from perpetual and term licenses for our messaging, directory, collaborative and enterprise application integration technologies. License revenues are recognized when persuasive evidence of an arrangement exists, delivery of the licensed software to the customer has occurred and the collection of a fixed or determinable license fee is considered probable. Service revenue is derived from hosted services, professional services and post-contract customer support. Hosted services relate to fees for our hosted messaging and collaboration services. These are primarily based upon monthly contractual per unit rates for the services involved, which are recognized on a ratable monthly basis over the term of the contract beginning with the month in which service delivery starts. Amounts billed or received in advance of service delivery, including but not limited to branding and set-up fees, are initially deferred and subsequently recognized on a ratable monthly basis over the term of the contract beginning with the month in which service delivery starts. Professional services revenue is derived from fees primarily related to training, installation and configuration services. The associated revenues are recognized in the period in which the services are performed. Customer support revenue is derived from fees related to post-contract customer support agreements associated with software product licenses. These fees are recognized ratably over the term of the support contract, generally one year. License. We recognized $51.6 million in license revenues during 2000, as compared to insignificant license revenues in 1999 and none in 1998. This significant increase over 1999 and 1998 was attributed to the introduction of our insource product offerings related to messaging, directory and meta-directory as a result of our acquisitions of Amplitude, ISOCOR, and PeerLogic. In addition, during 2000 we experienced an increase in demand for our messaging, directory, and meta-directory applications. Service. We recognized $84.0 million in service revenues during 2000, as compared to $16.2 million in 1999 and approximately $897,000 during 1998. We experienced significant increases in 2000, over the 1999 and 1998 service revenue levels as a result of the introduction of new product offerings, additional post-contract customer support agreements and an increase in our professional services, each of which is primarily attributable to our numerous acquisitions, specifically Amplitude, ISOCOR, RemarQ, and PeerLogic. Additionally, we experienced penetration into the hosted messaging services market, and have experienced increases in the number of email boxes hosted, including enterprise customers, and increased demand for our value-added outsourced services. Critical Path's international operations accounted for approximately 38% of net revenues during 2000. Revenues from international operations were insignificant in 1999 and 1998. This significant increase in international revenues related primarily to the acquisition of ISOCOR. Cost of Net Revenues License. Cost of net license revenues consists primarily of product media duplication, manuals and packaging materials, personnel and facility costs, and third-party royalties. This significant increase in 2000 over 1999 and 1998 levels was attributed to the introduction of new product offerings related to messaging, directory and meta-directory, as a result of our numerous acquisitions in 1999 and 2000, specifically, the acquisitions of Amplitude, ISOCOR, and PeerLogic. Service. Cost of net service revenues consists primarily of costs incurred in the delivery and support of messaging services, including depreciation of capital equipment used in network infrastructure, amortization of purchased technology, Internet connection charges, accretion of acquisition-related retention bonuses, personnel costs incurred in operations, customer support functions and professional services including custom 24 25 engineering, installation and training services for both hosted and licensed solutions, and other direct and allocated indirect costs. We added 15 new hosted messaging clusters to our data centers during 2000, expanding the capacity of our hosting network to manage current customer requirements and future growth. Additional costs were incurred during 2000 to add technology platforms for new service offerings. As a result of these significant acquisitions of equipment and related support and professional services resources, depreciation and other costs during 2000 increased substantially in comparison with 1999 and 1998. Cost of net service revenues also was impacted by the increased compensation and other personnel costs resulting from the additional headcount added through our ten acquisitions completed during 1999 and 2000, and through our continued efforts to enhance our portfolio of product and service offerings. Operations, customer support, and professional services staff increased to 340 employees at December 31, 2000, from 174 employees at December 31, 1999, and 25 employees at December 31, 1998. During 2000, we recognized charges associated with amortization of acquired technology as a result of our various acquisitions. Additionally, we recognized charges related to acquisition-related retention bonuses during 1999 and 2000 and stock-based charges associated with employee stock options during 1998, 1999 and 2000. Operating Expenses Sales and Marketing. Sales and marketing expenses consist primarily of compensation for sales and marketing personnel, advertising, public relations, other promotional costs, and, to a lesser extent, related overhead. Increases in marketing and promotional expenses, incentive compensation payments to sales personnel, and increases in compensation associated with additional headcount added through our ten acquisitions completed during 1999 and 2000, resulted in the increase in sales and marketing expenses. Sales and marketing staff increased to 305 employees at December 31, 2000, from 168 employees at December 31, 1999 and 30 employees at December 31, 1998, primarily through our acquisitions. Research and Development. Research and development expenses consist primarily of compensation for technical staff, payments to outside contractors, depreciation of capital equipment associated with research and development activities, and, to a lesser extent, related overhead. These significant increases from 1998 to 2000 resulted primarily from increased compensation and other personnel costs from the additional headcount added through our ten acquisitions completed during 1999 and 2000. Additionally, we increased headcount to continue to develop and enhance our portfolio of messaging, directory and security solutions. Research and development staff increased to 252 employees at December 31, 2000, from 94 employees at December 31, 1999, and 27 employees at December 31, 1998, primarily through our acquisitions. General and Administrative. General and administrative expenses consist primarily of compensation for personnel, fees for outside professional services, occupancy costs and, to a lesser extent, related overhead. These significant increases from 1998 to 2000, resulted primarily from increased compensation and other personnel costs associated with additional headcount added through our ten acquisitions completed during 1999 and 2000, and higher fees for outside professional services. General and administrative staff increased to 144 employees at December 31, 2000, from 52 employees at December 31, 1999, and 11 employees at December 31, 1998, primarily through our acquisitions. Amortization of Intangible Assets In connection with our 1999 and 2000 acquisitions, which were all accounted for using the purchase method of accounting, we recorded goodwill and other intangible assets, primarily including assembled workforce, customer base, and existing technology. There were no acquisitions in 1998. Based on the types of identifiable intangibles acquired in 2000, amortization expense of $18.1 million was allocated to cost of net revenues and amortization expense of $355.9 million was allocated to operating expenses. All amortization expense was allocated to operating expenses in 1999. 25 26 Acquisition-Related Retention Bonuses In connection with the acquisitions of dotOne, Amplitude, Xeti, FaxNet, ISOCOR, and docSpace, we established various retention bonus programs that in the aggregate amounted to approximately $20.7 million in incentives for certain former employees of these companies to encourage their continued employment with Critical Path (see Note 3 of Notes to Consolidated Financial Statements -- Acquisition-Related Retention Bonuses). Stock-Based Expenses Stock Options. We granted certain stock options with exercise prices below market value on the date of grant and issued certain common stock to employees, directors and advisors during 1999 and 1998. As a result, we recorded unearned compensation totaling $22.3 million in 1999 and $19.9 million in 1998. These amounts are being amortized over the vesting periods of the related options. In March 2001, in connection with an employee retention program, we granted options with exercise prices below market value on the date of grant to certain employees. This program will result in approximately $16.1 million in additional unearned compensation. We expect aggregate annual amortization related to unearned compensation of $19.4 million in 2001, $5.9 million in 2002, and $85,000 in 2003. During 2000, we also incurred stock-based charges of approximately $5.7 million in connection with certain severance agreements for terminated employees. Approximately, $3.4 million of this charge was included in employee severance expense in connection with our plan to reduce worldwide headcount and the remaining $2.3 million was included in stock-based expenses. During 1999, we incurred a stock-based charge of approximately $2.0 million in connection with a severance agreement for a terminated employee. This expense was charged to cost of net revenues based on the employee's function. Warrants. During 1999 and 2000, we issued warrants to purchase shares of our preferred and common stock pursuant to certain strategic agreements (see Note 15 of Notes to Consolidated Financial Statements -- Shareholders' Equity). We believe that these warrant agreements could have a significant current and potential future impact on our results of operations. In January 1999, we entered into an agreement with ICQ, Inc., a subsidiary of AOL Time Warner, pursuant to which we provide email hosting services that are integrated with ICQ's instant messaging service provided to ICQ's customers. As part of the agreement, ICQ agreed to provide sub-branded advertising for Critical Path in exchange for a warrant to purchase 2,442,766 shares of Series B Preferred Stock, issuable upon attainment of each of five milestones. As of April 9, 2000, all five milestones had been attained and the final revised aggregate fair value of all vested warrants was $93.8 million, which is being amortized to advertising expense using the straight-line method over four years. Aggregate charges recorded to stock-based expenses were $19.5 million during 2000 and $27.4 million during 1999. There were no related stock-based expenses recorded during 1998. In connection with our review of our fourth quarter financial results, we recorded an impairment charge of $16.8 million (see Note 17 of Notes to Consolidated Financial Statements -- Impairment of Long-Lived Assets). The adjusted fair value at December 31, 2000, of approximately $30.1 million will be amortized over the remaining benefit period of three years. In October 1999, we entered into an agreement with Qwest Communications Corporation, a telecommunications company, pursuant to which we will provide email hosting services to Qwest's customers. As part of the agreement, Qwest agreed to provide sub-branded advertising for us in exchange for a warrant to purchase up to a maximum of 3,534,540 shares of common stock upon attainment of each of six milestones. In October 1999, the first of the six milestones had been attained and the final revised aggregate fair value of the vested warrants associated with the first milestone approximated $22.2 million, which is being amortized to advertising expense using the straight-line method over three years. None of the remaining milestones are considered probable and as a result, the fair value of the warrants relating to the shares underlying the second through sixth milestones has not been recognized. Aggregate charges recorded to stock-based expenses were $7.4 million during 2000 and $1.5 million during 1999. In connection with our review of our fourth quarter financial results, we recorded an impairment charge of $4.8 million (see Note 17 of Notes to Consolidated 26 27 Financial Statements -- Impairment of Long-Lived Assets). The adjusted fair value at December 31, 2000, of approximately $8.6 million will be amortized over the remaining benefit period of two years. In December 1999, we entered into an agreement with Worldsport Network Ltd., the sole and exclusive provider of Internet solutions for the General Association of International Sports Federations or GAISF and a majority of the international federations it recognizes. Under the terms of the agreement, Worldsport offers Critical Path's web-based email and calendaring services to the entire GAISF network and its members. As part of the agreement, Worldsport agreed to provide sub-branded advertising for Critical Path in exchange for warrants to purchase up to a 1.25% equity interest in Critical Path on a fully diluted basis upon attainment of each of five milestones based on the number of email boxes for which Worldsport registers and provides sub-branding. The warrants are exercisable for five years after becoming vested. Any warrants not vested within five years of the date of the agreement will be cancelled. As of December 31, 2000, Worldsport had filed for bankruptcy and accordingly, none of the milestones were considered probable and no deferred compensation associated with these warrants was recognized. In December 1999, we entered into an agreement with one of our lessors, in connection with an office lease, pursuant to which the lessor is entitled to purchase up to a maximum of 25,000 shares of our common stock. The warrants may be exercised beginning January 1, 2000 through December 20, 2006 at a price of $90.00 per share. The warrants vest at the beginning of each month on a straight-line basis in the amount of 521 shares per month. The fair value of approximately $2.0 million is being amortized to general and administrative expenses using the straight-line method over 10 years. During 2000, $200,000 was charged to stock-based expense related to the vested warrants. No amounts were charged to stock-based expense related to the vested warrants during 1999. In January 2000, The docSpace Company entered into an agreement with a major telecommunications company ("Telco") pursuant to which docSpace would provide secure messaging services to the Telco's customers. As part of the agreement, Telco agreed to provide marketing, publicity, and promotional services to docSpace. As a result of the completion of our acquisition of docSpace, Critical Path assumed warrants that allowed Telco to purchase up to a maximum of 349,123 shares of Critical Path common stock upon attainment of each of three milestones. Subsequent to the acquisition, we entered into discussions with Telco to modify our relationship. Accordingly, we believe the vesting provisions of the proposed agreement will be modified to reflect the requirements of the new relationship. As of December 31, 2000, none of the vesting milestones of the original agreement had been attained; however, we believe that all shares underlying these warrants are probable of issuance. As a result, the shares underlying these milestones were remeasured, resulting in a revised fair value of the warrants of $9.6 million. As of December 31, 2000, no amounts had been recognized as stock-based expense related to these warrants. We expect that future changes in the trading price of our common stock at the end of each quarter, and at the time certain milestones are achieved, will cause additional substantial changes in the ultimate amount of the related stock-based charges. Acquired In-Process Research and Development In connection with the acquisitions of ISOCOR and PeerLogic during 2000, we recognized $3.7 million representing the value attributable to acquired in-process research and development that had not yet reached technological feasibility and had no alternative future use. These values were determined by estimating the future net cash flows of the acquired in-process research and development over their respective estimated useful life and discounting the net cash flows back to their present value. No amounts were recognized resulting from acquired in-process research and development during 1999 and 1998. Employee Severance Expenses On July 19, 2000, we announced our plan to reduce our worldwide employee headcount by approximately 11%. This employee reduction plan was executed with the intent to realize various synergies gained through the nine acquisitions we completed in 1999 and the first half of 2000. During 2000, we recognized a charge for severance-related costs totaling approximately $6.6 million, composed of $3.2 million in cash 27 28 charges and $3.4 million in stock-based compensation expense, resulting from the acceleration of certain employee stock options. Impairment of Long-Lived Assets As part of our review of our fourth quarter financial results, an impairment assessment of our long-lived assets was performed. The assessment was performed primarily due to the significant decline in our stock price, the net book value of assets significantly exceeding our market capitalization, the significant underperformance of certain acquisitions relative to projections, the overall decline of growth rates in the industry, and our lower fourth quarter 2000 and projected 2001 operating results compared to earlier forecasts. As a result, we recorded a $1.3 billion impairment charge to reduce goodwill and other intangible assets and deferred costs associated with our ICQ and Qwest relationships in the fourth quarter of 2000 to their estimated fair values. The estimates of their fair values were based upon our estimated discounted cash flows for the succeeding three years using a discount rate of 25% and an estimated terminal value. The assumptions supporting the cash flows, including the discount rate and estimated terminal value, were determined using management's best estimates. The discount rate was primarily based upon the weighted average cost of capital for comparable companies. The remaining goodwill and identifiable intangibles balance of approximately $77.3 million will be amortized over the remaining useful lives, which approximates two years. These remaining identifiable intangible assets primarily relate to existing technology for some of the licensed products we acquired in 2000 and certain amounts related to assembled work forces acquired in 1999 and 2000. The aggregate adjusted fair value at December 31, 2000, relative to the ICQ and Qwest warrants, approximates $38.7 million and will be amortized over the remaining relative benefit periods of between two and three years. Interest and Other Income (Expense) Interest and other income (expense) consists primarily of interest earnings on cash and cash equivalents as well as net realized gains (losses) on foreign exchange transactions. We completed private placements of equity securities in April 1998, September 1998, and January 1999, and we completed public offerings of common stock in April 1999 and June 1999. In addition, on March 30, 2000, we issued $300.0 million of five-year, 5.75% Convertible Subordinated Notes due April 1, 2005. As a result, interest income increased significantly during the latter half of 1999 and into 2000, in comparison with early 1999, due to higher cash balances available for investing. During 2000, we recognized a net loss from foreign currency transactions associated with our international operations in the amount of $280,000. Foreign currency transaction gain or loss were insignificant during 1999 and 1998. Interest Expense Interest expense consists primarily of the interest and amortization of related issuance costs related to the Convertible Subordinated Notes we issued in March 2000, the amortization of related issuance costs and interest on certain capital leases. We incurred approximately $13.0 million in interest expense on the Convertible Subordinated Notes, and approximately $1.6 million related to amortization of debt issuance costs in 2000. Interest on capital leases and other long-term obligations amounted to approximately $1.3 million during 2000, $688,000 during 1999, and $227,000 during 1998. Additionally, amortization of stock-based charges associated with warrants issued in connection with various of our financings in 1998 and 1999, amounted to $64,000 during 2000, $64,000 during 1999 and $161,000 during 1998. Equity in Net Loss of Critical Path Pacific In June 2000, we established a joint venture, Critical Path Pacific, with Mitsui and Co., Ltd., NTT Communications Corporation and NEC Corporation to deliver advanced Internet messaging solutions to businesses in Asia. We invested $7.5 million and hold a 40% ownership interest in the joint venture. This investment is being accounted for using the equity method. During 2000, we recorded equity in net loss of joint venture of approximately $1.0 million. 28 29 Minority Interest in Net Income of Consolidated Subsidiary As of December 31, 2000, we owned a 72.87% interest in CP Italia, a consolidated subsidiary, which was acquired in connection with the acquisition of ISOCOR. For 2000, the minority interest in net income of CP Italia amounted to $649,000. In March 2001, in connection with our agreement to purchase the remaining minority interest, we acquired the outstanding 27.13% interest in CP Italia for approximately $4.2 million. Loss on Investments During 2000, we determined that certain of our investments were permanently impaired and recorded write downs of $23.6 million, consisting of $2.6 million in investments in marketable securities and $21.0 million in investments in non-marketable securities (see Note 7 of Notes to Consolidated Financial Statements -- Investments). Provision for Income Taxes No current provision or benefit for U.S. federal or state income taxes has been recorded as we have incurred net operating losses for income tax purposes since our inception. No deferred provision or benefit for federal or state income taxes has been recorded as we are in a net deferred tax asset position for which a full valuation allowance has been provided due to uncertainty of realization. We recognized a provision for foreign income taxes during 2000 as certain of our European operations generated income taxable in certain European jurisdictions. LIQUIDITY AND CAPITAL RESOURCES During 2000 and 1999, we invested our cash primarily in money market funds and other highly liquid securities with maturities of less than 90 days with the intent to make such funds readily available for operating purposes. Beginning in 2001, we have begun investing a portion of our cash in high grade, low risk investments with an average maturity of 12 months. As of December 31, 2000, our cash balance was $216.5 million and our working capital amounted to approximately $186.8 million. We used cash to fund operating activities during 2000 primarily due to our net loss adjusted for non-cash charges, severance expense and acquisition-related retention bonus payments. These disbursements related primarily to compensation for our employees. In addition, we used cash to fund various other operating costs, which are identified in the Results of Operations portion of this section. During 1999, we used cash to fund operating activities, primarily related to compensation for our employees. The large increase in cash used in operations from 1999 to 2000 was predominantly caused by the increase in employees and facilities resulting from our numerous acquisitions and to a lesser extent the operating costs of the new products and services acquired. We used cash in investing activities during 2000 to purchase property, equipment and other capital expenditures and to fund certain strategic acquisitions and investments. The significant outlay in capital expenditures during 2000 was primarily related to installation of additional network infrastructure equipment in our data centers, licenses of new software platforms, and purchases of furniture and equipment for new employees. During 2000, we completed our acquisitions of ISOCOR, docSpace, RemarQ, Netmosphere, and PeerLogic, and as a result, expended a significant amount of capital. In addition, we made several strategic investments in private entities and an initial capital contribution to fund our interest in the Critical Path Pacific joint venture. We advanced funds to certain employees pursuant to promissory notes. These uses of cash were offset by the repayment of a previous advance to a private company pursuant to a promissory note and certain of the employee notes. During 1999, we disbursed capital to purchase property and equipment, expended significant capital related to our 1999 acquisitions, advanced funds to obtain equity positions in strategic partners, and issued notes to certain employees and officers. We received cash proceeds from financing activities during 2000 from the sale of $300.0 million in convertible subordinated notes, as well as from the exercise of employee stock options and the purchase of stock under our employee stock purchase plan. These cash proceeds were partially offset by a payment to 29 30 retire a note payable assumed in the PeerLogic acquisition and payments to retire principal on capital lease obligations. During 1999, we received cash proceeds from the sale of our preferred stock, the closing of our initial public offering of common stock, and closing of our follow-on offering of common stock. These increases in cash in 1999 were offset by a payment to retire principal on capital lease obligations and the purchase of treasury stock. Liquidity Since inception, we have incurred substantial costs as a result of the rapid expansion of our product offerings and network infrastructure during 1999 and 2000. We continue to face significant risks associated with successful execution of our business strategy. These risks include, but are not limited to, technology and product development, introduction and market acceptance of new products and services, changes in the marketplace, liquidity, competition from existing and new competitors which may enter the marketplace, retention of key personnel, and pending litigation. We require sufficient capital to implement our strategy, to adequately address the appropriate target markets, generate sales demand for our current and planned future products and services. In addition, our liquidity could be adversely impacted by the litigation referred to in Note 13 of Notes to Consolidated Financial Statements -- Commitments and Contingencies, although we believe the litigation will not have a material adverse impact on working capital through the end of 2001. We believe, based on the available cash balances, we have sufficient cash resources to fund operations through at least the end of 2001. On a long-term basis, however, we may require additional financing. There can be no assurance, however, that such financing would be available when needed, if at all, or on favorable terms and conditions. 30 31 ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS WE HAVE A HISTORY OF LOSSES, EXPECT CONTINUING LOSSES AND MAY NEVER ACHIEVE PROFITABILITY. As of December 31, 2000, we had an accumulated deficit, including other comprehensive income, of approximately $2.0 billion. We have not achieved profitability in any period, and expect to continue to incur net losses in accordance with generally accepted accounting principles for the foreseeable future. We expect that our operating expenses will increase as we continue to spend resources on building our business and that this increase may have a negative effect on operating results and financial condition in the near term. We have spent heavily on technology and infrastructure development. We may continue to spend substantial financial and other resources to develop and introduce new end-to-end Internet messaging infrastructure products and services, and improve our sales and marketing organizations, strategic relationships and operating infrastructure. In addition, in future periods we will continue to incur significant non-cash charges related to the ten acquisitions we completed in 1999 and 2000 and stock-based compensation. We expect that our cost of revenues, sales and marketing expenses, general and administrative expenses, operations and customer support expenses, and depreciation and amortization expenses could continue to increase in absolute dollars and may increase as a percent of revenues. If revenues do not correspondingly increase, our operating results and financial condition could be harmed. Should we continue to incur net losses in future periods, we may not be able to retain employees, fund investments in capital equipment, sales and marketing programs, and research and development to successfully compete against our competitors. We may never obtain sufficient revenues to achieve profitability. If we do achieve profitability, we may not sustain or increase profitability in the future. This may, in turn, cause our stock price to decline. DUE TO OUR LIMITED OPERATING HISTORY, EVOLVING BUSINESS STRATEGY AND THE EMERGING NATURE OF THE INTERNET MESSAGING INFRASTRUCTURE MARKET, FUTURE REVENUES ARE UNPREDICTABLE, AND OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE. We cannot accurately forecast our revenues as a result of our limited operating history, evolving business strategy and the emerging nature of the Internet messaging infrastructure market. Forecasting is further complicated by rapid changes in our business due to the ten acquisitions we completed in 1999 and 2000, as well as a related increase in license revenues as a percentage of total revenues from an insignificant percentage in 1999 to 38% in 2000. Our revenues could fall short of expectations if we experience delays or cancellations of even a small number of orders. We often offer volume-based pricing, which may affect operating margins. A number of factors are likely to cause fluctuations in operating results, including, but not limited to: - Continued growth of the Internet in general and the use of messaging infrastructure products and services in particular; - Demand for outsourced messaging services; - Demand for licensing of messaging, directory, and other products; - Our ability to attract and retain customers and maintain customer satisfaction; - Our ability to attract and retain qualified personnel with Internet industry expertise, particularly sales and marketing personnel; - The reaction of our customers and potential customers to our ongoing integration of acquired businesses; - Our ability to upgrade, develop and maintain our systems and infrastructure; - The budgeting cycles of our customers and potential customers; - The amount and timing of operating costs and capital expenditures relating to expansion of business and infrastructure; - Our ability to effectively respond to the rapid technology change of the Internet messaging infrastructure market; 31 32 - Technical difficulties or system outages; and - The announcement or introduction of new or enhanced services by competitors. In addition to the factors set forth above, operating results will be impacted by the extent to which we incur non-cash charges associated with stock-based arrangements with employees and non-employees. In particular, we have incurred and expect to continue to incur substantial non-cash charges associated with the grant of stock options to employees and non-employees and the grant of warrants to our customers and other parties with which we have commercial relationships. These grants of options and warrants also may be dilutive to existing shareholders. Our operating results also could be impacted by a decision to eliminate a product or service offering through termination, sale or other disposition or to sustain certain products and services at a minimum level where customer commitments prevent us from eliminating the offering altogether. We are currently evaluating our various products, services, facilities and the business plan under which we are operating, and each of the foregoing alternatives is under consideration. Any decision to eliminate or limit our offering of a product or service could involve the expenditure of capital, the realization of losses, a reduction in workforce, facility consolidation, and/or the elimination of revenues along with the associated costs, any of which could harm our financial condition and operating results. As a result of the foregoing, period-to-period comparisons of operating results are not a good indication of future performance. It is likely that operating results in some quarters will be below market expectations. In this event, the price of our common stock is likely to decline. PENDING LITIGATION COULD SERIOUSLY HARM OUR BUSINESS. Since February 2001, various of our shareholders have filed separate lawsuits against us, our independent accountants and certain of our current and former officers and directors. The uncertainty associated with substantial unresolved lawsuits could seriously harm our business and financial condition. In particular, the lawsuits could harm our relationships with existing customers and our ability to obtain new customers. The continued defense of the lawsuits also could result in the diversion of our management's time and attention away from business operations, which could harm our business. Negative developments with respect to the lawsuits could cause our stock price to decline significantly. In addition, although we are unable to determine the amount, if any, that we may be required to pay in connection with the resolution of these lawsuits by settlement or otherwise, the size of any such payment could seriously harm our financial condition. Most of the lawsuits could have been filed as purported class actions by persons who claim that they purchased our common stock during a purported class period. The complaints generally allege that we and the other named defendants made false or misleading statements of material fact about our financial statements, including our revenues, revenue recognition practices, business operations and prospects for the year 2000 and beyond. The complaints, in general, do not specify the amount of damages that plaintiffs seek. As a result, we are unable to estimate the possible range of damages that might be incurred as a result of the lawsuits. We have not set aside any financial reserves relating to potential damages associated with any of these lawsuits. LIMITATIONS OF OUR DIRECTOR AND OFFICER LIABILITY INSURANCE MAY HARM OUR BUSINESS. Our liability insurance for actions taken by officers and directors during the period from March 1999 to March 2001, the period during which events related to securities class action lawsuits against us and certain of our current and former executive officers are alleged to have occurred, provide only limited liability protection. If these policies do not adequately cover our expenses related to those lawsuits, our business and financial condition could be seriously harmed. Under California law, in connection with our charter documents and indemnification agreements we entered into with our executive officers and directors, we must indemnify our current and former officers and directors to the fullest extent permitted by law. The indemnification covers any expenses and liabilities reasonably incurred in connection with the investigation, defense, settlement or appeal of legal proceedings. 32 33 THE PENDING SECURITIES AND EXCHANGE COMMISSION INVESTIGATION COULD HARM OUR BUSINESS. In February 2001, the Securities and Exchange Commission, or SEC, issued a formal order of investigation of us and certain unidentified individuals associated with us. The investigation relates to non-specified accounting matters, financial reports, other public disclosures and trading activity in our stock. While we do not know the current status of the investigation or any possible actions that may be taken against us as a result, any negative developments with respect to the investigation or any SEC action against us could harm our business and cause our stock price to decline significantly. WE HAVE EXPERIENCED AND MAY CONTINUE TO EXPERIENCE TURNOVER OF SENIOR MANAGEMENT AND KEY PERSONNEL, WHICH COULD HARM OUR BUSINESS AND OPERATIONS. We are currently engaged in a search for a Chief Executive Officer. Our success depends on our ability to recruit and hire a Chief Executive Officer. If we are not able to successfully recruit a Chief Executive Officer our business will be seriously harmed. Additionally, the loss of the services of key personnel could harm our business results. Our success depends on our ability to recruit, retain and motivate highly skilled sales and marketing, operational, technical and managerial personnel. Competition for these people is intense, and we may not be able to successfully recruit, train or retain qualified personnel. In February 2001, we announced a series of changes in Critical Path management. David Hayden, our Chairman and a founder, was appointed our Executive Chairman of the Board of Directors and asked to take a greater role in the day-to-day operations of the company. A search for a new chief executive officer currently is ongoing, following the resignation of Doug Hickey from his position as Chief Executive Officer. Diana Whitehead, formerly our Vice President of Engineering and Operations, was promoted to President, following David Thatcher's resignation from Critical Path. Additionally, Mari Tangredi, formerly our Vice President of Corporate Development, has been named Executive Vice President of Business Development, Sales and Professional Services, following William Rinehart's resignation from Critical Path. It is possible that this high turnover at our senior management levels will continue and that other senior executive officers also will resign. Additionally, our management team has not worked together for a significant length of time and may not be able to work together effectively to successfully implement our strategy. If the management team is unable to accomplish our business objectives, our ability to grow our business could be severely impaired. We do not have long-term employment agreements with any of our executive officers and key personnel. In addition, we do not maintain key person life insurance on our employees and have no plans to do so. The loss of the services of one or more of our current senior executive officers or key personnel could harm our business and affect our ability to successfully implement our business objectives. WE WILL FACE TECHNICAL, OPERATIONAL AND STRATEGIC CHALLENGES THAT MAY PREVENT US FROM SUCCESSFULLY CONTINUING THE INTEGRATION OF ANY BUSINESSES WE HAVE ACQUIRED. Acquisitions involve risks related to the integration and management of acquired technology, operations and personnel. The integration of businesses that we have acquired into our business has been and will continue to be a complex, time consuming and expensive process, which may disrupt our business if not completed in a timely and efficient manner. We must operate as a combined organization utilizing, common information and communication systems, operating procedures, financial controls and human resources practices to be successful. In particular, we are currently evaluating, upgrading or replacing our financial information systems and establishing uniformity among the systems of the acquired businesses. We may encounter substantial difficulties, costs and delays involved in integrating the operations of our subsidiaries, including: - potential incompatibility of business cultures; - perceived adverse changes in business focus; and - potential failure in effectively managing our rapid growth in personnel. 33 34 Consequently, we may not be successful in integrating acquired businesses or technologies and may not achieve anticipated revenue and cost benefits. We also cannot guarantee that these acquisitions will result in sufficient revenues or earnings to justify our investment in, or expenses related to, these acquisitions or that any synergies will develop. If we are not successful in integrating acquired businesses or if expected earnings or synergies do not materialize, we could be forced to attempt to resell or cease operations of acquired businesses. In either event, we would likely incur significant expenses as well as non-cash charges to write-off acquired assets, which could seriously harm our financial condition and operating results. In this regard, in the fourth quarter of 2000, we incurred a $1.29 billion impairment charge to reduce the value of goodwill and other intangible assets related to the ten acquisitions we completed in 1999 and 2000 (see Note 22 of the Notes to Consolidated Financial Statements -- Quarterly Financial Data (Unaudited). Further, due in part to the significant underperformance of certain acquisitions relative to projections, we are currently reviewing the products and services we sell to customers, the locations in which we operate and the manner in which we go to market with our core product and service offerings. Ultimately, we may decide to eliminate certain acquired product or service offerings through termination, sale or other disposition or to sustain certain products and services at a minimum level where customer commitments prevent us from eliminating the offering altogether. Any decision to eliminate or limit our offering of an acquired product or service could involve the expenditure of capital, the realization of losses, a reduction in workforce, facility consolidation, and/or the elimination of revenues along with the associated costs, any of which could harm our financial condition and operating results. FURTHER ACQUISITIONS COULD RESULT IN DILUTION, OPERATING DIFFICULTIES AND OTHER CONSEQUENCES. Since January 1999, we have completed the acquisition of ten companies for an aggregate consideration consisting of cash, common stock and the assumption of stock options and warrants totaling approximately $1.8 billion. We may continue to acquire or invest in additional businesses, products, services and technologies that complement or augment our products and services offerings and customer base. We cannot guarantee that we will not engage in discussions with companies regarding strategic acquisitions, investments or partnerships. We would expect to pay for acquisitions or investments by issuing additional common stock, which would dilute current shareholders, or by using cash. In connection with an acquisition or investment, it may be necessary for us to raise additional funds through public or private financings. We cannot assure you that we will be able to raise additional funds at any particular point in the future or on favorable terms. In addition, we may be required to amortize significant amounts of goodwill and other intangible assets in connection with future acquisitions, which would materially increase operating expenses. IF WE FAIL TO IMPROVE SALES AND MARKETING ACTIVITIES, WE MAY BE UNABLE TO IMPROVE OUR BUSINESS. Our ability to increase revenues will depend on our ability to successfully recruit, train and retain sales and marketing personnel. Competition for qualified personnel is intense and we may not be able to hire and retain personnel with relevant experience. The complexity and implementation of our Internet messaging infrastructure products and services require highly trained sales and marketing personnel to educate prospective customers regarding the use and benefits of our services. Current and prospective customers, in turn, must be able to educate their end-users. Any delays or difficulties encountered in our staffing efforts would impair our ability to attract new customers and enhance our relationships with existing customers. This in turn would adversely impact the timing and extent of revenues. Because we have experienced high turnover in our sales force and the majority of our current sales and marketing personnel have recently joined us and have limited experience working together, our sales and marketing organizations may not be able to compete successfully against the sales and marketing organizations of our competitors. If we do not successfully operate our sales and marketing activities, our business could suffer and our stock price could decline. OUR RESERVES MAY BE INSUFFICIENT TO COVER BILLS WE ARE UNABLE TO COLLECT. We assume a certain level of credit risk with our customers in order to do business. Conditions affecting any of our customers could cause them to become unable or unwilling to pay us in a timely manner, or at all, for products or services we have already provided them. In the past, we have experienced significant collection 34 35 delays from certain customers, and we cannot predict whether we will continue to experience similar or more severe delays. In particular, a portion of our customers are suffering from the general weakness in the economy and among technology companies in particular. Although we have established reserves that we believe are sufficient to cover losses due to delays in or inability to pay, there can be no assurance that such reserves will be sufficient to cover such losses. If losses due to delays or inability to pay are greater than our reserves, it could harm our business, operating results and financial condition. IF WE DO NOT SUCCESSFULLY ADDRESS THE RISKS INHERENT IN THE EXPANSION OF OUR INTERNATIONAL OPERATIONS, OUR BUSINESS COULD SUFFER. During 2000, we expanded our international operations significantly. We derived 38% of our revenue from international sales in 2000 compared to an insignificant amount in 1999. We intend to continue to operate in international markets and to spend significant financial and managerial resources to do so. If revenues from international operations do not exceed the expense of establishing and maintaining these operations, our business, financial condition and operating results will suffer. We have limited experience in international operations and may not be able to compete effectively in international markets. We face certain risks inherent in conducting business internationally, including: - Difficulties and costs of staffing and managing international operations; - Fluctuations in currency exchange rates and imposition of currency exchange controls; - Differing technology standards; - Difficulties in collecting accounts receivable and longer collection periods; - Unexpected changes in regulatory requirements including U.S. export restrictions on encryption technologies; - Political and economic instability; - Potentially adverse tax consequences; and - Reduced protection for intellectual property rights in some countries. Any of these factors could harm our international operations and, consequently, our business and consolidated operating results. Specifically, failure to successfully manage international growth could result in higher operating costs than anticipated, or could delay or preclude altogether our ability to generate revenues in key international markets. UNPLANNED SYSTEM INTERRUPTIONS AND CAPACITY CONSTRAINTS COULD REDUCE OUR ABILITY TO PROVIDE MESSAGING SERVICES AND COULD HARM OUR BUSINESS REPUTATION. Our customers have, in the past, experienced some interruptions in our messaging service. We believe that these interruptions will continue to occur from time to time. These interruptions are due to hardware failures, unsolicited bulk email, or "spam," attacks and operating system failures. Our business will suffer if we experience frequent or long system interruptions that result in the unavailability or reduced performance of systems or networks or reduce our ability to provide email services. We expect to experience occasional temporary capacity constraints due to sharply increased traffic, which may cause unanticipated system disruptions, slower response times, impaired quality and degradation in levels of customer service. If this were to continue to happen, our business and reputation could suffer dramatically. We have entered into messaging agreements with some customers that require minimum performance standards, including standards regarding the availability and response time of messaging services. If we fail to meet these standards, our customers could terminate their relationships with us and we could be subject to contractual monetary penalties. UNKNOWN SOFTWARE DEFECTS COULD DISRUPT OUR SERVICES AND HARM OUR BUSINESS AND REPUTATION. Our software products are inherently complex. Additionally, our service offerings depend on complex software, both internally developed and licensed from third parties. Complex software often contains defects, 35 36 particularly when first introduced or when new versions are released. We may not discover software defects in our products or that affect new or current services or enhancements until after they are deployed. Although we have not experienced any material software defects to date, it is possible that, despite testing, defects may occur in the software. These defects could cause service interruptions, which could damage our reputation or increase service costs, cause us to lose revenue, delay market acceptance or divert development resources, any of which could cause our business to suffer. WE MAY NEED ADDITIONAL CAPITAL AND RAISING ADDITIONAL CAPITAL MAY DILUTE EXISTING SHAREHOLDERS. We believe that existing capital resources will enable us to maintain current and planned operations for at least the next twelve months. However, we may be required to raise additional funds due to unforeseen circumstances. If capital requirements vary materially from those currently planned, we may require additional financing sooner than anticipated. Such financing may not be available in sufficient amounts or on terms acceptable to us and may be dilutive to existing shareholders. THE TRADING PRICES AND VOLUMES OF OUR STOCK HAVE BEEN VOLATILE AND WE EXPECT THAT THIS VOLATILITY WILL CONTINUE. Our stock price and trading volumes have been highly volatile since our initial public offering on March 29, 1999. We expect that this volatility will continue in the future due to factors, including actual or anticipated fluctuations in results of operations and changes in or failure to meet market expectations. For example, in February 2001, after we announced a revision of our fourth quarter results of operations, our stock was suspended from trading on Nasdaq for a period of time, and subsequently the market price of our stock declined. In addition, the stock market itself is experiencing and may continue to experience significant price and volume fluctuations that have affected the market prices for the stocks of technology companies, particularly Internet companies. These broad market fluctuations may continue to result in a material decline in the market price of our common stock. WE DEPEND ON STRATEGIC RELATIONSHIPS AND OTHER SALES CHANNELS AND THE LOSS OF CERTAIN STRATEGIC RELATIONSHIPS COULD HARM OUR BUSINESS AND OUR REVENUES. We depend on strategic relationships to expand distribution channels and to undertake joint service and product development and marketing efforts. Our ability to increase revenues depends upon marketing services and products through new and existing strategic relationships. We depend on a broad acceptance of Internet messaging infrastructure services on the part of potential partners and acceptance of our company as the supplier for these Internet messaging infrastructure services. We also depend on joint marketing and product development through strategic relationships to achieve market acceptance and brand recognition. If we lose any strategic relationships, fail to renew these agreements or relationships or fail to develop new strategic relationships, our business will suffer. IF OUR SYSTEM SECURITY IS BREACHED, OUR BUSINESS AND REPUTATION COULD SUFFER. A fundamental requirement for online communications is the secure transmission of confidential information over public networks. Third parties may attempt to breach our security or that of our customers. If these attempts are successful, customers' confidential information, including customers' profiles, passwords, financial account information, credit card numbers or other personal information could be breached. We may be liable to our customers for any breach in security and a breach could harm our reputation. We rely on encryption technology licensed from third parties. Although we have implemented network security measures, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. We may be required to expend significant capital and other resources to license encryption technology and additional technologies to protect against security breaches or to alleviate problems caused by any breach. Failure to prevent security breaches may harm our business and operating results. 36 37 WE MAY NOT BE ABLE TO PROTECT INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. We regard our copyrights, service marks, trademarks, trade secrets and similar intellectual property as critical to our success, and we rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with employees, customers and partners to protect proprietary rights. Despite these precautions, unauthorized third parties may infringe or copy portions of our services or reverse engineer or obtain and use information that we regard as proprietary. End user license provisions protecting against unauthorized use, copying, transfer and disclosure of the licensed program may be unenforceable under the laws of certain jurisdictions and foreign countries. The status of United States patent protection in the software industry is not well defined and will evolve as the U.S. Patent and Trademark Office grants additional patents. We have several patents pending in the United States and may seek additional patents in the future. We do not know if the patent application or any future patent application will be issued with the scope of the claims sought, if at all, or whether any patents received will be challenged or invalidated. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. Our means of protecting proprietary rights in the United States or abroad may not be adequate and competitors may independently develop similar technology. Additionally, although we have not received notice of any other alleged patent infringement, we cannot be certain that our products do not infringe issued patents that may relate to our products. In addition, because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to our software products. WE MAY HAVE LIABILITY FOR INTERNET CONTENT AND WE MAY NOT HAVE ADEQUATE LIABILITY INSURANCE. As a provider of messaging services, we face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials transmitted via our services. We do not and cannot screen all of the content generated by our users, and we could be exposed to liability with respect to this content. Furthermore, some foreign governments, such as Germany, have enforced laws and regulations related to content distributed over the Internet that are more strict than those currently in place in the United States. Although we carry general liability and umbrella liability insurance, our insurance may not cover claims of these types or may not be adequate to indemnify us for all liability that may be imposed. There is a risk that a single claim or multiple claims, if successfully asserted against us, could exceed the total of our coverage limits. There also is a risk that single claim or multiple claims asserted against us may not qualify for coverage under our insurance policies as a result of coverage exclusions that are contained within these policies. Should either of these risks occur, capital contributed by our shareholders may need to be used to settle claims. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage could harm our reputation and business and operating results, or could result in the imposition of criminal penalties. OUR ARTICLES OF INCORPORATION AND BYLAWS CONTAIN PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE IN CONTROL. Our articles of incorporation and bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Some of these provisions: - Authorize the issuance of preferred stock that can be created and issued by the board of directors without prior shareholder approval, commonly referred to as "blank check" preferred stock, with rights senior to those of common stock; - Prohibit shareholder action by written consent; and - Establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by shareholders at a meeting. In March 2001, we adopted a shareholder rights plan or "poison pill." This plan could cause the acquisition of our company by a party not approved by our board of directors to be prohibitively expensive. 37 38 SUPPLEMENTAL PRO FORMA FINANCIAL DATA The following supplemental pro forma financial information presents Critical Path's condensed consolidated results of operations during 1998, 1999 and 2000, excluding the impact of certain special charges consisting of (i) amortization of intangible assets associated with purchase business combinations, (ii) accruals for employee retention bonuses associated with purchase business combinations, (iii) stock-based compensation associated with outstanding options and warrants, (iv) in-process research and development associated with purchase business combinations, (v) severance expense associated with workforce reductions, and (vi) impairment of long-lived assets. This supplemental presentation is for informational purposes, only, and is not intended to replace the consolidated operating results prepared and presented in accordance with generally accepted accounting principles.
YEAR ENDED DECEMBER 31, ----------------------------- 1998 1999 2000 ------- -------- -------- (IN THOUSANDS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues License................................................... $ -- $ -- $ 51,607 Service................................................... 1,128 16,263 84,046 ------- -------- -------- Total net revenues................................ 1,128 16,263 135,653 ------- -------- -------- Cost of net revenues License................................................... -- -- 2,731 Service................................................... 2,153 16,505 73,109 ------- -------- -------- Total cost of net revenues........................ 2,153 16,505 75,840 ------- -------- -------- Gross profit (loss)......................................... (1,025) (242) 59,813 ------- -------- -------- Operating expenses Sales and marketing....................................... 1,687 13,811 66,125 Research and development.................................. 2,098 7,682 31,022 General and administrative................................ 3,814 14,051 30,444 ------- -------- -------- Total operating expenses.......................... 7,599 35,544 127,591 ------- -------- -------- Loss from operations........................................ (8,624) (35,786) (67,778) Interest and other income, net.............................. 375 7,061 12,970 Interest expense............................................ (227) (688) (15,884) Equity in net loss of joint venture......................... -- -- (1,019) Minority interest in net income of consolidated subsidiary................................................ -- -- (649) ------- -------- -------- Loss before income taxes.................................... (8,476) (29,413) (72,360) Provision for income taxes.................................. -- -- (6,513) ------- -------- -------- Net loss.................................................... $(8,476) $(29,413) $(78,873) ======= ======== ======== Net loss per share -- basic and diluted..................... $ (2.17) $ (0.99) $ (1.31) Weighted average shares -- basic and diluted................ 3,899 29,770 60,399
38 39 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of December 31, 2000, the Company's investment portfolio consisted of available-for-sale securities, excluding those classified as cash equivalents, of $10.6 million (see Note 7 of Notes to Consolidated Financial Statements -- Investments). These securities consist of strategic equity investments in corporate partners, certain of which are publicly traded and marketable and certain of which are privately held. These securities are subject to equity price risk. The Company has not attempted to reduce or eliminate its market exposure on these equity securities. During the fourth quarter of 2000, the Company determined that the impairment of certain of these investments was deemed to be other than temporary and recorded a write down of $23.6 million, consisting of $2.6 million in investments in marketable securities and $21.0 million in investments in non-marketable securities. For each 10% decline in market value of its available-for-sale equity securities from December 31, 2000, the Company's marketable securities would decline in value by $1.1 million. The Company's long-term obligations consist of the Company's $300.0 million five-year, 5.75% Convertible Subordinated Notes due April 2005, and certain fixed rate capital leases. Accordingly, an immediate 10% change in interest rates would not affect the Company's long-term obligations or the Company's results of operations. We do not attempt to reduce or eliminate our market exposure on these securities. A significant portion of our worldwide operations has a functional currency other than the United States dollar. Accordingly, we are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, and assets and liabilities of these operations. Fluctuations in exchange rates may harm our results of operations and could also result in exchange losses. The impact of future exchange rates fluctuations cannot be predicted adequately. To date, we have not sought to hedge the risks associated with fluctuations in exchange rates. Information relating to quantitative and qualitative disclosure about market risk is set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA FINANCIAL STATEMENTS Reference is made to the Index of Consolidated Financial Statements which appears on page F-1 of this report. The Report of Independent Accountants, Consolidated Financial Statements, Notes to Consolidated Financial Statements and Financial Statement Schedule which are listed in the Index of Consolidated Financial Statements and which appear beginning on page F-2 of this report are incorporated into this Item 8. 39 40 SUPPLEMENTAL DATA The following table sets forth certain unaudited quarterly statements of operations data for each of Critical Path's quarters since inception. This information has been derived from Critical Path's consolidated unaudited financial statements, which, in management's opinion, have been prepared on the same basis as the audited consolidated financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the quarters presented. This information should be read in conjunction with the audited consolidated financial statements of Critical Path and the notes thereto included elsewhere in this document. The operating results for any quarter are not necessarily indicative of the operating results for any future period.
1998 1999 ----------------- ----------------------------------------- THIRD FOURTH FIRST SECOND THIRD FOURTH ------- ------- -------- -------- -------- -------- (IN THOUSANDS) CONSOLIDATED STATEMENT OF OPERATIONS DATA (UNAUDITED): Net revenues License............................. $ -- $ -- $ -- $ -- $ -- $ -- Service............................. 156 605 1,049 2,006 4,913 8,189 ------- ------- -------- -------- -------- -------- Total net revenues.......... 156 605 1,049 2,006 4,913 8,189 ------- ------- -------- -------- -------- -------- Cost of net revenues License............................. -- -- -- -- -- -- Service............................. 896 966 1,914 3,234 4,681 6,676 Amortization of purchased technology....................... -- -- -- -- -- -- Acquisition-related retention bonuses.......................... -- -- -- -- 130 390 Stock-based expenses................ 45 127 446 743 2,712 631 ------- ------- -------- -------- -------- -------- Total cost of net revenues.................. 941 1,093 2,360 3,977 7,523 7,697 ------- ------- -------- -------- -------- -------- Gross profit (loss)................... (785) (488) (1,311) (1,971) (2,610) 492 ------- ------- -------- -------- -------- -------- Operating expenses Sales and marketing................. 558 851 1,984 3,219 3,557 5,051 Research and development............ 560 861 1,379 1,430 1,895 2,978 General and administrative.......... 895 1,726 1,550 2,691 3,678 6,132 Amortization of intangible assets... -- -- -- 550 9,263 22,446 Acquisition-related retention bonuses.......................... -- -- -- -- 570 3,017 Stock-based expenses................ 224 1,532 11,657 8,162 5,425 21,216 Acquired in-process research and development...................... -- -- -- -- -- -- Employee severance expenses......... -- -- -- -- -- -- Impairment of long-lived assets..... -- -- -- -- -- -- ------- ------- -------- -------- -------- -------- Total operating expenses.... 2,237 4,970 16,570 16,052 24,388 60,840 ------- ------- -------- -------- -------- -------- Loss from operations.................. (3,022) (5,458) (17,881) (18,023) (26,998) (60,348) Interest and other income, net........ 48 255 351 1,882 2,841 1,987 Interest expense...................... (87) (126) (64) (180) (167) (341) Equity in net loss of joint venture... -- -- -- -- -- -- Minority interest in net income of consolidated subsidiary............. -- -- -- -- -- -- Loss on investments................... -- -- -- -- -- -- ------- ------- -------- -------- -------- -------- Loss before income taxes.............. (3,061) (5,329) (17,594) (16,321) (24,324) (58,702) Provision for income taxes............ -- -- -- -- -- -- ------- ------- -------- -------- -------- -------- Net loss.............................. $(3,061) $(5,329) $(17,594) $(16,321) $(24,324) $(58,702) ======= ======= ======== ======== ======== ========
40 41
2000 ----------------------------------------------------------------------------- THIRD(1) FOURTH(1) ------------------------- -------------------------- FIRST SECOND AS REPORTED AS RESTATED AS ANNOUNCED AS REVISED -------- --------- ----------- ----------- ------------ ----------- (IN THOUSANDS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: (UNAUDITED) Net revenues License........................... $ 11,070 $ 13,897 $ 21,998 $ 12,365 $ 22,776 $ 14,275 Service........................... 13,483 19,598 22,977 22,977 29,188 27,988 -------- --------- --------- --------- --------- ----------- Total net revenues........ 24,553 33,495 44,975 35,342 51,964 42,263 -------- --------- --------- --------- --------- ----------- Cost of net revenues License........................... 1,007 737 634 634 223 353 Service........................... 14,340 16,738 19,076 19,076 22,611 22,955 Amortization of purchased technology..................... 2,114 4,421 4,434 4,434 7,171 7,171 Acquisition-related retention bonuses........................ 390 390 260 260 -- -- Stock-based expenses.............. 493 383 381 381 329 329 Impairment of long-lived assets... -- -- -- -- -- 25,315 -------- --------- --------- --------- --------- ----------- Total cost of net revenues................ 18,344 22,669 24,785 24,785 30,334 56,123 -------- --------- --------- --------- --------- ----------- Gross profit........................ 6,209 10,826 20,190 10,557 21,630 (13,860) -------- --------- --------- --------- --------- ----------- Operating expenses Sales and marketing............... 13,605 17,342 16,128 16,128 18,116 19,050 Research and development.......... 6,323 9,213 7,635 7,853 7,469 7,633 General and administrative........ 6,766 7,332 6,491 6,568 9,325 9,778 Amortization of intangible assets......................... 47,499 88,986 94,160 94,160 125,223 125,223 Acquisition-related retention bonuses........................ 2,679 3,693 2,888 1,028 968 894 Stock-based expenses.............. 6,703 11,942 10,388 10,388 18,118 18,118 Acquired in-process research and development.................... 200 -- 3,500 3,500 -- -- Employee severance expenses....... -- -- 6,695 6,695 -- -- Impairment of long-lived assets... -- -- -- -- -- 1,282,150 -------- --------- --------- --------- --------- ----------- Total operating expenses................ 83,775 138,508 147,885 146,320 179,219 1,462,846 -------- --------- --------- --------- --------- ----------- Loss from operations................ (77,566) (127,682) (127,695) (135,763) (157,589) (1,476,706) Interest and other income, net...... 1,258 4,697 4,905 4,905 2,110 2,110 Interest expense.................... (274) (5,260) (5,214) (5,214) (5,200) (5,200) Equity in net loss of joint venture........................... -- -- (640) (640) (379) (379) Minority interest in net income of consolidated subsidiary........... -- (325) (201) (201) (123) (123) Loss on investments................. -- -- -- -- (9,745) (23,589) -------- --------- --------- --------- --------- ----------- Loss before income taxes............ (76,582) (128,570) (128,845) (136,913) (170,926) (1,503,887) Provision for income taxes.......... (360) (1,439) (2,534) (2,534) (2,180) (2,180) -------- --------- --------- --------- --------- ----------- Net loss............................ $(76,942) $(130,009) $(131,379) $(139,447) $(173,106) $(1,506,067) ======== ========= ========= ========= ========= ===========
- --------------- (1) See Note 22 of Notes to Consolidated Financial Statements -- Quarterly Financial Data (Unaudited). 41 42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS AND EXECUTIVE OFFICERS The executive officers, directors and key employees of Critical Path and their ages as of March 15, 2001 are as follows:
NAME AGE POSITION ---- --- -------- David C. Hayden...................... 45 Executive Chairman of the Board of Directors Cynthia D. Whitehead................. 53 President Lawrence P. Reinhold................. 41 Executive Vice President and Chief Financial Officer Mari E. Tangredi..................... 36 Executive Vice President of Business Development, Sales and Professional Services Sue Barsamian........................ 41 Senior Vice President of Product Marketing Michael Serbinis..................... 27 Vice President and Chief Technology Officer Brett M. Robertson................... 40 Vice President of Strategic Development and General Counsel Cheryl Van........................... 42 Vice President of Human Resources Lisa Gansky(1)....................... 42 Executive Director Kevin R. Harvey(1)................... 36 Director Amy Rao(2)(3)........................ 38 Director James A. Smith(4).................... 48 Director George Zachary(2).................... 35 Director
- --------------- (1) Member of the Compensation Committee of the Board of Directors. (2) Member of the Audit Committee of the Board of Directors. (3) Ms. Rao was appointed to the Board of Directors and the Audit Committee on March 23, 2001. (4) Mr. Smith was a member of the Board of Directors and the Audit Committee as of March 15, 2001 but resigned from these positions on April 2, 2001. David C. Hayden founded Critical Path and served as the Chairman, President and Chief Executive Officer and Secretary from its inception in February 1997 to October 1998. Mr. Hayden has served as Chairman of the Board of Directors of Critical Path since October 1998 and was appointed Executive Chairman of the Board in February 2001. From February 1993 to August 1996, Mr. Hayden served as Chairman, Chief Executive Officer, and co-founder of The McKinley Group, Inc., creators of Magellan, an Internet search engine. Cynthia D. Whitehead has served as President of Critical Path since February 2001. From March 1999 to February 2001, Ms. Whitehead served as Vice President of Engineering and Operations. From May 1998 to March 1999, Ms. Whitehead was an independent information technology consultant. From 1997 to May 1998, Ms. Whitehead served as Vice President of Information Technology and Chief Information Officer of SBC Communications, parent of Pacific Bell and Southwestern Bell. From 1970 to 1997, Ms. Whitehead was employed in various capacities with Pacific Telesis, most recently as Chief Information Officer and as Vice President -- Technology Services Group of its Pacific Bell operating subsidiary. Lawrence P. Reinhold joined Critical Path as Executive Vice President and Chief Financial Officer during December 2000. From 1995 to December 2000, Mr. Reinhold was employed as a partner with Price Waterhouse and PricewaterhouseCoopers, and most recently served as Managing Partner of that firm's Technology, Information & Communications and Entertainment & Media practice in the Midwest Region of the United States. 42 43 Mari E. Tangredi has served as Executive Vice President of Business Development, Sales and Professional Services since February 2001. From January 2000 to February 2001, Ms. Tangredi served as our Vice President, Corporate Development for Critical Path. From August 1999 to January 2000, Ms. Tangredi served as our Vice President, Business Development, and prior to that she had served as our Vice President, Business Development and Marketing. From June 1995 to November 1997, Ms. Tangredi served as the General Manager/Vice President of Electronic Commerce of Pacific Bell. Sue Barsamian has served as our Senior Vice President of Product Marketing since February 2001. Ms. Barsamian joined Critical Path as Vice President of Product Marketing in March 2000 through its acquisition of RemarQ Communities. From December 1998 to March 2000, Ms. Barsamian served as Vice President of Marketing for RemarQ. From March 1996 to December 1998, Ms. Barsamian was a Principal in Romans Barsamian. From August 1988 to March 1996, Ms. Barsamian was employed in various marketing and sales management capacities with Verity, most recently as Vice President of Marketing. Michael Serbinis has served as our Vice President and Chief Technology Officer since February 2001. Mr. Serbinis joined Critical Path as its Chief Security Officer in March 2000 and served in this capacity until February 2001. From November 1997 to March 2000, Mr. Serbinis was the Chief Technology Officer of The docSpace Company, which he co-founded in November 1997. From September 1996 to October 1997, Mr. Serbinis was a software engineer for Total Control, a subsidiary of General Electric. From April 1996 to August 1996, Mr. Serbinis was responsible for search engine engineering at Zip2 Corporation. Brett M. Robertson has served as Vice President of Strategic Development and General Counsel since June 1999. From July 1998 to December 1998, Ms. Robertson served as General Counsel of Broderbund Software. From August 1994 to July 1998, Ms. Robertson served as Associate General Counsel of Broderbund Software. Cheryl Van has served as Vice President of Human Resources since January 2000. From March 1997 to December 1999, Ms. Van served as Vice President of Employment and Development at Visa International. From October 1988 to February 1997, Ms. Van was employed at Apple Computer in various capacities, and most recently as Senior Manager Employment. Lisa Gansky has served as a director of Critical Path since May 1998 and was appointed Executive Director in February 2001. Ms. Gansky has been a Principal at Trading Fours, a venture development company, since January 1997. From June 1995 to January 1997, Ms. Gansky served as Vice President of AOL, Inc., an online and Internet services company. From June 1994 to January 1995, Ms. Gansky founded and served as Chief Executive Officer of Global Network Navigator, Inc., an Internet solutions company. Kevin R. Harvey has served as a director of Critical Path since April 1998. Mr. Harvey has been a General Partner of Benchmark Capital, a venture capital firm, since January 1995. Mr. Harvey is also a director of Silicon Gaming, Inc., an entertainment and gaming technology company, and a director of several privately held companies. Amy Rao has served as a director of Critical Path since March 2001. Ms. Rao founded Integrated Archive Systems, a systems integrator and managed services company in 1994 and has served as its Chief Executive Officer since its inception. George Zachary has served as a director of Critical Path since April 1998. Mr. Zachary has been a partner at Mohr, Davidow Ventures II, a venture capital firm, since January 1996. From March 1993 to December 1997, Mr. Zachary ran the consumer products business at Silicon Graphics, Inc., a computer workstation company. We have authorized up to seven (7) directors. All directors are elected to hold office until our next annual meeting of shareholders and until their successors have been elected. Officers are elected at the first board of directors meeting following the shareholders' meeting at which the directors are elected and serve at the discretion of the board of directors. There are no family relationships among any of our directors or executive officers. 43 44 ADDITIONAL INFORMATION Additional information required by this item is incorporated by reference to the information set forth in the section entitled "Information About the Board of Directors and Committees of the Board" in the Proxy Statement for our 2001 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year ended December 31, 2000. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information set forth in the section entitled "Compensation of Executive Officers" contained in the Proxy Statement for our 2001 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year ended December 31, 2000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information set forth in the section entitled "Common Stock Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement for our 2001 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year ended December 31, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS The information required by this item is incorporated by reference to the information set forth in the section entitled "Transactions with Related Parties" contained in the Proxy Statement for our 2001 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year ended December 31, 2000. 44 45 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Index to Consolidated Financial Statements Please see the accompanying Index to Consolidated Financial Statements which appears on page F-1 of this report. The Report of Independent Accountants, Consolidated Financial Statements and Notes to Consolidated Financial Statements which are listed in the Index to Consolidated Financial Statements and which appear beginning on page F-2 of this report are incorporated by reference into Item 8 above. (a)(2) Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts for the years ended December 31, 1998, 1999 and 2000 appears on page S-1 of this report and should be read in conjunction with the consolidated financial statements and related notes thereto and report of independent accountants filed herewith. Schedules not mentioned above have been omitted because the information required to be set forth therein is not applicable or the information is otherwise included in the Financial Statements or notes thereto. (b) Reports on Form 8-K For the quarter ended December 31, 2000, we filed the following reports on Form 8-K: On October 2, 2000, we filed a report on Form 8-K announcing Paul Gigg, Executive Vice President and Chief Operating Officer, would be leaving Critical Path. On October 6, 2000, we filed a report on Form 8-K announcing our acquisition of PeerLogic, Inc. The following financial statements and pro forma financial information were filed as part of this report: (a) PeerLogic, Inc. Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1998, December 31, 1999 and June 30, 2000 Consolidated Statements of Operations for the Years Ended December 31, 1998 and 1999 and the Six Months Ended June 30, 1999 and 2000 Consolidated Statements of Shareholders' Deficit for the Years Ended December 31, 1998 and 1999 and the Six Months Ended June 30, 2000 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1999 and the Six Months Ended June 30, 1999 and 2000 (b) Pro Forma Condensed Consolidated Financial Information (Unaudited): Overview Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2000 Pro Forma Condensed Consolidated Statements of Operations for the Year Ended December 31, 1999 and for the Six Months ended June 30, 2000. On November 17, 2000, we filed a report on Form 8-K/A announcing our acquisition of PeerLogic, Inc. On December 11, 2000, we filed a report on Form 8-K announcing Lawrence P. Reinhold would be succeeding Mark J. Rubash as Executive Vice President and Chief Financial Officer of Critical Path. (c) Exhibits The following exhibits are filed as part of, or are incorporated by reference into, this Annual Report on Form 10-K: 2.1 Asset Purchase Agreement, dated May 26, 1999, between the Registrant and Fabrik Communications, Inc. (Incorporated by reference to Exhibit 2.1 to the Registrant's Registration on Form S-1/A (File No. 333-78197))
45 46 2.2 Agreement and Plan of Reorganization, dated June 22, 1999, among Registrant, Amplitude Software Corp. and Apollo Acquisition Corp. (Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on August 31, 1999) 2.3 Agreement and Plan of Reorganization, dated July 15, 1999, among Registrant, dotOne Corporation and dotOne Acquisition Corp. (Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on August 2, 1999) 2.4 Agreement and Plan of Reorganization, dated October 8, 1999, by and among Registrant, Xeti Acquisition Corp. and Xeti, Inc. (Incorporated by reference to Exhibit 2.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 2.5 Agreement and Plan of Reorganization, dated October 20, 1999, by and among Registrant, Initialize Acquisition Corp. and ISOCOR. (Incorporated by reference to Annex A to the Registrant's Registration Statement on Form S-4 (File No. 333-92199)) 2.6 Agreement and Plan of Reorganization, dated November 2, 1999, by and among Registrant, Wellfleet Acquisition Corp. and FaxNet Corporation. (Incorporated by reference to Exhibit 2.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 2.7 Agreement and Plan of Reorganization, dated November 3, 1999, by and among Registrant, Compass Holding Corp., Compass Acquisition Corp., 3034996 Nova Scotia Company, 3034997 Nova Scotia Company and The docSpace Company. (Incorporated by reference to Exhibit 2.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 2.8 Agreement and Plan of Reorganization, dated January 28, 2000, by and among Registrant, Inc., D.V. Acquisition Corp. and RemarQ Communities, Inc. (Incorporated by reference to Exhibit 2.5 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 2.9 Agreement and Plan of Reorganization, dated August 8, 2000, by and among Registrant, Prince Acquisition Corp. and PeerLogic, Inc. (Incorporated by reference to Exhibit 5 to the Registrant's Current Report on Form 8-K filed on August 8, 2000) 3.1 Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3(i)(b) to the Registrant's Registration on Form S-1 (File No. 333-71499)) 3.2 Amendment to the Articles of Incorporation, dated January 5, 2001 3.3 Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3(ii)(b) to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 4.1 Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 4.2 Warrant to Purchase Preferred Stock dated September 11, 1998 issued by the Registrant to Hambrecht & Quist LLC. (Incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 4.3 Warrant to Purchase Preferred Stock dated January 13, 1999 issued by the Registrant to Hambrecht & Quist LLC. (Incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 4.4 Warrant to Purchase Common Stock dated January 29, 1999 issued by the Registrant to America Online, Inc. (Incorporated by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 4.5 Indenture, dated March 31, 2000, by and between Registrant and State Street Bank and Trust Company of California, N.A., Trustee, relating to the $300 million five-year, 5.75% Convertible Subordinated Notes due April 1, 2005 (Incorporated by reference to Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000) 10.1 Form of Indemnification Agreement between the Registrant and each of its directors and officers. (Incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499))
46 47 10.2 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.3 1998 Stock Plan and forms of stock option agreements thereunder. (Incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.4 Series B Preferred Stock Purchase Agreement dated September 11, 1998. (Incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.5 Amendment to Series B Preferred Stock Purchase Agreement dated January 13, 1999. (Incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.6 Amended and Restated Investors' Rights Agreement dated September 11, 1998. (Incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.7 Amendment to the Amended and Restated Investors' Rights Agreement dated January 13, 1999. (Incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.8 Master Equipment Lease Agreement dated April 28, 1998, and Lease Line Schedule thereto, by and between the Registrant and Lighthouse Capital Partners II, L.P. (Incorporated by reference to Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.9 Master Lease Agreement dated May 1, 1998, and addendum thereto, by and between the Registrant and Comdisco, Inc. (Incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.10 Standard Industrial/Multitenant Lease-Gross dated June 20, 1997 by and between the Registrant and 501 Folsom Street Building. (Incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.11 Letter Agreement dated October 1, 1998 by and between the Registrant and Douglas Hickey. (Incorporated by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.12 Promissory Note and Security Agreement dated November 2, 1998 by and between the Registrant and Douglas Hickey. (Incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.13 Warrant Agreement dated April 28, 1998 by and between the Registrant and Lighthouse Capital Partners II, L.P. (Incorporated by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.14 Warrant Agreement dated May 1, 1998 by and between the Registrant and Comdisco, Inc. (Incorporated by reference to Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.15 Master Services Agreement dated December 10, 1998 by and between the Registrant and US West Communications Services, Inc. (Incorporated by reference to Exhibit 10.15 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.16 Email Services Agreement dated May 27, 1998 by and between the Registrant and Network Solutions, Inc. (Incorporated by reference to Exhibit 10.16 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.17 Email Services Agreement dated July 6, 1998 by and between the Registrant and Starmedia Network, Inc. (Incorporated by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.18 Amendment to email Services Agreement September 30, 1998 by and between the Registrant and E*TRADE Group, Inc. (Incorporated by reference to Exhibit 10.18 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499))
47 48 10.19 Email Services Agreement dated September 14, 1998 by and between the Registrant and Sprint Communications Company L.P. (Incorporated by reference to Exhibit 10.19 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.20 Email Services Agreement dated March 19, 1998 by and between the Registrant and NTX, Inc. dba TABNet, Inc. (Incorporated by reference to Exhibit 10.20 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.21 QuickStart Loan and Security Agreement dated May 12, 1998 by and between the Registrant and Silicon Valley Bank. (Incorporated by reference to Exhibit 10.21 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.22 Email Services Agreement dated January 29, 1999 by and between the Registrant and ICQ, Inc. (Incorporated by reference to Exhibit 10.22 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.23 Sublease dated February 8, 1999 by and between Times Direct Marketing, Inc. and the Registrant (Incorporated by reference to Exhibit 10.23 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.24 Promissory Note and Security Agreement dated January 26, 1999 by and between the Registrant and Bill Rinehart. (Incorporated by reference to Exhibit 10.24 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.25 Office lease dated December 1999 by and between Ecker-Folsom Properties, LLC and the Registrant. (Incorporated by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 10.26 Office lease dated December 1999 by and between Ecker-Folsom Properties, LLC and the Registrant. (Incorporated by reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 10.27 Secured Promissory Note and Security Agreement, dated January 18, 2000, by and between the Registrant and Mark Rubash. (Incorporated by reference to Exhibit 10.28 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000) 10.28 1999 Stock Option Plan and forms of agreements thereunder (Incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-8 (File No. 333-87553)) *10.29 Offer Letter, dated December 4, 2000, by and between the Registrant and Lawrence P. Reinhold 10.30 Settlement Agreement and Mutual Release, effective as of December 7, 2000, by and between the Registrant and Mark Rubash 10.31 Agreement and Release, dated February 9, 2001, by and between the Registrant and Douglas Hickey 10.32 Form of Indemnification Agreement by and between the Registrant and each of its directors and officers 21.1 List of Subsidiaries 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants 24.1 Power of Attorney (see the Signatures section of this report)
- --------------- * Confidential treatment requested with respect to portions of this exhibit. 48 49 CRITICAL PATH, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... F-2 Consolidated Balance Sheet.................................. F-3 Consolidated Statement of Operations........................ F-4 Consolidated Statement of Shareholders' Equity.............. F-5 Consolidated Statement of Cash Flows........................ F-6 Notes to Consolidated Financial Statements.................. F-7 Schedule II -- Valuation and Qualifying Accounts............ S-1
F-1 50 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Critical Path, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Critical Path, Inc. and its subsidiaries at December 31, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PRICEWATERHOUSECOOPERS LLP San Francisco, California April 4, 2001 F-2 51 CRITICAL PATH, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 2000 DECEMBER 31 --------- ----------- ASSETS Current assets Cash and cash equivalents................................. $ 75,932 $ 216,542 Restricted cash........................................... 325 215 Accounts receivable, net.................................. 10,147 38,938 Other current assets...................................... 40,800 10,252 --------- ----------- Total current assets.............................. 127,204 265,947 Investments................................................. 18,426 10,610 Notes receivable from officers.............................. 669 2,702 Property and equipment, net................................. 52,517 85,304 Intangible assets, net...................................... 474,297 77,339 Other assets................................................ 692 8,953 --------- ----------- Total assets...................................... $ 673,805 $ 450,855 ========= =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable.......................................... $ 35,621 $ 43,710 Accrued expenses.......................................... 7,120 10,377 Deferred revenue.......................................... 1,818 15,720 Capital lease and other obligations, current.............. 6,585 9,363 --------- ----------- Total current liabilities......................... 51,144 79,170 Convertible subordinated notes payable...................... -- 300,000 Capital lease and other obligations, long-term.............. 5,669 4,687 --------- ----------- Total liabilities................................. 56,813 383,857 --------- ----------- Commitments and contingencies Minority interest in consolidated subsidiary................ -- 649 --------- ----------- Shareholders' equity Preferred Stock and paid-in-capital, $0.001 par value Shares authorized: 5,000 Shares issued and outstanding: none.................... -- -- Common Stock and paid-in-capital, $0.001 par value Shares authorized: 150,000 Shares issued and outstanding: 46,937 and 74,135....... 864,699 2,130,329 Notes receivable from shareholders........................ (1,154) (1,205) Unearned compensation..................................... (124,906) (80,760) Accumulated deficit, including other comprehensive loss... (121,647) (1,982,015) --------- ----------- Total shareholders' equity........................... 616,992 66,349 --------- ----------- Total liabilities and shareholders' equity........ $ 673,805 $ 450,855 ========= ===========
The accompanying notes are an integral part of these consolidated financial statements. F-3 52 CRITICAL PATH, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1999 2000 YEAR ENDED DECEMBER 31 -------- --------- ----------- Net revenues License............................................... $ -- $ -- $ 51,607 Service............................................... 897 16,157 84,046 -------- --------- ----------- Total net revenues............................ 897 16,157 135,653 -------- --------- ----------- Cost of net revenues License............................................... -- -- 2,731 Service............................................... 2,153 16,505 73,109 Amortization of purchased technology.................. -- -- 18,140 Acquisition-related retention bonuses................. -- 520 1,040 Stock-based expenses.................................. 193 4,532 1,586 Impairment of long-lived assets....................... -- -- 25,315 -------- --------- ----------- Total cost of net revenues.................... 2,346 21,557 121,921 -------- --------- ----------- Gross profit (loss)..................................... (1,449) (5,400) 13,732 -------- --------- ----------- Operating expenses Sales and marketing................................... 1,687 13,811 66,125 Research and development.............................. 2,098 7,682 31,022 General and administrative............................ 3,814 14,051 30,444 Amortization of intangible assets..................... -- 32,259 355,868 Acquisition-related retention bonuses................. -- 3,587 8,294 Stock-based expenses -- Sales and marketing........... 631 37,521 30,948 Stock-based expenses -- Research and development...... 148 2,161 3,449 Stock-based expenses -- General and administrative.... 1,621 6,778 12,754 Stock-based expenses -- Employee severance............ -- -- 3,447 Acquired in-process research and development.......... -- -- 3,700 Employee severance expenses........................... -- -- 3,248 Impairment of long-lived assets....................... -- -- 1,282,150 -------- --------- ----------- Total operating expenses...................... 9,999 117,850 1,831,449 -------- --------- ----------- Loss from operations.................................... (11,448) (123,250) (1,817,717) Interest and other income, net.......................... 375 7,061 12,970 Interest expense........................................ (388) (752) (15,948) Equity in net loss of joint venture..................... -- -- (1,019) Minority interest in net income of consolidated subsidiary............................................ -- -- (649) Loss on investments..................................... -- -- (23,589) -------- --------- ----------- Loss before income taxes................................ (11,461) (116,941) (1,845,952) Provision for income taxes.............................. -- -- (6,513) -------- --------- ----------- Net loss................................................ $(11,461) $(116,941) $(1,852,465) ======== ========= =========== Net loss per share -- basic and diluted................. $ (2.94) $ (3.93) $ (30.67) Weighted average shares -- basic and diluted............ 3,899 29,770 60,399
The accompanying notes are an integral part of these consolidated financial statements. F-4 53 CRITICAL PATH, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
1998 1999 2000 YEAR ENDED DECEMBER 31 -------- --------- ----------- Convertible Preferred Stock and paid-in-capital Balance, beginning of year...................................... $ -- $ 24,565 $ -- Issuance of Series A Preferred Stock, net.............. 9,124 -- -- Issuance of Series B Preferred Stock, net.............. 15,441 10,749 -- Exercise of stock purchase rights and warrants......... -- 1,747 -- Conversion of Preferred Stock, net..................... -- (37,061) -- -------- --------- ----------- Balance, end of year................................ 24,565 -- -- -------- --------- ----------- Common Stock and paid-in-capital Balance, beginning of year............................. 53 21,850 864,699 Issuance of Common Stock............................... 78 645,828 1,204,022 Exercise of stock options and warrants................. 1,114 1,648 32,246 Issuance of warrants and stock purchase rights......... 723 -- -- Unearned compensation related to stock options and warrants............................................ 19,882 158,541 29,608 Conversion of Preferred Stock, net..................... -- 37,061 -- Purchase of Common Stock............................... -- (229) (246) -------- --------- ----------- Balance, end of year................................ 21,850 864,699 2,130,329 -------- --------- ----------- Notes receivable from shareholders Balance, beginning of year............................. -- (1,151) (1,154) Issuance of Common Stock............................... (85) -- -- Exercise of stock options and warrants................. (1,066) (30) -- Interest on shareholder notes.......................... -- (58) (51) Repayment of shareholder notes......................... -- 85 -- -------- --------- ----------- Balance, end of year................................ (1,151) (1,154) (1,205) -------- --------- ----------- Unearned compensation Balance, beginning of year............................. -- (17,371) (124,906) Unearned compensation related to stock options and warrants............................................ (19,882) (158,541) (29,608) Amortization of unearned compensation.................. 2,511 51,006 73,754 -------- --------- ----------- Balance, end of year................................ (17,371) (124,906) (80,760) -------- --------- ----------- Accumulated deficit, including other comprehensive (loss) Balance, beginning of year............................. (1,074) (12,535) (121,647) -------- --------- ----------- Net loss............................................... (11,461) (116,941) (1,852,465) Other comprehensive (loss): Unrealized investment gains (loss).................. -- 7,926 (7,926) Foreign currency translation adjustments............ -- (97) 23 -------- --------- ----------- Comprehensive loss................................ (11,461) (109,112) (1,860,368) -------- --------- ----------- Balance, end of year................................ (12,535) (121,647) (1,982,015) -------- --------- ----------- Total shareholders' equity..................... $ 15,358 $ 616,992 $ 66,349 ======== ========= ===========
The accompanying notes are an integral part of these consolidated financial statements. F-5 54 CRITICAL PATH, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
1998 1999 2000 YEAR ENDED DECEMBER 31 -------- --------- ----------- Operating Net loss.............................................. $(11,461) $(116,941) $(1,852,465) Provision for doubtful accounts....................... 50 573 3,190 Depreciation and amortization......................... 1,019 8,063 35,980 Amortization of intangible assets..................... -- 32,259 374,008 Stock-based costs and expenses........................ 2,984 51,162 52,184 Acquired in-process research and development.......... -- -- 3,700 Impairment of long-lived assets....................... -- -- 1,307,465 Minority interest in net income of consolidated subsidiary......................................... -- -- 649 Equity in net loss of joint venture................... -- -- 1,019 Loss on investments................................... -- -- 23,589 Accounts receivable................................... (171) (4,708) (14,422) Other assets.......................................... (86) (25,612) (4,603) Accounts payable...................................... 151 25,916 (8,699) Accrued expenses...................................... 71 5,633 (1,380) Deferred revenue...................................... 500 (163) (711) -------- --------- ----------- Net cash used in operating activities......... (6,943) (23,818) (80,496) -------- --------- ----------- Investing Notes receivable from officers........................ (500) (169) (1,966) Property and equipment purchases...................... (491) (41,819) (54,461) Investments in unconsolidated entities, net........... -- (10,500) (28,492) Payments for acquisitions, net of cash acquired....... -- (116,359) (15,618) Promissory note receivable............................ -- (15,000) 10,000 Restricted cash....................................... (325) -- 110 -------- --------- ----------- Net cash used in investing activities......... (1,316) (183,847) (90,427) -------- --------- ----------- Financing Proceeds from issuance of Preferred Stock, net........ 23,445 12,496 -- Proceeds from issuance of Common Stock, net........... 41 259,803 35,368 Proceeds from issuance of convertible debt, net....... 500 -- 289,181 Proceeds from equipment lease line.................... 198 -- -- Repayment of debt..................................... (227) -- (6,000) Proceeds from payments of shareholder notes receivable......................................... -- 26 -- Principal payments on lease obligations............... (908) (3,193) (6,816) Purchase of Common Stock.............................. -- (229) (246) -------- --------- ----------- Net cash provided by financing activities..... 23,049 268,903 311,487 -------- --------- ----------- Net change in cash and cash equivalents................. 14,790 61,238 140,564 Effect of exchange rates on cash and cash equivalents... -- (97) 46 Cash and cash equivalents at beginning of year.......... 1 14,791 75,932 -------- --------- ----------- Cash and cash equivalents at end of year................ $ 14,791 $ 75,932 $ 216,542 ======== ========= =========== Supplemental cash flow disclosure: Cash paid for interest................................ $ 244 $ 688 $ 11,598 Cash paid for foreign income taxes.................... $ -- $ -- $ 335 Non-cash investing and financing activities: Property and equipment leases......................... $ 4,714 $ 5,863 $ -- Property and equipment purchases payable.............. $ -- $ 9,796 $ 1,470 Common Stock issued for notes receivable.............. $ 1,151 $ 29 $ -- Conversion of notes payable into Preferred Stock...... $ 1,120 $ -- $ -- Unrealized gain (loss) on investments................. $ -- $ 7,926 $ (7,926) Common Stock and options issued for acquisitions...... $ -- $ 387,651 $ 1,229,728
The accompanying notes are an integral part of these consolidated financial statements. F-6 55 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Critical Path, Inc. was incorporated in California on February 19, 1997. In connection with the Annual Meeting of Shareholders held in June 2000, the shareholders approved the re-incorporation of Critical Path, Inc. in Delaware, as well as an increase in the authorized shares of Common Stock from 150 million to 500 million. In January 2001, the Company amended its articles of incorporation to increase the authorized shares to 505 million; however management has not yet re-incorporated the Company in Delaware. Critical Path, along with its subsidiaries (collectively referred to herein as the "Company") provides Internet messaging infrastructure solutions for corporate enterprises and service providers worldwide. Basis of presentation The consolidated financial statements include the accounts of the Company, and its wholly-owned and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Acquisitions The Company has accounted for all business combinations using the purchase method of accounting. Results of operations of the acquired businesses are included in the Company's financial results from the date of the acquisition. Net assets of the companies acquired are recorded at their fair value at the acquisition date. The excess of the purchase price over the fair value of separately identified net assets acquired is included in intangible assets in the accompanying consolidated balance sheet. The fair value of separately identified intangible assets was determined based upon independent valuations using various valuation methodologies. Cash equivalents and restricted cash The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of deposits in money market funds. Restricted cash is composed of amounts held on deposit that are required as collateral for Company-issued credit cards. Investments Marketable securities are classified as available-for-sale as of each balance sheet date and are reported at fair value, with unrealized gains and losses, net of tax, recorded in shareholders' equity. Realized gains or losses and charges for other than temporary declines in value, if any, on available-for-sale securities are reported in other income or expense as incurred. The equity method is used to account for investments in unconsolidated entities if the Company has the ability to exercise significant influence over financial and operating matters, but does not have the ability to control such entities. The cost method is used to account for equity investments in unconsolidated entities where the Company does not have the ability to exercise significant influence over financial and operating matters. The Company periodically evaluates these investments for other-than-temporary impairment (Note 7 -- Investments). F-7 56 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Concentration of credit risk Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, restricted cash, and accounts receivable. Cash and cash equivalents and restricted cash are deposited with financial institutions that management believes are creditworthy. While the Company's accounts receivable are derived from product and service transactions with geographically dispersed companies that operate in a number of horizontal markets, certain customers may be negatively impacted as a result of an economic downturn or other industry or market related conditions. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. During 1998 and 1999, two Internet messaging customers accounted for a significant portion of the Company's net revenues. During 1998, these customers accounted for approximately, 62% and 30% of net revenues, and during 1999, these two customers accounted for approximately 15% and 4% of net revenues. Revenues generated from these two customers were insignificant in 2000. Fair value of financial instruments The Company's financial instruments, including cash and cash equivalents, restricted cash, accounts and notes receivable, accounts payable and capital lease obligations, are carried at cost, which approximates fair value due to the short maturity of these instruments. In addition, the Company holds $300.0 million in convertible subordinated notes, which are carried at cost (Note 11 -- Borrowings). Property and equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the shorter of the estimated useful lives of the assets, generally three to five years, or the lease term, if applicable. Gains and losses on disposals are included in results of operations at amounts equal to the difference between the net book value of the disposed assets and the proceeds received upon disposal. Expenditures for replacements and improvements are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred. Software costs for internal use The Company capitalizes costs related to software for internal use. These costs primarily include purchased software and qualifying external consulting fees and the amortization of these costs is included in general and administrative expenses. During 2000, approximately $2.1 million costs related to software for internal use were capitalized amortization of $226,000 was charged to expense. Software costs for products Development costs related to software products are expensed as incurred, as research and development costs, until technological feasibility of the product has been established. The Company has defined the establishment of technological feasibility as the completion of a working model. There is typically a relatively short time period between technological feasibility and product release, and the amount of costs incurred during such period is insignificant; as a result, capitalization of software development costs has been infrequent, however, during the fourth quarter of 2000, approximately $800,000 was capitalized. No amortization was recorded as the related products were not released in 2000 and there were no related amounts capitalized during 1999 or 1998. Intangible assets Identifiable intangible assets result from the application of the purchase method of accounting for the Company's acquisitions and are composed of the amounts allocated to the acquisition date fair value of F-8 57 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) assembled workforce, customer base and acquired technology. The excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired is recorded as goodwill. Intangible assets are stated net of accumulated amortization and were amortized on a straight-line basis over their expected useful lives ranging from two to eight years. As a result of the Company's fourth quarter 2000 impairment assessment of its long-lived assets, the Company determined that the remaining useful lives approximate two years. The Company periodically evaluates the reasonableness of the remaining useful lives of intangible assets based upon an analysis of current operating contributions and business plans. Valuation of long-lived assets The Company periodically evaluates the carrying value of long-lived assets and certain identifiable intangibles for impairment, when events and circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized whenever the evaluation demonstrates that the carrying amount of a long-lived asset is not recoverable (Note 9 -- Intangible Assets and Note 17 -- Impairment of Long-Lived Assets). Revenue recognition The Company recognizes revenue related to the sale of the Company's licensed software products, hosted messaging and collaboration services, professional services and post-contract customer support. License revenue License product revenue. License revenue is derived from perpetual and term licenses for the Company's messaging, directory, collaborative and enterprise application integration technologies. License revenues are recognized when persuasive evidence of an arrangement exists, delivery of the licensed software to the customer has occurred and the collection of a fixed or determinable license fee is considered probable. The Company's revenue recognition policies require that revenue recognized from software arrangements be allocated to each element of the arrangement based on the fair values of the elements, such as software products, specified upgrades and enhancements, post contract customer support, installation, training or other services. The determination of fair value is based on Company-specific objective evidence. If objective evidence of fair value for each element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value of the undelivered elements exists or until all elements of the arrangement are delivered. The Company also receives license fees from resellers under arrangements that do not provide product return, exchange or upgrade rights. Revenue from reseller agreements may include a nonrefundable, advance royalty which is payable upon the signing of the contract and license fees based on the contracted value of the Company's products purchased by the reseller. Guaranteed license fees from resellers, where no right of return exists, are recognized when persuasive evidence of an arrangement exists, delivery of the licensed software has occurred and the collection of a fixed or determinable license fee is considered probable. Non-guaranteed per-copy license fees from resellers are initially deferred and are recognized when they are reported as sold to end users by the reseller. Additionally, under the terms of the agreement, the Company is obligated to remit to the reseller any license fees collected by the Company from its other channel partners or direct sales force from their sale of the same product until completion of the term of the agreement. The Company will account for these transactions by recording revenue owed to the Company from these sales and recording a portion of the amount remitted to the reseller as a sales and marketing expense. Furthermore, in the event that the Company has a change in control or sells its rights to the software, the Company is obligated to pay the reseller an early termination penalty. F-9 58 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Service revenue Hosted messaging services. The Company derives service revenues related to fees for services related to the Company's hosted messaging solutions. These are primarily based upon monthly contractual per unit rates for the services involved, which are recognized on a ratable monthly basis over the term of the contract beginning with the month in which service delivery starts. Amounts billed or received in advance of service delivery, including but not limited to branding and set-up fees, are initially deferred and subsequently recognized on a ratable monthly basis over the expected term of the relationship beginning with the month in which service delivery starts. Professional services. The Company derives service revenue from fees primarily related to training, installation and configuration services. The associated revenues are recognized in the period in which the services are performed. Customer support. The Company derives services revenue for fees from post-contract customer support agreements associated with product licenses. These fees are recognized ratably over the term of the support contract, generally one year. Advertising expense Advertising and promotion costs are generally expensed as incurred. Costs associated with the development of print or other media campaigns are deferred until the period that includes the first commercial use of the media campaign. Costs associated with industry trade shows and customer conferences are deferred until the period that includes the applicable trade show or conference. Advertising costs totaled $135,000, $414,000 and $1.3 million during 1998, 1999 and 2000, respectively. Research and development Research and development costs include expenses incurred by the Company to develop and enhance its portfolio of Internet messaging infrastructure solutions. Research and development costs, including acquired in-process research and development costs, are recognized as expense as incurred. Stock-based compensation The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and its related interpretations and complies with the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25, compensation expense for fixed options is based on the difference, if any, on the date of the grant, between the fair value of the Company's stock and the exercise price of the option. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123. Income taxes Income taxes are computed using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company's consolidated financial statements or tax returns. The measurement of current and deferred tax assets and liabilities are based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. Deferred tax assets are reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. F-10 59 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Net loss per share Basic net loss per share is computed by dividing the net loss available to common shareholders for the period by the weighted average number of common shares outstanding during the period. Shares subject to repurchase by the Company and shares held in escrow in connection with certain acquisition agreements, are excluded from the basic calculation. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of each class of potential common shares is dilutive. Potential common shares include restricted Common Stock, shares held in escrow, and incremental Common and Preferred shares issuable upon the exercise of stock options and warrants and upon conversion of Series A and Series B Convertible Preferred Stock and the convertible notes. Comprehensive income The Company accounts for and reports comprehensive income or loss and its components in its financial statements. Comprehensive income or loss, as defined, includes the Company's net income or loss and all other changes in equity (net assets) during the period from non-owner sources. Foreign currency The Company considers the local currency to be the functional currency for predominantly all of its foreign operations. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the period. Translation adjustments are charged or credited to other comprehensive income, a component of shareholders' equity. Gains and losses on foreign currency transactions are included in non-operating income and expense. Segment and geographic information The Company does not currently manage its business in a manner that requires it to report financial results on a segment basis. The Company currently operates in one segment: Internet messaging infrastructure products and services and management uses one measure of profitability. (Note 20 -- Product and Geographic Information). Reclassifications Certain amounts previously reported have been reclassified to conform to the current period presentation. Liquidity Since inception, the Company has incurred aggregate consolidated net losses of approximately $2.0 billion, which includes $1.3 billion related to long-lived asset impairment, $410.0 million related to non-cash charges associated with the Company's ten acquisitions, and $105.8 million related to non-cash stock-based expenses. The Company continues to face significant risks associated with successful execution of its business strategy. These risks include, but are not limited to, technology and product development, introduction and market acceptance of new products and services, changes in the marketplace, liquidity, competition from existing and new competitors which may enter the marketplace, retention of key personnel, and pending litigation. The Company requires sufficient capital to implement its strategy, to adequately address the appropriate target markets, generate sales demand for its current and planned future products and services. In addition, the Company's liquidity could be adversely impacted by the litigation referred to in Note 13 -- Commitments and Contingencies, although management believes the litigation will not have a material adverse impact on working capital through the end of 2001. F-11 60 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Working capital at December 31, 2000 was $186.8 million, which included cash and cash equivalents of $216.5 million. Management believes based on the available cash balances, it has sufficient cash resources to fund operations through at least the end of 2001. On a long-term basis, however, the Company may require additional financing. There can be no assurance, however, that such financing would be available when needed, if at all, or on favorable terms and conditions. Recent accounting pronouncements In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," (as amended in 2000 by SAB 101A and SAB 101B) which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Based on the SEC's timeline for implementing SAB 101, the Company was required to comply with the guidelines in the fourth quarter of fiscal year 2000. Management believes that the impact of SAB No. 101 did not have a material effect on the financial position or results of operations of the Company. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of Effective Date of FASB Statement No. 133". SFAS 133, as amended by SFAS 137, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000, with earlier application encouraged. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities -- an amendment of FASB Statement No. 133." SFAS 133, SFAS 137 and SFAS 138 establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS 133, SFAS 137 and SFAS 138 are effective for fiscal years beginning after June 15, 2000. The Company currently has no derivative instruments and, therefore, the adoption of SFAS 133, SFAS 137 and SFAS 138 did not have a material impact on the Company's financial position or results of operations. NOTE 2 -- ACQUISITIONS During 1999 and 2000, the Company completed ten acquisitions. These acquisitions have been accounted for using the purchase method of accounting and were as follows: - Operating assets of the Connect Service business of Fabrik Communications, including the ongoing business operations as well as nearly 500 customer relationships; - dotOne Corporation, a corporate email messaging service provider; - Amplitude Software Corporation, a provider of business-to-business Internet calendaring and resource scheduling solutions; - Xeti, Inc., a developer of standards-based public key infrastructure solutions; - FaxNet Corporation, a outsource supplier of carrier-class enhanced fax and integrated messaging solutions; - ISOCOR Corporation, a supplier of Internet messaging, directory and meta-directory software solutions; - The docSpace Company, a provider of web-based services for secure file delivery, storage and collaboration; - RemarQ Communities, Inc., a provider of Internet collaboration services for corporations, web portals and Internet service providers; F-12 61 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - Netmosphere, Inc., a provider of e-Business solutions for project collaboration and communications; - PeerLogic, Inc., a provider of directory and enterprise application integration software.
ACQUIRED COMPANY ----------------------------------------------------------------------------------------------- FABRIK DOTONE AMPLITUDE XETI FAXNET ISOCOR DOCSPACE REMARQ -------- -------- ---------- -------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Acquisition date....... 5/26/99 7/12/99 8/31/99 11/24/99 12/6/99 1/19/00 3/8/00 3/30/00 Shares issued......... 109 641 4,107 274 2,845 5,030 3,806 3,868 Purchase price: Value of shares issued.............. $ 8,000 $ 35,000 $ 141,300 $ 18,500 $ 152,400 $ 226,700 $ 218,000 $ 259,300 Value of options assumed............. -- 3,200 22,000 3,100 7,300 37,200 -- 7,700 Cash.................. 12,000 17,500 45,000 2,000 20,000 -- 30,000 -- Transaction costs..... 100 1,300 6,100 200 7,900 13,500 10,000 600 -------- -------- ---------- -------- ---------- ---------- ---------- ---------- Total purchase price.......... $ 20,100 $ 57,000 $ 214,400 $ 23,800 $ 187,600 $ 277,400 $ 258,000 $ 267,600 ======== ======== ========== ======== ========== ========== ========== ========== Purchase price allocation: Property and equipment........... $ 500 $ -- $ -- $ -- $ -- $ -- $ -- $ -- Customer base......... 2,100 4,600 600 -- 5,500 9,800 -- 5,900 Assembled workforce... 400 1,500 3,800 360 900 3,400 500 3,300 In-process technology.......... -- -- -- -- -- 200 -- -- Existing technology... -- 600 4,100 540 6,100 18,300 21,500 4,500 Unvested/assumed options............. -- -- -- -- -- -- -- -- Assets/(Liabilities)... -- (1,700) 4,400 200 (10,100) 18,700 (7,100) 7,800 Goodwill.............. 17,100 52,000 201,500 22,700 185,200 227,000 243,100 246,100 -------- -------- ---------- -------- ---------- ---------- ---------- ---------- Total purchase price.......... $ 20,100 $ 57,000 $ 214,400 $ 23,800 $ 187,600 $ 277,400 $ 258,000 $ 267,600 ======== ======== ========== ======== ========== ========== ========== ========== ACQUIRED COMPANY ------------------------ NETMOSPHERE PEERLOGIC ----------- ---------- (IN THOUSANDS) Acquisition date....... 6/26/00 9/26/00 Shares issued......... 1,008 6,120 Purchase price: Value of shares issued.............. $ 33,000 $ 374,700 Value of options assumed............. 6,700 63,400 Cash.................. -- 3,000 Transaction costs..... 1,600 4,000 ---------- ---------- Total purchase price.......... $ 41,300 $ 445,100 ========== ========== Purchase price allocation: Property and equipment........... $ -- $ -- Customer base......... 9,000 5,500 Assembled workforce... 1,400 7,400 In-process technology.......... -- 3,500 Existing technology... 3,600 30,300 Unvested/assumed options............. -- 28,300 Assets/(Liabilities)... (1,000) (18,650) Goodwill.............. 28,300 388,750 ---------- ---------- Total purchase price.......... $ 41,300 $ 445,100 ========== ==========
Pro Forma Results (Unaudited) The following unaudited pro forma summary presents the Company's consolidated results of operations for 1999 and 2000 as if the acquisitions had been consummated at January 1, 1999. The pro forma consolidated results of operations include certain pro forma adjustments, including the amortization of intangible assets and the accretion of the acquisition-related retention bonuses.
1999 2000 Year Ended December 31 --------- ----------- (in thousands, except per share amounts) Net revenues................................................ $ 97,466 $ 154,382 Net loss.................................................... $(705,114) $(1,532,958) Net loss per share: Basic and diluted......................................... $ (14.79) $ (20.91)
The pro forma results are not necessarily indicative of those that would have actually occurred had the acquisitions taken place at the beginning of the periods presented. NOTE 3 -- ACQUISITION-RELATED RETENTION BONUSES In connection with the acquisitions of dotOne, Amplitude, Xeti, FaxNet, ISOCOR, and docSpace, the Company established a retention bonus program in the aggregate amount of $20.7 million to provide incentives for certain former employees of these companies to continue their employment with the Company. Payments of bonuses to the listed employees occurs on the six-month or twelve-month anniversary date of the acquisition, depending on the program, unless the listed employees voluntarily terminate their employment with the Company prior to the respective acquisition's six or twelve month anniversary. A ratable share of the adjusted eligible bonus amount has been accrued and charged to compensation expense over the respective F-13 62 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) six- or twelve-month period commencing on the date the bonuses were granted. There were no acquisition-related retention bonuses granted during 1998. As of December 31, 1999, the aggregate, adjusted eligible bonus amount was $11.6 million and the ratable charge to compensation expense for the year then ended was $4.1 million. Based on the functions of the employees scheduled to receive acquisition bonuses in 1999, $520,000 of the compensation charge was allocated to cost of net revenues and the remaining $3.6 million was allocated to operating expenses. No bonuses were paid in 1999. As of December 31, 2000, the aggregate, adjusted eligible bonus amount was $4.9 million and the ratable charge to compensation expense for the year then ended was $9.3 million. Based on the functions of the employees scheduled to receive acquisition bonuses in 2000, $1.0 million of the compensation charge was allocated to cost of net revenues and the remaining $8.3 million was allocated to operating expenses. Additionally, during 2000, approximately $790,000 was recognized as employee severance expense, resulting from acceleration of the required one year vesting period (Note 4 -- Employee Severance Expenses) in the third quarter of 2000. During 2000, $11.6 million was paid in acquisition-related retention bonuses and $2.5 million was accrued as of the year then ended. In March of 2001, the Company announced an employee retention bonus program designed to provide incentives for current employees of Critical Path to continue their employment with the Company. Under this program, the Company anticipates it may pay cash retention bonuses of up to approximately $7.5 million, based on the Company's achievement of certain 2001 financial metrics. NOTE 4 -- EMPLOYEE SEVERANCE EXPENSES On July 19, 2000, the Company announced its plan to reduce its worldwide employee headcount by approximately 113 employees or 11%. This employee reduction plan was executed with the intent to realize various synergies gained through the nine acquisitions the Company completed in 1999 and the first half of 2000. During 2000, the Company recognized a charge for severance-related costs totaling $6.7 million, composed of $3.3 million in cash charges and $3.4 million in stock-based compensation expense, which resulted from the acceleration of certain employee stock options in connection with the Company's employee reduction plan. During 2000, the Company paid all amounts related to employee severance. NOTE 5 -- ACCOUNTS RECEIVABLE
DECEMBER 31 1999 2000 ----------- ------- ------- (IN THOUSANDS) Accounts receivable.............................. $10,770 $42,463 Allowance for doubtful accounts.................. (623) (3,525) ------- ------- Accounts receivable, net............... $10,147 $38,938 ======= =======
The provision for doubtful accounts was $50,000, $446,000, and $3.2 million in 1998, 1999, and 2000, respectively. NOTE 6 -- OTHER CURRENT ASSETS
DECEMBER 31 1999 2000 ----------- ------- ------- (IN THOUSANDS) Deferred acquisition costs....................... $21,000 $ -- Notes receivable................................. 15,572 -- Other current assets............................. 4,228 10,252 ------- ------- Other current assets................... $40,800 $10,252 ======= =======
F-14 63 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred acquisition costs As of December 31, 1999, in connection with the Company's agreements to acquire docSpace and ISOCOR (Note 2 -- Acquisitions), the Company accrued for certain acquisition-related costs in the amount of $10.0 million and $11.0 million, respectively. Upon consummation of these acquisitions, the related amounts were recognized as part of the relative purchase price. Notes receivable In July 1999, the Company advanced $10.0 million to a privately-held company pursuant to a promissory note that bore interest at Prime rate. The note was advanced in connection with the Company's evaluation of the obligor for potential acquisition. The Company decided not to proceed with an acquisition of the obligor and all the principal and interest due was subsequently repaid in January 2000. In August 1999, the Company advanced $5.0 million to docSpace pursuant to a promissory note. The note bore interest at the Prime rate of interest of 8.0% per annum. The amount was advanced in connection with the Company's evaluation of docSpace for potential acquisition. On March 8, 2000, the Company consummated its acquisition of docSpace and the note was included in the total purchase price. As of December 31, 1999, accrued interest amounted to approximately $572,000. NOTE 7 -- INVESTMENTS
NET NET COST UNREALIZED REALIZED ESTIMATED DECEMBER 31, 1999 BASIS GAINS LOSSES(1) FAIR VALUE ----------------- ------- ---------- --------- ---------- (IN THOUSANDS) Marketable securities.................... $ 3,000 $7,926 $ -- $10,926 Non-marketable securities................ 7,500 -- -- 7,500 ------- ------ -------- ------- $10,500 $7,926 $ -- $18,426 ======= ====== ======== ======= DECEMBER 31, 2000 (IN THOUSANDS) Marketable securities.................... $ 3,510 $ -- $ (2,601) $ 909 Non-marketable securities................ 24,200 -- (20,988) 3,212 Investment in Critical Path Pacific, equity method.......................... 7,508 -- (1,019) 6,489 ------- ------ -------- ------- $35,218 $ -- $(24,608) $10,610 ======= ====== ======== =======
- --------------- (1) Includes a write-down of $23.6 million for other-than-temporary impairment. The Company's investments consist of strategic equity investments in corporate partners, certain of which are publicly traded and marketable and certain of which are privately held. The Company's investments in marketable securities are stated at fair value, which is based on quoted market prices. Adjustments to the fair value of these investments are recorded as a component of other comprehensive income. During 2000, the Company determined that the impairment of certain of these investments was deemed to be other-than-temporary and recorded write downs of $23.6 million, consisting of $2.6 million in investments in marketable securities and $21.0 million in investments in non-marketable securities. In June 2000, the Company established a joint venture, Critical Path Pacific ("CP Pacific"), with Mitsui and Co., Ltd., NTT Communications Corporation and NEC Corporation to deliver advanced Internet messaging solutions to businesses in Asia. The Company has invested $7.5 million and holds a 40% ownership interest in the joint venture. This investment is being accounted for using the equity method. During 2000, the Company recorded equity in net loss of joint venture of approximately $1.0 million. F-15 64 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- PROPERTY AND EQUIPMENT
DECEMBER 31 1999 2000 ----------- -------- -------- (IN THOUSANDS) Computer equipment and software............................. $ 64,312 $124,413 Furniture and fixtures...................................... 1,694 6,245 Leasehold improvements...................................... 1,499 4,002 -------- -------- 67,505 134,660 Less: Accumulated depreciation.............................. (14,988) (49,356) -------- -------- $ 52,517 $ 85,304 ======== ========
At December 31, 1999 and 2000, property and equipment included $18.6 million and $21.5 million of assets under capital leases, respectively, and accumulated depreciation totaled $7.0 million and $13.6 million at December 31, 1999 and 2000, respectively. Depreciation expense totaled $1.0 million, $8.1 million and $34.4 million during 1998, 1999, and 2000, respectively. NOTE 9 -- INTANGIBLE ASSETS
DECEMBER 31 1999 2000 ----------- -------- -------- (IN THOUSANDS) Goodwill............................................... $475,368 $ -- Existing technology.................................... 9,940 45,372 Customer base.......................................... 12,800 20,971 Assembled workforce.................................... 6,960 10,270 Patent license......................................... 1,488 726 -------- -------- 506,556 77,339 Less: Accumulated amortization......................... (32,259) -- -------- -------- $474,297 $ 77,339 ======== ========
Amortization expense was $32.6 million and $374.0 million in 1999 and 2000. There were no intangible assets during 1998. Based on the types of identifiable intangibles acquired in 2000, amortization expense of $18.1 million was allocated to cost of net revenues and amortization expense of $355.9 million was allocated to operating expenses. All amortization expense was allocated to operating expenses in 1999. During 2000, the Company also recognized $3.7 million of acquired in-process research and development costs, expensed in the period the transaction was consummated. Additionally, a $1.29 billion impairment charge to reduce goodwill and other intangible assets was recognized in 2000. The remaining goodwill and identifiable intangibles balance of approximately $77.3 million will be amortized over the remaining useful lives, which approximate two years. These remaining identifiable intangible assets primarily relate to existing technology for some of the Company's licensed products which were acquired in 2000 and certain amounts related to assembled work forces which were acquired in 1999 and 2000. See also Note 17 -- Impairment of Long-Lived Assets. NOTE 10 -- RELATED PARTY TRANSACTIONS Notes receivable from shareholders At December 31, 1999 and 2000, the Company had notes receivable from two shareholders, who were officers of the Company, related to purchases of Common Stock totaling $1,066,000 and $30,000. The notes accrue interest at 4.51% per annum and as of December 31, 1999 and 2000, accrued interest amounted to $58,000 and $109,000, respectively. The notes are full recourse and secured by the Company's Common Stock. In February 2001, these officers terminated their employment with the Company. In connection with F-16 65 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) these terminations, the $1,066,000 note receivable will be due and payable on or before May 9, 2002 and the $30,000 note receivable is due and payable in May 2001. Notes receivable from employees At December 31, 1999 and 2000, the Company held notes receivable from officers and employees of Critical Path totaling $669,000 and $2.7 million, respectively. The notes accrued interest at rates of between 4.51% and 6.80% per annum. These notes are due and payable between November 2003 and February 2004, or 30 days following termination of the officer or employee. As of December 31, 1999 and 2000, accrued interest amounted to $34,000 and $72,000, respectively. In February 2001, certain officers and employees of the Company terminated their employment with the Company. In connection with these terminations, a $500,000 note receivable from an officer will be due and payable on or before March 9, 2002 and $319,000 in notes receivable from employees will be due and payable within 30 days of their respective termination. Revenues In April 1998, the Company entered into an email services agreement with a significant customer, who was also a shareholder. Net revenues from this shareholder approximated $605,000 and $2.4 million during 1998 and 1999, respectively. During 2000, net revenues from this shareholder were insignificant. The following is a summary of revenues and receivables associated with related parties:
REVENUES RECEIVABLES ---------------------- ---------------------- YEAR ENDED DECEMBER 31 1998 1999 2000 1998 1999 2000 ---------------------- ---- ------ ------ ---- ------ ------ (IN THOUSANDS) E*TRADE................................... $605 $2,423 $ 395 $-- $1,055 $ 42 US West................................... 29 460 5,806 29 426 460 ICQ....................................... -- 267 240 -- 267 105 ---- ------ ------ ---- ------ ------ $634 $3,150 $6,441 $29 $1,748 $ 607 ==== ====== ====== ==== ====== ======
Expenses During 2000, the Company incurred $337,000 related to costs for travel on private aircraft owned or arranged by two officers of the Company. NOTE 11 -- BORROWINGS Convertible Subordinated Notes On March 30, 2000, the Company issued $300.0 million of five-year, 5.75% Convertible Subordinated Notes ("Notes") due April 2005, to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933. Holders may convert the Notes into shares of Common Stock at any time before their maturity or the business day before their redemption or repurchase by the Company. The conversion rate is 9.8546 shares per $1,000 principal amount of Notes subject to adjustment in certain circumstances. This rate is equivalent to a conversion price of approximately $101.48 per share. These Notes are carried at cost and had an approximate fair value at December 31, 2000 of $201.0 million. The Company incurred approximately $10.8 million in debt issuance costs, consisting primarily of underwriting discount and legal and other professional fees. These costs have been capitalized and will be recognized as a component of interest expense on a straight-line basis, which approximates the effective interest method, over the five-year term of the Notes. During 2000, the Company recorded interest expense related to these debt issuance cost of $1.6 million. F-17 66 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Interest of $8.7 million is payable on April 1 and October 1 of each year. As of December 31, 2000, there was approximately $4.3 million in interest payable, and during 2000 the Company recorded interest expense related to the Notes of $13.0 million. The Notes are subordinated in right of payment to all senior debt of the Company and effectively subordinated to all existing and future debt and other liabilities of the Company's subsidiaries. On or after the third business day after April 1, 2003, through March 31, 2004, the Company has the option to redeem all or a portion of the Notes that have not been previously converted at the redemption price equal to 102.30% of the principal amount. During the period from April 1, 2004 through March 31, 2005, the Company has the option to redeem all or a portion of the Notes that have been previously converted at the redemption price equal to 101.15% of the principal amount. Thereafter the redemption price is equal to 100% of principal amount. The Notes are non-callable for three years. In the event of a "Change in Control," as defined in Notes' Offering Circular, the Notes holders have the option of requiring the Company to repurchase any Notes held at a price of 100% of the principal amount of the Notes plus accrued interest to the date of repurchase. NOTE 12 -- INCOME TAXES The Company did not provide any current or deferred federal or state income tax provision or benefit for any of the periods presented because it has experienced operating losses since inception. The Company has provided current tax for foreign operations that are profitable. The Company has provided a full valuation allowance on the net deferred tax asset, consisting primarily of net operating loss carryforwards, because of uncertainty regarding its realizability. At December 31, 2000, the Company had approximately $274.0 million of federal and $211.0 million state net operating loss carryforwards available to offset future taxable income. Federal and state net operating loss carryforwards expire in varying amounts through 2020 for federal and 2006 for state purposes. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. These carryforwards will begin to expire at various times starting in 2012 and 2005 for federal and state tax purposes, respectively. At December 31, 2000, the Company also had research and development credit carryforwards of approximately $4.0 million for federal and state purposes. The research and development credit carryforwards expire through 2020 for federal purposes, and do not expire for state purposes. The components of the provision for income taxes are as follows (in thousands):
DECEMBER 31, 1999 2000 ------------ ---- ------ Current: Federal................................................... $-- $ -- State..................................................... -- -- Foreign................................................... -- 6,513 --- ------ -- 6,513 Deferred: Federal................................................... -- -- State..................................................... -- -- --- ------ -- -- Total provision for income taxes.................. $-- $6,513 === ======
F-18 67 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred tax assets (liabilities) consist of the following (in thousands):
DECEMBER 31, 1999 2000 ------------ -------- -------- Deferred tax assets Net operating loss carryforwards.......................... $ 37,791 $ 98,254 Tax credits............................................... 1,630 6,442 Property and equipment.................................... 2,295 1,085 Accrued expenses.......................................... 1,946 15,490 Other..................................................... 77 -- -------- -------- Total deferred tax assets......................... 43,739 121,271 Deferred tax liability Intangible assets......................................... (18,379) (26,917) -------- -------- Net deferred taxes.......................................... 25,360 94,354 ======== ======== Valuation allowance......................................... (25,360) (94,354) ======== ======== Net deferred taxes.......................................... $ -- $ -- ======== ========
The reconciliation of the statutory federal income tax rate to the Company's effective tax rate:
DECEMBER 31, 1999 2000 ------------ ------ ------ Tax benefit at federal statutory rate....................... (34.00)% (34.00)% State, net of federal benefit............................... (5.83) (0.54) Stock based expenses........................................ 12.71 0.41 Goodwill amortization....................................... 8.97 6.50 Intangible asset write off.................................. 0.00 24.10 Research and development credits............................ (0.79) (0.09) Change in valuation allowance............................... 18.90 3.73 Foreign taxes............................................... 0.00 0.35 Other....................................................... 0.04 (0.12) ------ ------ Provision for taxes......................................... 0.00% 0.34% ====== ======
NOTE 13 -- COMMITMENTS AND CONTINGENCIES Leases The Company leases office space and equipment under noncancelable operating and capital leases with various expiration dates through 2011. Rent expense during 1998, 1999 and 2000, totaled $220,000, $1.3 million and $5.8 million, respectively. F-19 68 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Future minimum lease payments under noncancelable operating and capital leases are as follows:
CAPITAL OPERATING LEASES LEASES ------- --------- (IN THOUSANDS) YEAR ENDING DECEMBER 31 2001...................................................... $10,098 $ 5,998 2002...................................................... 4,770 5,907 2003...................................................... 112 5,236 2004...................................................... -- 5,313 2005...................................................... -- 17,598 ------- ------- Total minimum lease payments.............................. 14,980 $40,052 ======= Less: Amount representing interest........................ (914) Unamortized discount...................................... (16) ------- Present value of capital lease obligations................ 14,050 Less: Current portion..................................... (9,363) ------- Long-term portion of capital lease obligations............ $ 4,687 =======
Equipment Lease Lines In April and May 1998, the Company entered into three separate financing agreements that provided for the acquisition of up to $6.5 million in equipment and the acquisition of up to $1.5 million in software and tenant improvements. These agreements limited acquisitions to $2.0 million in equipment acquisitions through April 30, 1999, $3.5 million in equipment acquisitions and $1.5 million in software and tenant improvements through May 1, 1999, and $1.0 million in equipment acquisitions through March 31, 2001, respectively. These amounts are payable over three-year periods, in monthly installments of principal and interest, with interest accruing at rates between 6.30% and 7.00% per annum. Approximately $1.0 million is collateralized by the related equipment acquired. In connection with two of the agreements, the Company issued warrants to purchase a total of 339,522 shares of Series A Preferred Stock at a purchase price of $0.72 per share. The Company estimated the fair value of these warrants at date of issuance totaled approximately $186,000 that is being amortized as interest expense over the term of the related lease obligation. Service Level Agreements Net revenues are derived from contractual relationships that typically have one to three year terms. Certain agreements require minimum performance standards regarding the availability and response time of email services. If these standards are not met, such contracts are subject to termination and the Company could be subject to monetary penalties. Contingencies The Company has certain obligations relating to a master distributor agreement with a reseller. Refer to Note 1 -- The Company and Summary of Significant Accounting Policies, License Revenue. Litigation and Investigations (Also see Note 22 -- Quarterly Financial Data (Unaudited)) Securities Class Actions. Beginning on February 2, 2001, a number of securities class action complaints were filed against the Company, certain of its current and former officers and directors and its independent accountants, in the United States District Court for the Northern District of California. The complaints have been filed as purported class actions by individuals who allege that they purchased the Company's Common Stock during a purported class period; the alleged class periods vary among the complaints and are in the F-20 69 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) process of being consolidated into a single action. The complaints generally allege that, in differing periods from April 2000 to February 1, 2001, the Company and other named defendants made false or misleading statements of material fact about the Company's financial statements, including its revenues, revenue recognition policies, business operations and prospects for the year 2000 and beyond. The complaints seek an unspecified amount in damages on behalf of persons who purchased the Company's Common Stock during certain periods. Derivative Actions. Beginning on February 5, 2001, the Company has been named as a nominal defendant in a number of derivative actions, purportedly brought on its behalf, filed in the Superior Court of the State of California. The derivative complaints allege that certain of its current and former officers and directors breached their fiduciary duties to the Company, were unjustly enriched by their sales of the Company's Common Stock, engaged in insider trading in violation of California law or published false financial information in violation of California law. The plaintiffs seek unspecified damages on the Company's behalf from each of the defendants. Because of the nature of derivative litigation, any recovery in the action would inure to the Company's benefit. Securities and Exchange Commission Investigation In February 2001, the Securities and Exchange Commission (the "SEC") issued a formal order of investigation of the Company and certain unidentified individuals associated with the Company with respect to non-specified accounting matters, financial reports, other public disclosures and trading activity in the Company's securities. While the Company does not know the current status of the investigation or any possible actions that may be taken against the Company as a result, any SEC action against us could harm the Company's business. The uncertainty associated with substantial unresolved lawsuits and the SEC investigation could seriously harm the Company's business and financial condition. In particular, the lawsuits or the investigation could harm its relationships with existing customers and its ability to obtain new customers. The continued defense of the lawsuits and conduct of the investigation could also result in the diversion of management's time and attention away from business operations, which could harm the Company's business. Negative developments with respect to the lawsuits or the investigation could cause the Company's stock price to decline significantly. In addition, although the Company is unable to determine the amount, if any, that it may be required to pay in connection with the resolution of these lawsuits or the investigation by settlement or otherwise, the size of any such payment could seriously harm the Company's financial condition. NOTE 14 -- MINORITY INTEREST IN SUBSIDIARY As of December 31, 2000, the Company owned a 72.87% interest in CP Italia, a consolidated subsidiary, which was acquired in connection with the acquisition of ISOCOR. For the year ended December 31, 2000, the minority interest in net income of CP Italia amounted to $649,000. In March 2001, the outstanding 27.13% interest in CP Italia was acquired for approximately $4.2 million. F-21 70 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15 -- SHAREHOLDERS' EQUITY Changes in equity security shares outstanding were:
YEAR ENDED DECEMBER 31 1998 1999 2000 ---------------------- ------ ------- ------ (IN THOUSANDS) Convertible Preferred Stock Shares outstanding, beginning of year................. -- 16,362 -- Issuance of Series A.................................. 12,725 -- -- Issuance of Series B.................................. 3,637 2,773 -- Exercise of stock purchase rights and warrants........ -- 777 -- Conversion of Preferred Stock......................... -- (19,912) -- ------ ------- ------ Shares outstanding, end of year.................... 16,362 -- -- ------ ------- ------ Common Stock Shares outstanding, beginning of year................. 2,394 8,294 46,937 Issuance of Common Stock.............................. 3,864 17,285 19,958 Exercise of stock options and warrants................ 2,036 1,580 7,313 Conversion of Preferred Stock......................... -- 19,912 -- Purchase of Common Stock.............................. -- (134) (73) ------ ------- ------ Shares outstanding, end of year.................... 8,294 46,937 74,135 ====== ======= ======
Incorporation and Authorized Capital The Company's Articles of Incorporation, as amended, authorize the Company to issue 500 million shares of Common Stock at $0.001 par value, and 5 million shares of Preferred Stock, at $0.001 par value. The holders of Preferred Stock have various voting and dividend rights as well as preferences in the event of liquidation. Preferred Stock In January 1999, the Company completed the second round of the Series B Preferred Stock financing through the issuance of 2,772,708 shares at $4.26 per share for net proceeds of approximately $10,749,000. In connection with this financing, the Company issued warrants to purchase 51,364 shares of Series B Preferred Stock at $4.26 per share to the placement agent. Prior to the closing of the Company's initial public offering, the Series B Preferred Stock placement agent sold back to the Company at $4.26 per share an aggregate of 53,293 shares held by the placement agent or its affiliates. As of the closing of the Company's initial public offering, all of the Series B Preferred Stock outstanding was converted into an aggregate of 19,912,000 shares of Common Stock at a conversion ratio of 1:1. Common Stock In January 1999, the Company sold 1,090,909 shares of Common Stock at a price of $2.20 per share to a customer that also agreed to provide marketing related services. In connection with the transactions, the Company recognized a charge totaling $2.2 million that was attributed to sales and marketing expense over the one-year term of the agreement. On March 29, 1999, the Company completed its initial public offering of 5,175,000 shares of Common Stock (including the exercise of the underwriters over allotment option) and realized net proceeds of $114.1 million. On June 2, 1999, the Company completed a follow-on public offering of 3,000,000 shares of Common Stock and realized net proceeds of $140.7 million. F-22 71 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Warrants ICQ In January 1999, the Company entered into an agreement with ICQ, Inc., a subsidiary of AOL Time Warner, pursuant to which the Company provides email hosting services that are integrated with ICQ's instant messaging service provided to ICQ's customers. As part of the agreement, ICQ agreed to provide sub-branded advertising for the Company in exchange for a warrant to purchase 2,442,766 shares of Series B Preferred Stock, issuable upon attainment of each of five milestones. As of April 9, 2000, all five milestones had been attained. Using the Black-Scholes option-pricing model and assuming a term of seven years and expected volatility of 90%, the final revised aggregate fair value of all vested warrants was $93.8 million, which was being amortized to advertising expense using the straight-line method over four years. Aggregate charges to stock-based expenses of $27.4 million and $19.5 million were recorded during 1999 and 2000, respectively, related to these warrants. There were no related stock-based expenses recorded in 1998. In connection with the Company's review of its fourth quarter financial results, the Company recorded an impairment charge of $16.8 million. See also Note 17 -- Impairment of Long-Lived Assets. The adjusted fair value at December 31, 2000, of approximately $30.1 million will be amortized over the remaining benefit period of three years. On September 8, 2000, ICQ executed a net exercise of warrants to purchase 766,674 shares related to the attainment of the first of five milestones (the related gross number of warrants to purchase shares of the Company's Common Stock were 814,254 shares). On September 18, 2000, ICQ executed a net exercise of warrants to purchase 1,441,067 shares related to the attainment of the remaining four milestones (the related gross number of warrants to purchase shares of the Company's Common Stock were 1,628,512 shares). Qwest Communications Corporation In October 1999, the Company entered into an agreement with Qwest Communications Corporation, a telecommunications company, pursuant to which the Company will provide email hosting services to Qwest's customers. As part of the agreement, Qwest agreed to provide sub-branded advertising for Critical Path in exchange for a warrant to purchase up to a maximum of 3,534,540 shares of Common Stock upon attainment of each of six milestones. The following table summarizes the shares underlying each milestone and the related exercise price:
REGISTERED NO. SHARES OF SUB-BRANDED UNDERLYING EXERCISE EMAIL BOXES WARRANTS PRICE -------------- ---------- -------- Milestone 1.......................... Upon Execution 589,090 $41.581 Milestone 2.......................... 400,000 589,090 44.581 Milestone 3.......................... 800,000 589,090 47.581 Milestone 4.......................... 1,200,000 589,090 50.581 Milestone 5.......................... 1,600,000 589,090 53.581 Milestone 6.......................... 2,000,000 589,090 56.581 --------- Total...................... 3,534,540 =========
The shares underlying those milestones for which achievement is considered probable are remeasured at each subsequent reporting date, beginning at December 31, 1999, until each sub-branded Qwest mailbox registration threshold is achieved and the related warrant shares vest, at which time the fair value attributable to that tranche of the warrant is fixed. In the event such remeasurement results in increases or decreases from the initial fair value, which could be substantial, these increases or decreases will be recognized immediately, if the fair value of the shares underlying the milestone has been previously recognized, or over the remaining term, if not. F-23 72 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In October 1999, the first of the six milestones had been attained, using the Black-Scholes option-pricing model and assuming a term of 5 years and expected volatility of 90%, the final revised aggregate fair value of the vested warrants associated with the first milestone approximated $22.2 million, which is being amortized to advertising expense using the straight-line method over three years. The Company expects that future changes in the trading price of the Company's Common Stock at the end of each quarter, and at the time certain milestones are considered probable and achieved, may cause additional substantial changes in the ultimate amount of the related stock-based charges. As of December 31, 2000, only the first of the six milestones had been attained. None of the remaining milestones are considered probable and as a result, the fair value of the warrants relating to the shares underlying the second through sixth milestones has not been recognized. During 1999 and 2000, $1.5 million and $7.4 million, respectively, was charged to stock-based expense related to the vested warrants. In connection with the Company's review of its fourth quarter financial results, the Company recorded an impairment charge of $4.8 million. See also Note 17 -- Impairment of Long-Lived Assets. The adjusted fair value at December 31, 2000, of approximately $8.6 million will be amortized over the remaining benefit period of two years. Worldsport Network Ltd. In December 1999, the Company entered into an agreement with Worldsport Network Ltd., the sole and exclusive provider of Internet solutions for the General Association of International Sports Federations ("GAISF") and a majority of the international federations it recognizes. Under the terms of the agreement, Worldsport offers the Company's web-based email and calendaring services to the entire GAISF network and its members. As part of the agreement, Worldsport agreed to provide sub-branded advertising for the Company in exchange for warrants to purchase up to a 1.25% equity interest in the Company on a fully diluted basis upon attainment of each of five milestones based on the number of email boxes for which Worldsport registers and provides sub-branding. The warrants are exercisable for five years after becoming vested. Any warrants not vested within five years of the date of the agreement will be cancelled. The Company believes that this agreement could have a significant current and potential future impact on the Company's results of operations. However, Worldsport has filed for bankruptcy during 2000 and the Company now believes the warrants will ultimately expire unvested and unexercised. Lessor Warrant In December 1999, the Company entered into an agreement with one of its lessors, in connection with an office lease, pursuant to which the lessor is entitled to purchase up to a maximum of 25,000 shares of Common Stock. The warrants may be exercised beginning January 1, 2000 through December 20, 2006 at a price of $90.00 per share. The warrants vest at the beginning of each month on a straight-line basis in the amount of 521 shares per month. Using the Black-Scholes option pricing model and assuming a term of six years and expected volatility of 90%, the fair value of the warrants on the effective date of the agreement approximated $2.0 million, which is being amortized to general and administrative expenses using the straight-line method over ten years beginning January 2000. During 2000, approximately $200,000 was charged to stock-based expense related to the vested warrants. Telco In January 2000, docSpace entered into an agreement with a major telecommunications company ("Telco") pursuant to which docSpace would provide secure messaging services to the Telco's customers. As part of the agreement, Telco agreed to provide marketing, publicity, and promotional services to docSpace. As a result of the completion of the Company's acquisition of docSpace, the Company assumed warrants that F-24 73 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) allowed Telco to purchase up to a maximum of 349,123 shares of Common Stock upon attainment of each of three milestones. The Company believes that this agreement could have a significant current and potential future impact on the Company's results of operations as a result of stock-based charges. Subsequent to the acquisition, the Company entered into discussions with Telco to modify their relationship. Accordingly, the vesting provisions of the proposed agreement were modified to reflect the requirements of the new relationship. As of December 31, 2000, none of the vesting milestones had been attained; however, the Company believes that all shares underlying these warrants are probable of issuance. As a result, the shares underlying these milestones were remeasured using the Black-Scholes option-pricing model, the December 31, 2000 closing price of the Company's Common Stock of $30.75 and assuming a term of seven years and expected volatility of 128%, resulting in a revised fair value of the warrants of $9.6 million. The fair value of the warrants will be recognized on a straight-line basis over the greater of the term of the contract or the expected period of benefit of the strategic relationship. During 2000, no amounts were recognized as stock-based expense related to these warrants. The Company expects that future changes in the trading price of the Company's Common Stock at the end of each quarter, and at the time certain milestones are achieved, will cause additional substantial changes in the ultimate amount of the related stock-based charges. Stock Purchase Rights In February 1998, the Company entered into stock purchase agreements with three founders and sold 3,863,635 shares of the Company's Common Stock at $0.02 per share. Under the terms of the stock purchase agreements, the Company has the right to purchase the shares of Common Stock at the original issue price in the event any one of the founders ceases to be an employee of the Company. These repurchase rights lapse by 25% on the first anniversary of the vesting start date and ratably each month thereafter for 36 months. Repurchase rights with respect to 50% of the then unvested shares of Common Stock lapsed on the closing date of the Company's initial public offering. On September 1, 1999, 80,508 shares were repurchased in connection with the early termination of one of the founders. At December 31, 2000, 198,864 of these shares of Common Stock were subject to repurchase rights. In connection with the issuance of these shares, the Company recorded unearned compensation of $1,306,000 that is being recognized over the periods in which the Company's repurchase rights lapse. During 1998, 1999 and 2000, $344,000, $428,000 and $428,000, respectively, were recognized in related compensation expense. In October 1998, an officer exercised stock options to purchase 1,274,687 shares of the Company's Common Stock at a price of $0.84 per share. Under the terms of the option, the Company has the right to purchase the unvested shares of Common Stock at the original issue price in the event the officer ceases to be an employee of the Company. The repurchase rights lapse ratably each month for 48 months. At December 31, 1999 and 2000, 902,903 and 584,231 of these shares of Common Stock were subject to repurchase rights, respectively. In connection with the option grant preceding this transaction, the Company recognized unearned compensation totaling $3.8 million that is included in the aggregate unearned compensation charges discussed below. In February 2001, this officer's employment was terminated and the unvested portion of these stock options was accelerated, which will result in a charge to stock-based expenses in 2001. Employee Stock Purchase Plan During 1999, the Board of Directors adopted the 1999 Employee Stock Purchase Plan ("ESPP"). The Company has authorized 600,000 shares for issuance. The number of shares of Common Stock reserved under the ESPP may be increased annually on January 1 of each year beginning in 2000 by an amount equal to 1% of the Company's issued and outstanding Common Stock. However, such increases are limited to 1,000,000 F-25 74 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) additional shares. Employees generally will be eligible to participate in the ESPP if the Company customarily employs them for more than 20 hours per week and more than five months in a calendar year and are not 5% or greater shareholders. Under the ESPP, eligible employees may select a rate of payroll deduction up to 15% of their compensation subject to certain maximum purchase limitations. The ESPP was implemented in a series of overlapping twenty-four month offering periods beginning on the effective date of the Company's initial public offering with subsequent offering periods beginning on the first trading day on or after May 1 and November 1 of each year. Purchases will occur on each April 30 and October 31 (the "Purchase Dates") during each participation period. Under the ESPP, eligible employees have the opportunity to purchase shares of Common Stock at a purchase price equal to 85% of the fair market value per share of Common Stock on either the start date of the offering period or the date on which the option is exercised, whichever is less. If the fair market value of the Common Stock on any Purchase Date (other than the final Purchase Date) is lower than the fair market value on the start date of that offering period, then all participants in that offering period will be automatically withdrawn from such offering period and re-enrolled in the offering period immediately following. Stock purchases under the ESPP in 1999 and 2000 were 42,495 and 112,665, respectively, at a price of $20.40 in 1999 and between $20.40 and $40.27 per share in 2000. As of December 31, 2000, 914,212 shares were available under the ESPP for future issuance. Stock Options During 1998 and 1999, the Company's Board of Directors adopted the 1998 Stock Option Plan and the 1999 Stock Option Plan (together, the "Option Plans"). The Option Plans provide for the granting of up to 31,788,741 stock options to employees and consultants of the Company. Options granted under the Plan may be either incentive stock options ("ISOs") or nonqualified stock options ("NSOs"). ISOs may be granted only to Company employees (including officers and directors). NSOs may be granted to Company employees and consultants. The Company has, in connection with the acquisition of various companies, assumed the stock option plans of each acquired company. At December 31, 1999 and 2000, a total of 830,672 and 1,598,793 shares, respectively, of the Company's Common Stock were reserved for outstanding shares issued under the assumed plans, and the related options are included in the table below. Options under all of the Company's stock option plans may be granted for periods of up to ten years and at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however, that (i) the exercise price of an ISO may not be less than 100% of the estimated fair value of the shares on the date of grant, and (ii) the exercise price of an ISO granted to a 10% shareholder may not be less than 110% of the estimated fair value of the shares on the date of grant. Options generally vest 25% per year and are exercisable for a maximum period of ten years from the date of grant. A summary of the status of the Company's stock option plans as of December 31, 1999, and 2000, and changes during the periods ending on those dates is presented below:
1999 2000 ---------------------- ---------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE EXERCISE EXERCISE YEAR ENDED DECEMBER 31 SHARES PRICE SHARES PRICE ---------------------- ---------- --------- ---------- --------- Options outstanding, beginning of year...................... 7,752,556 $ 0.86 13,787,959 $15.12 Granted and assumed......................................... 8,315,363 $26.87 20,634,167 $51.30 Exercised................................................... (1,247,665) $ 1.32 (5,001,418) $ 6.44 Canceled.................................................... (1,032,295) $19.04 (7,313,495) $41.78 ---------- ---------- Options outstanding, end of year............................ 13,787,959 $15.12 22,107,213 $42.03 ========== ==========
AT DECEMBER 31 -------------- Options exercisable......................................... 2,245,271 0.88 3,587,894 28.93 Weighted-average fair value of options granted during the period.................................................... $38.94 $46.09
F-26 75 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 2000:
OPTIONS OUTSTANDING ----------------------------------------------- OPTIONS EXERCISABLE WEIGHTED- ---------------------------- AVERAGE WEIGHTED- WEIGHTED- NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ------------------------ ----------- ---------------- -------------- ----------- -------------- $ 0.022 - $ 0.022 120,558 7.17 $ 0.02 31,778 $ 0.02 $ 0.022 - $ 0.836 2,428,661 7.81 $ 0.81 613,799 $ 0.79 $ 1.000 - $24.000 3,529,290 8.47 $ 8.41 1,055,914 $ 8.29 $24.063 - $33.875 2,098,615 8.95 $31.75 505,329 $32.77 $34.500 - $43.000 2,499,220 9.29 $42.36 241,890 $41.67 $44.320 - $50.500 3,600,182 9.53 $48.58 518,734 $49.28 $50.750 - $70.000 2,082,624 9.33 $61.18 352,291 $62.90 $71.750 - $71.750 2,681,292 9.64 $71.75 3,750 $71.75 $73.313 - $74.875 186,000 9.21 $73.64 28,039 $73.56 $75.000 - $87.000 2,880,771 9.06 $75.19 236,370 $75.61 ---------- --------- 22,107,213 9.01 $42.03 3,587,894 $28.93 ========== =========
The compensation cost associated with the Company's stock-based compensation plans, determined using the minimum value method prescribed by SFAS No. 123, did not result in a material difference from the reported net loss during 1998. Had compensation cost been recognized based on the fair value at the date of grant for options granted during 1999 and 2000, the pro forma amounts of the Company's net loss and net loss per share would have been as follows:
1999 2000 YEAR ENDED DECEMBER 31 ---------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net loss -- as reported............................. $(116,941) (1,855,232) Net loss -- pro forma............................... (118,947) (2,198,973) Basic and diluted net loss per share -- as reported.......................................... (3.93) (30.72) Basic and diluted net loss per share -- pro forma... (4.00) (36.41)
The Company calculated the minimum value and the fair value of each option grant on the date of grant during 1999 and 2000, respectively, using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following assumptions:
1999 2000 YEAR ENDED DECEMBER 31 ---- ----- Risk-free interest rate..................................... 6.0% 6.0% Expected lives (in years)................................... 4.0 4.0 Dividend yield.............................................. 0.0% 0.0% Expected volatility......................................... 90.0% 128.0%
Unearned stock-based compensation In connection with certain stock option grants and Common Stock issuances to employees, directors and advisors during 1998 and 1999, the Company recognized unearned compensation totaling $19.9 million and $22.3 million, respectively, which is being amortized over the vesting periods of the related options. Amortization expense recognized during 1998, 1999, and 2000 totaled approximately $2.5 million, $17.6 million and $12.5 million, respectively. During 1999, the Company incurred a stock-based charge of approximately $2.0 million in connection with a severance agreement for a terminated employee. This expense was charged to cost of net revenues. F-27 76 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During 2000, the Company incurred stock-based charges of approximately $5.7 million in connection with certain severance agreements for terminated employees. Approximately $3.4 million of this charge was included in employee severance expense in connection with the Company's plan to reduce worldwide headcount (Note 4 -- Employee Severance Expenses) and the remaining $2.3 million was included in stock-based expenses. In March 2001, the Company granted employee stock options with exercise prices below market value on the date of grant in connection with a program designed to provide incentives for current employees of the Company to continue their employment. The Company issued to certain existing employees approximately 13.5 million stock options vesting monthly over a 2-year period, which are expected to result in approximately $16.1 million in additional unearned compensation. Other comprehensive loss
1999 2000 DECEMBER 31 ------ ---- (IN THOUSANDS) Unrealized investment gains................................. $7,926 $ -- Foreign currency translation adjustments.................... (97) (74) ------ ---- Other comprehensive income.................................. $7,829 $(74) ====== ====
There were no tax effects allocated to any components of other comprehensive income during 1999 and 2000 (Note 12 -- Income Taxes). NOTE 17 -- IMPAIRMENT OF LONG-LIVED ASSETS As part of the Company's review of its fourth quarter financial results, an impairment assessment of its long-lived assets was performed. The assessment was performed primarily due to the significant decline in the Company's stock price, the net book value of assets significantly exceeding the Company's market capitalization, the significant underperformance of certain acquisitions relative to projections, the overall decline in industry growth rates, and the Company's lower fourth quarter actual and projected 2001 operating results compared to earlier forecasts. As a result, the Company recorded a $1.3 billion impairment charge to reduce goodwill and other intangible assets and deferred costs associated with its ICQ and Qwest relationships in the fourth quarter of 2000 to their estimated fair values. The estimates of fair values were based upon the discounted estimated cash flows of the Company for the succeeding three years using a discount rate of 25% and an estimated terminal value. The assumptions supporting the estimated cash flows, including the discount rate and an estimated terminal value, reflects management's best estimates. The discount rate was primarily based upon the weighted average cost of capital for comparable companies. NOTE 18 -- DEFINED CONTRIBUTION PLAN The Company maintains a defined contribution plan, the Critical Path 401(k) Plan, under which its employees are eligible to participate. Participants may make voluntary contributions based on a percentage of their compensation, within certain limitations. Under the plan, discretionary contributions may be made by the Company. Participants are fully vested in the Company's contributions after a specified number of years of service, as defined under the plan. No contributions have been made by the Company since its inception. F-28 77 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 19 -- LOSS PER SHARE Net loss per share is calculated as follows:
1998 1999 2000 ---------- ----------- ------------- YEAR ENDED DECEMBER 31 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net loss........................................ $(11,461) $(116,941) $(1,852,465) ======== ========= =========== Weighted average shares outstanding............. 5,119 32,860 63,379 Weighted average common shares issued subject to repurchase agreements......................... (1,220) (2,830) (1,493) Shares held in escrow related to acquisitions... -- (260) (1,487) -------- --------- ----------- Shares used in computation of basic and diluted loss per share................................ 3,899 29,770 60,399 ======== ========= =========== Basic and diluted loss per share................ $ (2.94) $ (3.93) $ (30.67) ======== ========= ===========
During 1998, 1999 and 2000, there were 28,607,997, 19,164,493 and 7,907,018, respectively, potential common shares that were excluded from the determination of diluted net loss per share, as the effect of such shares on a weighted average basis is anti-dilutive. NOTE 20 -- PRODUCT AND GEOGRAPHIC INFORMATION Revenue information on a product basis is as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1998 1999 2000 ---- ------- -------- (IN THOUSANDS) Net revenues License InScribe Messaging................................ $ -- $ -- $ 27,853 Other............................................. -- -- 23,754 Service Hosted Messaging.................................. 897 15,057 37,280 InScribe Fax Messaging............................ -- 1,100 13,887 Maintenance....................................... -- -- 10,966 Professional Services............................. -- -- 14,527 Other............................................. -- -- 7,386 ---- ------- -------- $897 $16,157 $135,653 ==== ======= ========
Information regarding revenues and long-lived assets attributable to the Company's primary geographic regions is as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1998 1999 2000 ---- ------- -------- (IN THOUSANDS) Net revenues United States........................................ $897 $16,157 $ 83,864 Europe Ireland........................................... -- -- 23,916 Italy............................................. -- -- 14,708 Other............................................. -- -- 13,165 ---- ------- -------- $897 $16,157 $135,653 ==== ======= ========
F-29 78 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, ------------------------------ 1998 1999 2000 ------ -------- -------- (IN THOUSANDS) Long-lived assets United States...................................... $4,687 $522,973 $156,142 Other.............................................. -- 3,841 6,501 ------ -------- -------- $4,687 $526,814 $162,643 ====== ======== ========
NOTE 21 -- SUBSEQUENT EVENTS Shareholder Rights Plan. In March 2001, the Board of Directors adopted a Shareholder Rights Plan. Under this plan, certain Rights will be distributed as a dividend at the rate of one Right for each share of the Company's Common Stock held by shareholders of record as of the close of business on May 15, 2001. The Rights Plan is designed to prevent an acquirer from gaining control of the Company without offering a fair and adequate price and terms to all of the Company's shareholders. The Rights Plan is intended to increase the Company's ability to negotiate with potential acquiring companies to maximize shareholder value and is not intended to interfere with takeover offers or other strategic alternatives that the Company's Board of Directors believes are in the shareholders' best interests. The Rights Plan was not adopted in response to any attempt to acquire the company. NOTE 22 -- QUARTERLY FINANCIAL DATA (UNAUDITED) On January 30, 2001, the Company's financial management first became aware that certain software licensing contracts that had been recorded as revenue during the fourth quarter of 2000 appeared to be questionable. An unscheduled meeting of the Company's Board of Directors was convened on February 1, 2001, and following that meeting the Company issued a press release dated February 2, 2001 announcing that (a) it believed that its previously announced unaudited financial results for the fourth quarter of 2000 may have been materially misstated, (b) the Board of Directors had formed a special committee to conduct an investigation into the matter, and (c) the Company's president and vice president of worldwide sales had been placed on administrative leave related to the matter. On February 9, 2001, the Company issued a press release announcing management changes, including (a) the return to management of its chairman and a founder, (b) the promotion to president of its senior vice president of engineering and operations, (c) the resignation of its chief executive officer, and (d) the resignation of its president and vice president of worldwide sales who had been placed on administrative leave. On February 15, 2001, the Company announced that, based on the preliminary results of the investigation being conducted by the special committee of the Board of Directors, it would revise its previously announced unaudited financial results for the fourth quarter of 2000 and was reviewing certain specific transactions that were reported as revenue during the third quarter of 2000 based on new facts. The Company also announced that these unaudited results were preliminary and that further adjustments might need to be made. After the Company's February 15, 2001 announcement, the Company became aware of additional transactions previously reported as revenue during the third and fourth quarters of 2000 that should not have been recorded as revenue or that should have been recorded as revenue in later periods. F-30 79 CRITICAL PATH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Adjustments to the Company's reported third quarter results for the year 2000 were as follows (in thousands):
2000 -------------- THIRD QUARTER -------------- (IN THOUSANDS) Matters impacting revenues: - Software licensing and hosted messaging transactions for which revenues were recognized and it was subsequently determined that revenues, if any, should have been recognized in a later quarter........................... $(3,948) - Software licensing transactions for which no revenue will be recognized primarily as a result of re-evaluating the judgment that management used in the application of accounting principles to these transactions............................................ (5,685) ------- Total revenue decrease...................................... (9,633) ------- Matter impacting costs and expenses: - Miscellaneous selling, general and administrative expense adjustments..................................... 1,565 ------- Total net loss increase..................................... $(8,068) =======
As a result of the materially restated revenue for the third quarter of 2000 and the materially revised revenue for the fourth quarter of 2000, as well as the subsequent significant decline in the Company's Common Stock price, management determined that it was appropriate to re-evaluate whether the carrying values of its long-lived assets, primarily goodwill and other intangible assets including the deferred costs associated with its ICQ and Qwest relationships, were impaired as of December 31, 2000. A discounted cash flow analysis indicated the Company's long-lived assets were impaired and, as a result, the Company recorded an impairment charge aggregating $1.31 billion in the fourth quarter of 2000. In addition, in the fourth quarter of 2000 the Company determined that certain of its investments had suffered an other-than-temporary decline in value and accordingly recognized a loss of $23.6 million on the write-down of those investments to their fair value. QUARTERLY RESULTS OF OPERATIONS
FIRST SECOND THIRD FOURTH -------- -------- -------- -------- 1999 (IN THOUSANDS) Net revenues.......................................... $ 1,049 $ 2,006 $ 4,913 $ 8,189 Gross profit (loss)................................... (1,311) (1,971) (2,610) 492 Loss from operations.................................. (17,881) (18,023) (26,998) (60,348) Net loss.............................................. (17,594) (16,321) (24,324) (58,702) Net loss per share -- basic and diluted............... $ (2.51) $ (0.49) $ (0.65) $ (1.41)
THIRD QUARTER ------------------------- FIRST SECOND AS REPORTED AS RESTATED FOURTH -------- --------- ----------- ----------- ----------- 2000 (IN THOUSANDS) Net revenues........................... $ 24,553 $ 33,495 $ 44,975 $ 35,342 $ 42,263 Gross profit (loss).................... 6,209 10,826 20,190 10,557 (13,860) Loss from operations................... (77,566) (127,682) (127,695) (135,763) (1,476,706) Net loss............................... (76,942) (130,009) (131,379) (139,447) (1,506,067) Net loss per share -- basic and diluted.............................. $ (2.51) $ (2.22) $ (2.13) $ (2.26) $ (21.27)
F-31 80 SCHEDULE II CRITICAL PATH, INC. VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING OF COSTS AND DEDUCTIONS- AT END OF YEAR ENDED DECEMBER 31, PERIOD EXPENSES WRITE-OFFS PERIOD ----------------------- ------------ ---------- ----------- --------- 2000.......................................... $ 623 $5,492 $(2,590) $3,525 1999.......................................... $ 50 $ 817 $ (244) $ 623 1998.......................................... $ -- $ 50 $ -- $ 50
The above balances include the Company's sales reserve and provision for doubtful accounts. S-1 81 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Francisco, State of California, on the 4th day of April, 2001. Critical Path, Inc. By: /s/ DAVID C. HAYDEN ------------------------------------ David C. Hayden Executive Chairman of the Board Each person whose signature appears below constitutes and appoints Cynthia D. Whitehead and Lawrence P. Reinhold and each of them, as attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendment to this Report and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this amendment to its Annual Report on Form 10-K has been signed below by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ DAVID C. HAYDEN Executive Chairman of the Board April 4, 2001 - ------------------------------------------ David C. Hayden /s/ CYNTHIA D. WHITEHEAD President April 4, 2001 - ------------------------------------------ (Principal Executive Officer) Cynthia D. Whitehead /s/ LAWRENCE P. REINHOLD Executive Vice President and April 4, 2001 - ------------------------------------------ Chief Financial Officer Lawrence P. Reinhold (Principal Financial and Accounting Officer) /s/ LISA GANSKY Executive Director April 4, 2001 - ------------------------------------------ Lisa Gansky /s/ KEVIN R. HARVEY Director April 4, 2001 - ------------------------------------------ Kevin R. Harvey /s/ AMY RAO Director April 4, 2001 - ------------------------------------------ Amy Rao /s/ GEORGE ZACHARY Director April 4, 2001 - ------------------------------------------ George Zachary
82 EXHIBIT INDEX 2.1 Asset Purchase Agreement, dated May 26, 1999, between the Registrant and Fabrik Communications, Inc. (Incorporated by reference to Exhibit 2.1 to the Registrant's Registration on Form S-1/A (File No. 333-78197)) 2.2 Agreement and Plan of Reorganization, dated June 22, 1999, among Registrant, Amplitude Software Corp. and Apollo Acquisition Corp. (Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on August 31, 1999) 2.3 Agreement and Plan of Reorganization, dated July 15, 1999, among Registrant, dotOne Corporation and dotOne Acquisition Corp. (Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on August 2, 1999) 2.4 Agreement and Plan of Reorganization, dated October 8, 1999, by and among Registrant, Xeti Acquisition Corp. and Xeti, Inc. (Incorporated by reference to Exhibit 2.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 2.5 Agreement and Plan of Reorganization, dated October 20, 1999, by and among Registrant, Initialize Acquisition Corp. and ISOCOR. (Incorporated by reference to Annex A to the Registrant's Registration Statement on Form S-4 (File No. 333-92199)) 2.6 Agreement and Plan of Reorganization, dated November 2, 1999, by and among Registrant, Wellfleet Acquisition Corp. and FaxNet Corporation. (Incorporated by reference to Exhibit 2.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 2.7 Agreement and Plan of Reorganization, dated November 3, 1999, by and among Registrant, Compass Holding Corp., Compass Acquisition Corp., 3034996 Nova Scotia Company, 3034997 Nova Scotia Company and The docSpace Company. (Incorporated by reference to Exhibit 2.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 2.8 Agreement and Plan of Reorganization, dated January 28, 2000, by and among Registrant, Inc., D.V. Acquisition Corp. and RemarQ Communities, Inc. (Incorporated by reference to Exhibit 2.5 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 2.9 Agreement and Plan of Reorganization, dated August 8, 2000, by and among Registrant, Prince Acquisition Corp. and PeerLogic, Inc. (Incorporated by reference to Exhibit 5 to the Registrant's Current Report on Form 8-K filed on August 8, 2000) 3.1 Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3(i)(b) to the Registrant's Registration on Form S-1 (File No. 333-71499)) 3.2 Amendment to the Articles of Incorporation, dated January 5, 2001 3.3 Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3(ii)(b) to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 4.1 Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 4.2 Warrant to Purchase Preferred Stock dated September 11, 1998 issued by the Registrant to Hambrecht & Quist LLC. (Incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 4.3 Warrant to Purchase Preferred Stock dated January 13, 1999 issued by the Registrant to Hambrecht & Quist LLC. (Incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 4.4 Warrant to Purchase Common Stock dated January 29, 1999 issued by the Registrant to America Online, Inc. (Incorporated by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 4.5 Indenture, dated March 31, 2000, by and between Registrant and State Street Bank and Trust Company of California, N.A., Trustee, relating to the $300 million five-year, 5.75% Convertible Subordinated Notes due April 1, 2005 (Incorporated by reference to Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000)
83 10.1 Form of Indemnification Agreement between the Registrant and each of its directors and officers. (Incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.2 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.3 1998 Stock Plan and forms of stock option agreements thereunder. (Incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.4 Series B Preferred Stock Purchase Agreement dated September 11, 1998. (Incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.5 Amendment to Series B Preferred Stock Purchase Agreement dated January 13, 1999. (Incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.6 Amended and Restated Investors' Rights Agreement dated September 11, 1998. (Incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.7 Amendment to the Amended and Restated Investors' Rights Agreement dated January 13, 1999. (Incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.8 Master Equipment Lease Agreement dated April 28, 1998, and Lease Line Schedule thereto, by and between the Registrant and Lighthouse Capital Partners II, L.P. (Incorporated by reference to Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.9 Master Lease Agreement dated May 1, 1998, and addendum thereto, by and between the Registrant and Comdisco, Inc. (Incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.10 Standard Industrial/Multitenant Lease-Gross dated June 20, 1997 by and between the Registrant and 501 Folsom Street Building. (Incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.11 Letter Agreement dated October 1, 1998 by and between the Registrant and Douglas Hickey. (Incorporated by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.12 Promissory Note and Security Agreement dated November 2, 1998 by and between the Registrant and Douglas Hickey. (Incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.13 Warrant Agreement dated April 28, 1998 by and between the Registrant and Lighthouse Capital Partners II, L.P. (Incorporated by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.14 Warrant Agreement dated May 1, 1998 by and between the Registrant and Comdisco, Inc. (Incorporated by reference to Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.15 Master Services Agreement dated December 10, 1998 by and between the Registrant and US West Communications Services, Inc. (Incorporated by reference to Exhibit 10.15 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.16 Email Services Agreement dated May 27, 1998 by and between the Registrant and Network Solutions, Inc. (Incorporated by reference to Exhibit 10.16 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.17 Email Services Agreement dated July 6, 1998 by and between the Registrant and Starmedia Network, Inc. (Incorporated by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.18 Amendment to email Services Agreement September 30, 1998 by and between the Registrant and E*TRADE Group, Inc. (Incorporated by reference to Exhibit 10.18 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499))
84 10.19 Email Services Agreement dated September 14, 1998 by and between the Registrant and Sprint Communications Company L.P. (Incorporated by reference to Exhibit 10.19 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.20 Email Services Agreement dated March 19, 1998 by and between the Registrant and NTX, Inc. dba TABNet, Inc. (Incorporated by reference to Exhibit 10.20 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.21 QuickStart Loan and Security Agreement dated May 12, 1998 by and between the Registrant and Silicon Valley Bank. (Incorporated by reference to Exhibit 10.21 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.22 Email Services Agreement dated January 29, 1999 by and between the Registrant and ICQ, Inc. (Incorporated by reference to Exhibit 10.22 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.23 Sublease dated February 8, 1999 by and between Times Direct Marketing, Inc. and the Registrant (Incorporated by reference to Exhibit 10.23 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.24 Promissory Note and Security Agreement dated January 26, 1999 by and between the Registrant and Bill Rinehart. (Incorporated by reference to Exhibit 10.24 to the Registrant's Registration Statement on Form S-1 (File No. 333-71499)) 10.25 Office lease dated December 1999 by and between Ecker-Folsom Properties, LLC and the Registrant. (Incorporated by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 10.26 Office lease dated December 1999 by and between Ecker-Folsom Properties, LLC and the Registrant. (Incorporated by reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 10.27 Secured Promissory Note and Security Agreement, dated January 18, 2000, by and between the Registrant and Mark Rubash. (Incorporated by reference to Exhibit 10.28 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000) 10.28 1999 Stock Option Plan and forms of agreements thereunder (Incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-8 (File No. 333- 87553)) *10.29 Offer Letter, dated December 4, 2000, by and between the Registrant and Lawrence P. Reinhold 10.30 Settlement Agreement and Mutual Release, effective as of December 7, 2000, by and between the Registrant and Mark Rubash 10.31 Agreement and Release, dated February 9, 2001, by and between the Registrant and Douglas Hickey 10.32 Form of Indemnification Agreement by and between the Registrant and each of its directors and officers 21.1 List of Subsidiaries 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants 24.1 Power of Attorney (see the Signatures section of this report)
- --------------- * Confidential treatment requested with respect to portions of this exhibit. EX-3.2 2 f70514ex3-2.txt EX-3.2 1 Exhibit 3.2 AMENDMENT TO THE ARTICLES OF INCORPORATION OF CRITICAL PATH, INC. a California Corporation The undersigned David A. Thatcher hereby certifies that: ONE: He is the duly elected and acting President and Secretary of said corporation. TWO: Article III of the Articles of Incorporation of said corporation shall be amended and to read in full as follows: ARTICLE III STOCK This Corporation is authorized to issue two classes of stock to be designated respectively, Common Stock ("Common Stock") and Preferred Stock ("Preferred Stock"). The total number of shares of capital stock which the Corporation is authorized to issue is Five Hundred Five Million (505,000,000) shares, of which Five Hundred Million (500,000,000) shares shall be Common Stock, and Five Million (5,000,000) shares shall be Preferred Stock. Both the Common Stock and the Preferred Stock shall have par value of $0.001 per share. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Corporation (the "Board of Directors") is expressly authorized, within the limitations and restrictions stated in this Amended and Restated Articles of Incorporation, to provide for the issue, in one or more series, of all or any of the remaining shares of the Preferred Stock, and to fix the number of shares and to determine or alter for each such series, such voting powers, full or limited, or no voting powers, and such designations, preferences, and relative, participating, optional, or other rights and such qualifications, limitations, or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such shares and as may be permitted by the General Corporation Law of California. The Board of Directors is also expressly authorized (unless forbidden in the resolution or resolutions providing for such issue) to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series of Preferred Stock subsequent to the issue of shares of that series. In case the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. * * * THREE: The foregoing amendment has been approved by the Board of Directors of said corporation. 2 FOUR: The foregoing amendment was approved by the holders of the requisite number of shares of said corporation in accordance with Sections 902 and 903 of the California General Corporation Law; the total number of outstanding shares of each class entitled to vote with respect to the foregoing amendment was 58,732,075 shares of Common Stock and 1 share of Preferred Stock, designated Special Voting Stock. The number of shares voting in favor of the foregoing amendment equaled or exceeded the vote required, such required vote being the majority of the outstanding shares of Common Stock voting as a single class and a majority of the outstanding shares of Common Stock and Special Voting Stock on as-if converted into common stock basis, voting together as a single class. 3 IN WITNESS WHEREOF, the undersigned have executed this certificate on December 1, 2000. /s/ DAVID A. THATCHER -------------------------------- David A. Thatcher, President /s/ DAVID A. THATCHER -------------------------------- David A. Thatcher, Secretary The undersigned certify under penalty of perjury that they have read the foregoing Restated Articles of Incorporation and know the contents thereof, and that the statements therein are true. Executed at San Francisco, California on December 1, 2000. /s/ DAVID A. THATCHER -------------------------------- David A. Thatcher /s/ DAVID A. THATCHER -------------------------------- David A. Thatcher EX-10.29 3 f70514ex10-29.txt EX-10.29 1 EXHIBIT 10.29 Confidential Treatment Requested For Certain Portions December 4, 2000 Lawrence P. Reinhold 3207 Plantation Court Naperville, IL 60564 Dear Larry: I am extremely pleased to offer you the position of Executive Vice President and Chief Financial Officer of Critical Path, Inc. (the "Company"). The terms of your employment with the Company are set forth below. 1. Position. (a) You will become the Executive Vice President and Chief Financial Officer of the Company working out of the Company's offices in San Francisco, California. You will have overall responsibility for finance and administration and will report to the Company's Chief Executive Officer. Your start date will be on December 11, 2000 or as soon as practical after that date. (b) You agree that you will, to the best of your ability and experience, at all times loyally and conscientiously perform all the duties and obligations required of you pursuant to the express and implicit terms hereof, and to the reasonable satisfaction of the Company. During the term of your employment, you further agree that you will devote all of your business time and attention to the business of the Company, unless the Company expressly agrees otherwise. You are not permitted to engage in any business activity that competes with the Company's business. 2. Compensation. (a) Salary. Your salary will be $[*] on an annualized basis, and you will be paid a monthly salary of $[*] (payable semi-monthly), less regular payroll deductions; which covers all hours worked. Your salary will be reviewed annually as a part of the Company's regular salary review process. [*] Confidential Treatment Requested 2 Lawrence P. Reinhold December 4, 2000 Page 2 (b) Bonus. You will be eligible to receive annual incentive bonuses in the future, in the discretion of the Board of Directors, based on achievement of targets to be set by the Board or the Chief Executive Officer. I expect that your bonus will be set at between [*]% to [*]% of your base pay. (c) Loan. The Company will extend you a loan in the principal amount of $[*] (the "Loan") on your start date. The loan will bear interest at the applicable federal rate, and will be due upon the earlier of four (4) years or [*] days following the termination of your employment. All interest will be accrued and added to the loan principal. The Loan and the accrued interest will be forgiven straight-line on a monthly basis over a four-year period commencing on your start date; provided that in the event you are terminated without Cause or if you terminate your employment for Good Reason (as defined in Appendix A) the Loan and accrued interest will be forgiven in full. Furthermore, if you are terminated without Cause ( as defined in Appendix A) within twelve (12) months following a Change in Control, the Loan will be forgiven in full. Furthermore, in the event of your death or disability, the loan and accrued interest will be forgiven in full. 3. Stock Options. (a) The Company will grant you options to purchase an aggregate of [*] shares (the "Shares") of Common Stock. You will receive a qualified incentive stock option to purchase [*] of the Shares which will be exercisable at the fair market value of the Common Stock on the date of the grant and will vest in equal monthly installments over four years. You will receive an additional option to purchase [*] of the Shares which will be exercisable at a price per share equal to [*] and will also vest in equal monthly installments over four years. The specific terms of the options will be set forth in option agreements to be issued pursuant to the Company's stock option plan and shall provide for, among other items, the early exercise of up to all of the options granted to you prior to vesting of such options. (b) In the event of a Change of Control of the Company, two-thirds (2/3) of the Shares originally granted under each option will vest immediately preceding the Change of Control, and if you are terminated without Cause or if you terminate your employment for Good Reason (as defined in Appendix A) concurrent with or within twelve (12) months following a Change in Control, an additional twenty-five percent (25%) of the Shares originally granted under each option will vest. (c) In the event you are terminated by the Company (or any successor to the Company) without Cause or if you terminate your employment for Good Reason (as defined in Appendix A) you will receive payment of severance benefits equal to your base monthly salary for [*] months from the date of termination and you will also vest as to an additional [*] months [*] Confidential Treatment Requested 3 Lawrence P. Reinhold December 4, 2000 Page 3 of Shares; provided that as a condition of such severance you execute an agreement in form acceptable to the Company providing for a mutual release of any claims you may have against the Company, its officers, directors, stockholders, agents and affiliates, on the one hand, and the Company may have against you, on the other hand. The option grant and the loan described above are subject to the approval of the Board of Directors. Such approval will be received prior to your start date. 4. Benefits. (a) You will be eligible for paid time off. You will be provided with health insurance benefits as provided in our benefits plan. These benefits may change from time to time. You will be covered by workers' compensation insurance and State Disability Insurance, as required by law. (b) The Company will provide you with standard medical and dental insurance benefits in accordance with Company policy. (c) The Company will pay your reasonable, temporary housing expenses in the San Francisco Bay Area and reasonable weekly transportation to and from the Chicago area for you and/or your family until you have relocated to your permanent home in the San Francisco Bay Area. (d) The Company will pay full corporate relocation expenses, including any reasonable closing costs on the sale of the principal residence in the Chicago area, reasonable moving expenses and any reasonable closing costs from the purchase of a principal residence in the San Francisco Bay Area. (e) The Company will expeditiously enter into an indemnification agreement with you in the same form as executed in favor of other directors and officers of the Company. 5. Proprietary Information Agreement. You will be required to sign and abide by the terms of Critical Path's standard proprietary information agreement which is incorporated into this agreement by reference. You will also represent and warrant to Critical Path that the performance of your duties will not violate any agreement with, or trade secrets, of any other person or entity. 6. Immigration Documentation. Please be advised that your employment is contingent on your ability to prove your identity and authorization to work in the U.S. for 4 Lawrence P. Reinhold December 4, 2000 Page 4 Critical Path. You must comply with the Immigration and Naturalization Service's employment verification requirements. 7. Term of Employment. Your employment with Critical Path is "at will". In other words, either you or Critical Path can terminate your employment at any time for any reason, with or without Cause and with or without notice. 8. Dispute Resolution Procedure. The parties agree that any dispute arising out of or related to the employment relation between them, including the termination of that relationship and any allegations of unfair or discriminatory treatment arising under state or federal law or otherwise, shall be resolved by final and binding arbitration, except where the law specifically forbids the use of arbitration as a final and binding remedy. (a) The party claiming to be aggrieved shall furnish to the other party a written statement of the grievance, identify any witnesses or documents that support the grievance and the relief requested or proposed. (b) If the other party does not agree to furnish the relief requested or proposed, or otherwise does not satisfy the demand of the party claiming to be aggrieved, the parties shall submit the dispute to non-binding mediation before a mediator to be jointly selected by the parties. Critical Path will pay the cost of such mediation. (c) If the mediation does not produce a resolution of the dispute, the parties agree that the dispute shall be resolved by final and binding arbitration. The parties shall attempt to agree to the identity of an arbitrator, and if they are unable to do so, they will obtain a list of arbitrators from the Federal Mediation and Conciliation Service and select an arbitrator by striking names from that list. The arbitrator shall have the authority to determine whether the conduct complained of in paragraph (a) of this section violates the rights of the complaining party and, if so, to grant any relief authorized by law; provided, however, the parties agree, that for violations of the employee's trade secret obligations, the Company retains the right to seek preliminary injunctive relief in court in order to preserve the status quo or prevent irreparable injury before the matter can be heard in arbitration. The arbitrator shall not have the authority to modify, change or refuse to enforce the terms of any employment agreement between the parties. In addition, the arbitrator shall not have the authority to require Critical Path to change any lawful policy of benefit plan. Critical Path shall bear the costs of the arbitration if the employee prevails. If Critical Path prevails, the employee will pay half of the cost of the arbitration, or $500, whichever is less. Each party shall be responsible for paying its own attorney's fees. 5 Lawrence P. Reinhold December 4, 2000 Page 5 Arbitration shall be the final remedy for any dispute between the parties, including but not limited to disputes involving claims for discrimination or harassment (such as claims under the Fair Employment and Hearing Act, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, or the Age Discrimination in Employment Act), wrongful termination, breach of contract, breach of public policy, physical or mental harm or distress or any other disputes, and the parties agree that the dispute shall be submitted to arbitration where the party claiming to be aggrieved has not complied with the preliminary steps provided for in paragraphs (a) and (b) above. The parties agree the arbitration award shall be enforceable in any court having jurisdiction to enforce this agreement and Release of Claims, so long as the arbitrator has not made errors of law. (d) Critical Path reserves the right to modify, change or cancel this provision upon thirty (30) days of written notice. However, such cancellation shall not affect matters that have already been submitted for arbitration. 9. Integrated Agreement. Please note that this agreement supercedes any other prior agreements, representations or promises of any kind, whether written, oral, expressed or implied between the parties hereto with respect to the subject matters herein. This Agreement constitutes the full and complete agreement between you and Critical Path with respect to the subject matters herein. This agreement cannot be changed unless in writing, signed by you and another officer of Critical Path. 10. Severability. If any term of this Agreement is held to be invalid, void or unenforceable, the remainder of this Agreement shall remain in full force and effect and shall in no way be affected; and, the parties shall use their best efforts to find an alternative way to achieve the same result. Larry, as you know we are very excited about the contribution you can make to the future success of Critical Path, and we are looking forward to your joining our organization. In order to confirm your agreement with and acceptance of these terms, please sign a copy of this letter and return it to me. If there is any matter in this letter that you wish to discuss further, please do not hesitate to call me. Sincerely, 6 Lawrence P. Reinhold December 4, 2000 Page 6 /s/ Doug Hickey --------------------------------- Doug Hickey Chief Executive Officer I accept Critical Path's offer under the terms expressed in this letter. I understand that this is not an employment contract for any fixed period, and subject to the provisions of this letter agreement, either party may end the employment relationship at any time for any reason. I have reviewed this letter with such financial, legal and accounting advisors, as I deem appropriate. /s/ LAWRENCE P. REINHOLD December 4, 2000 - ------------------------------------- -------------------------------------- Lawrence P. Reinhold Date 7 Lawrence P. Reinhold December 4, 2000 Page 7 APPENDIX A "Change of Control" shall mean the consummation of one of the following: (i) the acquisition of 50% or more of the outstanding stock of the Company pursuant to a tender offer validly made under any federal or state law (other than a tender offer by the Company); (ii) a merger, consolidation or other reorganization of the Company (other than a reincorporation of the Company), if after giving effect to such merger, consolidation or other reorganization of the Company, the shareholders of the Company immediately prior to such merger, consolidation or other reorganization do not represent a majority in interest of the holders of voting securities (on a fully diluted basis) with the ordinary voting power to elect directors of the surviving entity after such merger, consolidation or other reorganization; (iii) the sale of all or substantially all of the assets of the Company to a third party who is not an affiliate of the Company. "Cause" shall mean (i) failure or refusal to perform a directive of the Board of Directors of the Company that is consistent with your duties and responsibilities as set forth in paragraph 1 hereof (provided, that the Company provides to you written notice specifying the nature of such failure or refusal and the actions needed to be taken by you to cure the same and such failure or refusal is not cured by you within thirty (30) days of receipt of such notice), (ii) you shall have been determined to be guilty of willful misconduct or be in material violation of your fiduciary obligations to the Company (provided, that the Company provides to you written notice specifying the nature of such breach and actions needed to be taken by you to cure same and such breach is not cured by you within ten (10) days of receipt of such notice), (iii) you perform your duties in a grossly negligent manner, or (iv) are convicted of any crime that has a material adverse impact on (A) your ability to perform your duties hereunder, (B) the Company or (C) the Company's business. "Good Reason" shall be deemed to occur if (a)(1) there is a material adverse change in employee's position causing such position to be of significantly less stature or of significantly less responsibility, (2) a reduction of more than twenty percent (20%) of employee's base compensation unless in connection with similar decreases of other similarly situated employees of the Company, or (3) employee's refusal to relocate to a facility or location more than fifty (50) miles from the Company's current location; and (b) within the thirty (30) day period immediately following such material change or reduction employee elects to terminate his employment voluntarily. EX-10.30 4 f70514ex10-30.txt EX-10.30 1 EXHIBIT 10.30 SETTLEMENT AGREEMENT AND MUTUAL RELEASE This Settlement Agreement and Mutual Release ("Agreement") is made by and between Critical Path, Inc. (the "Company"), and Mark J. Rubash ("Employee"). WHEREAS, Employee was employed by the Company; WHEREAS, the Company and Employee have entered into a Proprietary Information and Inventions Agreement (the "Confidentiality Agreement"); WHEREAS, the Company and Employee have mutually agreed to terminate the employment relationship and to release each other from any claims arising from or related to the employment relationship; NOW THEREFORE, in consideration of the mutual promises made herein, the Company and Employee (collectively referred to as "the Parties") hereby agree as follows: 1. Resignation. Employee resigned from his position as the Company's Executive Vice President and Chief Financial Officer effective December 7, 2000. 2. Consideration. The Company agrees to pay Employee a single, lump-sum bonus payment of Two-Hundred and Fifty Thousand Dollars ($250,000.00) in cash, less the principal and interest amount due from Employee to the Company under an outstanding Note; such principal and interest totals One Hundred Five Thousand Two-Hundred Thirty-Five Dollars and Seven Cents ($105,235.07). Therefore, the net cash bonus payable to Employee is One Hundred Forty-Four Thousand Seven Hundred and Sixty-Four Dollars and Ninety-Three Cents ($144,764.93), as shown on in the attached exhibit less applicable federal and state withholding. The net cash bonus payable, less applicable federal and state withholding, will be remitted to and received by Employee no later than January 5, 2001. The Company has the option to either remit the applicable amount through a direct deposit to Employee's bank account or by manual payment advice delivered by Federal Express to Employee's home address. 3. Vesting of Stock. The Parties agree that for purposes of determining the number of shares of the Company's common stock which Employee is entitled to purchase from the Company, Employee will be entitled to continue vesting of stock until December 7, 2000. The exercise of any stock options shall continue to be subject to the terms and conditions of the Company's Stock Option Plan and the applicable Stock Option Agreement between Employee and the Company. 4. Benefits. Employee shall be covered by the Company's health insurance until December 31, 2000. After that date Employee shall have the right to convert his health and any other insurance benefits to individual coverage pursuant to COBRA. Should Employee so elect, the Company shall reimburse Employee for 1 months health care coverage. 5. Confidential Information. Employee shall continue to maintain the confidentiality of all confidential and proprietary information of the Company and shall continue to comply with the 2 terms and conditions of the Confidentiality Agreement between Employee and the Company. Employee shall return all the Company property and confidential and proprietary information in his possession to the Company on or before the Effective Date of this Agreement. 6. Payment of Salary. Employee acknowledges and represents that the Company has paid all salary, wages, accrued vacation, commissions and any and all other benefits due to Employee. 7. Reimbursement of Expenses. The Company acknowledges and represents that the Employee is due $1,470.26 for valid business expenses incurred on the Company's behalf during the course of employment through December 7, 2000. Company acknowledges and represents that reimbursement for such expenses will be made to Employee on or before December 31, 2000. 8. Release of Claims. Employee agrees that the foregoing consideration represents settlement in full of all outstanding obligations owed to Employee by the Company. Employee and the Company, on behalf of themselves, and their respective heirs, family members, executors, officers, directors, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns, hereby fully and forever release each other and their respective heirs, family members, executors, officers, directors, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns, from, and agree not to sue concerning, any claim, duty, obligation or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that any of them may possess arising from any omissions, acts or facts that have occurred up until and including the Effective Date of this Agreement including, without limitation, (a) any and all claims relating to or arising from Employee's employment relationship with the Company and the termination of that relationship; (b) any and all claims relating to, or arising from, Employee's right to purchase, or actual purchase of shares of stock of the Company, including, without limitation, any claims for fraud, misrepresentation, breach of fiduciary duty, breach of duty under applicable state corporate law, and securities fraud under any state or federal law; (c) any and all claims for wrongful discharge of employment; breach of contract, both express and implied; breach of a covenant of good faith and fair dealing, both express and implied; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; defamation; negligence; personal injury; assault; battery; invasion of privacy; false imprisonment; and conversion; (d) any and all claims for violation of any federal, state or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, the Fair Labor Standards Act, the California Fair Employment and Housing Act, and Labor Code section 201, et seq.; -2- 3 (e) any and all claims arising out of any other laws and regulations relating to employment or employment discrimination; and (f) any and all claims for attorneys' fees and costs. The Company and Employee agree that the release set forth in this section shall be and remain in effect in all respects as a complete general release as to the matters released. This release does not extend to any obligations incurred under this Agreement. 9. Acknowledgment of Waiver of Claims under ADEA. Employee acknowledges that he is waiving and releasing any rights he may have under the Age Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and release is knowing and voluntary. Employee and the Company agree that this waiver and release does not apply to any rights or claims that may arise under ADEA after the Effective Date of this Agreement. Employee acknowledges that the consideration given for this waiver and release Agreement is in addition to anything of value to which Employee was already entitled. Employee further acknowledges that he has been advised by this writing that (a) he should consult with an attorney prior to executing this Agreement; (b) he has at least twenty-one (21) days within which to consider this Agreement; (c) he has at least seven (7) days following the execution of this Agreement by the parties to revoke the Agreement; and (d) this Agreement shall not be effective until the revocation period has expired. 10. Civil Code Section 1542. The Parties represent that they are not aware of any claim by either of them other than the claims that are released by this Agreement. Employee and the Company acknowledge that they have been advised by legal counsel and/or are familiar with the provisions of California Civil Code Section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Employee and the Company, being aware of said code section, agree to expressly waive any rights they may have thereunder, as well as under any other statute or common law principles of similar effect. 11. No Pending or Future Lawsuits. Employee represents that he has no lawsuits, claims, or actions pending in his name, or on behalf of any other person or entity, against the Company or any other person or entity referred to herein. Employee also represents that he does not intend to bring any claims on his own behalf or on behalf of any other person or entity against the Company or any other person or entity referred to herein. 12. Application for Employment. Employee understands and agrees that, as a condition of this Agreement, he shall not be entitled to any employment with the Company, its subsidiaries, or any successor, and he hereby waives any right, or alleged right, of employment or re-employment with the Company. -3- 4 13. Confidentiality. The Parties hereto each agree to use their best efforts to maintain in confidence the existence of this Agreement, the contents and terms of this Agreement, and the consideration for this Agreement (hereinafter collectively referred to as "Settlement Information"). Each Party hereto agrees to take every reasonable precaution to prevent disclosure of any Settlement Information to third parties, and each agrees that there will be no publicity, directly or indirectly, concerning any Settlement Information. The Parties hereto agree to take every precaution to disclose Settlement Information only to those employees, officers, directors, attorneys, accountants, governmental entities, and family members who have a reasonable need to know of such Settlement Information. 14. No Cooperation. Employee agrees he will not act in any manner that might damage the business of the Company. Employee agrees that he will not counsel or assist any attorneys or their clients in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints by any third party against the Company and/or any officer, director, employee, agent, representative, shareholder or attorney of the Company, unless under a subpoena or other court order to do so. 15. Non-Disparagement. Each party agrees to refrain from any defamation, libel or slander of the other, or tortious interference with the contracts and relationships of the other. 16. Indemnification. The Company will provide Employee indemnification pursuant to the indemnification agreement between the Company and Employee. 17. Tax Consequences. The Company makes no representations or warranties with respect to the tax consequences of the payment of any sums to Employee under the terms of this Agreement. Employee agrees and understands that he is responsible for payment, if any, of local, state and/or federal taxes on the sums paid hereunder by the Company and any penalties or assessments thereon. Employee further agrees to indemnify and hold the Company harmless from any claims, demands, deficiencies, penalties, assessments, executions, judgments, or recoveries by any government agency against the Company for any amounts claimed due on account of Employee's failure to pay federal or state taxes or damages sustained by the Company by reason of any such claims, including reasonable attorneys' fees. 18. No Admission of Liability. The Parties understand and acknowledge that this Agreement constitutes a compromise and settlement of any current or potential claims. No action taken by the Parties hereto, or either of them, either previously or in connection with this Agreement shall be deemed or construed to be (a) an admission of the truth or falsity of any current or potential claims heretofore made or (b) an acknowledgement or admission by either party of any fault or liability whatsoever to the other party or to any third party. 19. Costs. The Parties shall each bear their own costs, expert fees, attorneys' fees and other fees incurred in connection with this Agreement. 20. Arbitration. The Parties agree that any and all disputes arising out of the terms of this Agreement, their interpretation, and any of the matters herein released, shall be subject to binding arbitration in San Francisco County before the American Arbitration Association under its California -4- 5 Employment Dispute Resolution Rules, or by a judge to be mutually agreed upon. The Parties agree that the prevailing party in any arbitration shall be entitled to injunctive relief in any court of competent jurisdiction to enforce the arbitration award. The Parties agree that the prevailing party in any arbitration shall be awarded its reasonable attorney's fees and costs. 21. Authority. The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Employee represents and warrants that he has the capacity to act on his own behalf and on behalf of all who might claim through him to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein. 22. No Representations. Each party represents that it has had the opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this Agreement. Neither party has relied upon any representations or statements made by the other party hereto which are not specifically set forth in this Agreement. 23. Severability. In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision. 24. Entire Agreement. This Agreement represents the entire agreement and understanding between the Company and Employee concerning Employee's separation from the Company, and supersedes and replaces any and all prior agreements and understandings concerning Employee's relationship with the Company and his compensation by the Company. 25. No Oral Modification. This Agreement may only be amended in writing signed by Employee and the President of the Company. 26. Governing Law. This Agreement shall be governed by the laws of the State of California. 27. Effective Date. This Agreement is effective seven days after it has been signed by both Parties. 28. Counterparts. This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned. 29. Voluntary Execution of Agreement. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the Parties hereto, with the full intent of releasing all claims. The Parties acknowledge that: (a) They have read this Agreement; -5- 6 (b) They have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice or that they have voluntarily declined to seek such counsel; (c) They understand the terms and consequences of this Agreement and of the releases it contains; (d) They are fully aware of the legal and binding effect of this Agreement. -6- 7 IN WITNESS WHEREOF, the Parties have executed this Settlement Agreement and Mutual Release on the respective dates set forth below. Critical Path, Inc. Dated: , 2000 By: /s/ David A. Thatcher --------- --------------------------------------- David A. Thatcher President MARK J. RUBASH, an individual Dated: December 19, 2000 By: /s/ Mark J. Rubash ------------ --------------------------------------- Mark J. Rubash APPROVED AS TO FORM: WILSON SONSINI GOODRICH & ROSATI, P.C. Dated: , 2000 By: /s/ MARK L. REINSTRA ---------- --------------------------------------- Mark L. Reinstra, Esq. Attorneys for the Company EX-10.31 5 f70514ex10-31.txt EX-10.31 1 EXHIBIT 10.31 Agreement and Release made effective as of February 9, 2001 by and between Critical Path, Inc., a California corporation (the "Company") and Douglas Hickey ("Executive"). WITNESSETH: WHEREAS, Executive is Chief Executive Officer of the Company; WHEREAS, Executive and the Company entered into an employment agreement dated October 1, 1998 (the "Employment Agreement") and an indemnification agreement in 1999 (the "Indemnification Agreement"); WHEREAS, certain issues have arisen as to the reporting of the Company's earnings and revenues for 2000 (the "Issues"); WHEREAS, since the Issues arose while Executive was Chief Executive Officer, it is desirable that Executive step down from his position; NOW, THEREFORE, the parties agree as follows: 1. Effective February 9, 2001, Executive hereby resigns from all directorships and officer positions with the Company and its affiliates and as a fiduciary of any benefit plan of the Company or its affiliates. The Executive shall execute such additional documents with regard thereto as reasonably requested by the Company. 2. The Executive shall cooperate with and assist the Company with regard to transition of his responsibilities and transition of matters that he has been involved in while an officer of the Company. The parties shall cooperate with each other with regard to any matters related to the Issues, including any investigation, action or other proceedings, unless Executive acted 1 2 unlawfully. In addition, the Executive shall assist the Company with regard to providing information, to the extent he has knowledge, on any other matters that relates to his period of service with the Company. The Company shall reimburse any reasonable expenses incurred by Executive and which have been preapproved in writing by the Company in connection with the foregoing assistance. 3. Payments made to Executive by the Company as set forth in Section 5, below, shall be offset by the Company in the amount of $23,297.04 for personal charges made to Executive's Company credit card, less any amounts that Executive is able to prove to Company's reasonable satisfaction to be Company expenditures. 4. Executive acknowledges that during his employment, he may have obtained confidential, proprietary and trade secret information, including information relating to the Company's products, plans, designs and other valuable confidential information. Executive agrees not to disclose any such confidential information unless required by subpoena or court order, and that Executive will first give the Company written notice of such subpoena or court order with reasonable advance notice to the extent possible (except as prohibited by law) to permit the Company to oppose such subpoena or court order if it chooses to do so. Further, Executive acknowledges that he does not have in his possession and has returned all Company property (including all laptop computers, hardware and software), proprietary, trade secret and confidential information, as well as all copies and duplicates thereof. 5. Provided that the Executive executes and does not revoke the Release annexed hereto as Exhibit A within the time specified therein, Executive shall receive or has been provided: 2 3 (a) Within ten (10) business days after the date of execution of Exhibit A, a lump sum payment equal to nine (9) months of base salary plus automobile allowance, less deductions required by law; (b) Promptly any accrued but unpaid amounts, including but not limited to unpaid salary, accrued but unused paid time off ("PTO") and, unreimbursed business expenses (which Executive shall promptly submit accompanied by documentation in accordance with Company policy); (c) Any option or Restricted Stock that would vest on or prior to August 9, 2001 shall be deemed to be immediately vested. Otherwise, all vesting shall cease effective as of February 9, 2001. The Company acknowledges that Executive (including vested shares previously gifted by him) will have 1,274,687 shares of Restricted Stock fully vested, 29,000 unrestricted shares fully vested and 449,006 options for shares of stock fully vested (of which 299,946 will be incentive stock options). The Company further acknowledges that the Executive has ninety (90) days from February 9, 2001 to exercise any vested options; (d) The Company will pay the cost for Executive's and his eligible dependent's group health benefit coverage continuation under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), to the same extent previously provided to Executive, through February 9, 2002, or until Executive becomes eligible for group health insurance benefits from another employer, whichever occurs first. Executive understands and agrees that he has obligation to inform immediately the Company if he becomes eligible for such insurance from another employer and that Executive may not increase the number of his designated dependants, if any, during this time unless Executive does so at his own expense. In addition, the Company shall 3 4 pay up to $5,000 for Executive's annual physical scheduled for February 2001 at Mayo Clinic and up to $5000 in travel and other expenses associated therewith. Such amounts shall be paid or, if paid by Executive, reimbursed within ten days of Executive's providing the Company with documentation with regard thereto; (e) The Company shall continue to provide at its expense (or reimburse Executive for) continuation of Executive's existing financial planning services through AYCO company for one (1) year at a fee of $18,500; (f) The repayment date of the nonrecourse Promissory Note for Five Hundred Thousand Dollars ($500,000) dated 1998 (a copy of which is annexed hereto as Exhibit C) shall be extended until March 9, 2002 and shall remain nonrecourse; (g) The repayment date of the recourse Promissory Note for One Million Sixty Five Thousand Six Hundred Thirty Eight Dollars and Ninety-Four Cents ($1,065,638.94) dated November 1998 (a copy of which is annexed hereto as Exhibit D) shall be extended to May 9, 2002; (h) The Promissory Notes referred to in paragraph (f) and (g) above are incorporated herein and shall remain secured by Common Stock as currently provided. In the event Executive desires to sell any such Common Stock, the Company shall release such stock from the security interest provided Executive promptly upon sale pays to the Company against the loans (the (g) loan first) the after tax net proceeds received by Executive upon such sale; (i) Executive's Common Stock and Options shall continue to be registered under an S-8; and 4 5 (j) Executive shall be entitled to use the Company apartment for ninety (90) days from February 9, 2001, so as to be available to assist the Company under Section 2 with regard to transition during this period. Executive understands and agrees that he shall be responsible for all tax obligations, if any, associated with any of the benefits set forth in Section 5. 6. (a) The Company acknowledges and agrees that, subject to the terms and conditions of the Indemnification Agreement, Executive is entitled to indemnification under the terms and conditions of the Indemnification Agreement and under the Company's Articles and Bylaws with regard to any Proceedings (as defined in the Indemnification Agreement) with regard to the Issues and represents that such indemnification has been approved by the directors in accordance with Section 5.2 of the Indemnification Agreement. Furthermore, Executive shall be reimbursed for Expenses (as defined in the Indemnification Agreement) pursuant to Section 4.1 of the Indemnification Agreement. (b) The Company agrees that Executive shall be entitled to separate counsel of his choice with regard to Proceedings and that the Expenses in connection therewith will be covered under the Indemnification provisions set forth in Section 6(a) above. Notwithstanding the foregoing, with regard to any Proceedings that is a civil litigation (other than administrative or criminal matters) where both the Company and the Executive are defendants, the Company may appoint its counsel of record as counsel of record for Executive in the matter (subject to, and until, the exceptions in Section 11(b)(i) - (iii) of the Indemnification Agreement become effective) but Executive may have "shadow" counsel of his choice for any Proceeding that is civil litigation as referenced above, the Expenses of whom shall be paid by the Company notwithstanding the 5 6 appointment of different counsel of record by the Company. If Executive determines in good faith that shadow counsel should become counsel of record for Executive in any such Proceeding so as to best protect his interests, the Company agrees to honor such request on the same basis as under the first sentence of this paragraph. Executive agrees to make such decision only after consultation with counsel for the Company. The Company further agrees that any internal investigation by the Company is a Proceeding. (c) Executive acknowledges and agrees that under Section 4.1 of the Indemnification Agreement the Company is entitled to repayment by Executive for all payments advanced to Executive pursuant to the Indemnification Agreement if it shall ultimately be determined that Executive is not entitled to be indemnified pursuant to the terms of the Indemnification Agreement. 7. The parties shall not willfully and intentionally defame each other in any public forum, provided the foregoing shall not in any way obstruct justice, limit any claims made in any litigation, or prevent a party from "correcting the record." 8. The provisions set forth in the Executive's Proprietary Information and Inventions Agreement (a copy of which is annexed hereto as Exhibit E) shall continue to apply, provided Executive shall be entitled to retain copies of any documents in his possession with regard to the Issues. 9. The Company shall pay Executive's reasonable legal fees (based on standard hourly rates of Executive's counsel) in negotiating this Agreement, up to a maximum of $15,000.00. 6 7 10. Executive shall execute the release set forth in Exhibit A hereto and the Company shall execute the release set forth in Exhibit B hereto. 11. This Agreement and Releases (Exhibits A & B) is the entire agreement between the parties and supersedes the Employment Agreement and any other prior agreements or understandings, whether written or oral, between them regarding the subject matter herein unless such agreements are incorporated herein, provided, however, neither the Promissory Notes (Exhibits C & D), the Proprietary Information Agreement (Exhibit E), the Indemnification Agreement, nor any other rights of indemnification, contribution, to be held harmless or for director and officer liability insurance coverage shall be superseded. It may not be terminated or modified orally, but only by a writing executed by the party to be charged. The Agreement and Release shall be interpreted under the laws of the State of California without regard to principles of conflict of laws. 12. The Agreement and Releases are binding on and for the benefit of Executive, the Releasees and their respective heirs, executors, administrators, successors and assigns, whenever the context requires. If any term or condition is determined to be overbroad or invalid, the remainder of the provisions shall remain in full force and effect. 13. The execution and delivery of the Agreement and Releases or any performance of any acts in connection therewith shall not be deemed at any time or place to be an admission by Releasees or Executive that either Releasees or Executive performed or failed to perform any act in violation the other parties' rights. It is the sole purpose of this Agreement and Releases to avoid the expense and vexation of possible litigation between them. 7 8 14. With the exception of the Indemnification Agreement, which shall be controlled by its terms, if any suit is brought relating to the enforcement or breach of this Agreement and Release (with the exception of a claim by Executive challenging the validity of this Release under the ADEA, as amended by the OWBPA), the Court shall have the discretion to award the prevailing party in such suit shall be entitled to all remedies and reimbursement for reasonable costs, expenses and attorney's fees incurred by it. 15. The parties shall keep the terms of this Agreement confidential except to the extent such terms become public (other then by virtue of an improper act of the party), provided that (a) a party may comply with required governmental filing and disclosure requirements, (b) a party may comply with legal process provided that (to the extent legally permitted to do so), the party gives the other party prompt written notice thereof so that the other party if it desires may oppose such legal process, (c) the Company may disclose it on a need to know basis to its officers, board members, employees , attorneys and auditors and the Executive may disclose it to his attorneys, financial advisors, accountants, family and current girlfriend and, on a need to know basis as to any limitations on Executive's activities, to any potential employer, provided that any such entities or persons shall be informed to the confidentiality obligations with regard to the information and that any violation by such person or entity shall be deemed a violation by the party disclosing it to such person or entity, and (d)as necessary to enforce or defend his or its rights hereunder. 8 9 16. The parties hereby agree that this Agreement may be executed in counterparts. In witness whereof, the parties have executed this Agreement this _____ day of February, 2001. CRITICAL PATH, INC. By: /s/ DOUGLAS HICKEY -------------------------------- Douglas Hickey 9 10 EXHIBIT A 1. In consideration of the provisions set forth in the Agreement attached hereto, Douglas Hickey ("Executive"), on behalf of himself and his heirs, executors, administrators, successors and assigns, hereby unconditionally releases and discharges Critical Path, Inc. (the "Company"), and its past and present subsidiaries, successors, affiliate companies and assigns, and their respective past and present directors, officers, representatives, agents, investigators, attorneys and employees, in such capacities as well as any benefit plan and its fiduciaries (collectively "Releasees" and individually "Releasee") from all known and unknown claims (including claims for attorneys' fees and costs), charges, actions and causes of action, demands, damages, and liabilities of any kind or character, in law or equity, suspected or unsuspected, known or unknown, past or present, that he ever had, may now have, or may later assert against any Releasee heretofore occurring on or before February 9, 2001, other than Executive's rights under the Indemnification Agreement (as defined in the Agreement), any other rights of indemnification, contribution or to be held harmless and any rights to, or under any policy with regard to, directors and officers liability insurance, if any, and matters expressly excluded under the Agreement. To the fullest extent permitted by law, this release includes but is not limited to: (a) claims arising under the Age Discrimination in Employment Act of 1967 ("ADEA"), as amended by the Older Workers Benefit Protection Act ("OWBPA") (except as it relates to the validity of this Release under the ADEA/OWBPA), the Workers' Adjustment and Retraining Notification Act, the ERISA, the Family and Medical Leave Act of 1993, the ADA, the California Fair Employment and Housing Act, and any other federal, state, or local law prohibiting age, race, color, gender, creed, religion, sexual preference/orientation, marital status, national origin, mental or physical disability, veteran status, or any other form of unlawful 10 11 discrimination or claim with respect to or arising out of Executive's employment with or termination from the Company; (b) claims (whether based on common law or otherwise) arising out of or related to any contract (whether express or implied); (c) claims under any federal, state or local constitutions, statutes, rules or regulations; (d) claims (whether intentional or otherwise, common law or tort) including but not limited to, wrongful termination, defamation, violation or public policy; and (e) claims included in, related to, or which could have been included in any presently pending federal, state or local lawsuit filed by Executive or on his behalf against any Releasee. Executive represents that he has no claims currently pending against any Releasee in any forum and that if Executive does have any such claims, Executive agrees to immediately dismiss with prejudice. Section 1542 of the Civil Code of the State of California states: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." Notwithstanding the provisions of Section 1542, and for the purpose of implementing a full and complete release and discharge of all Releasees with respect to claims in California as well as all other jurisdictions, Executive expressly acknowledges that this Release is intended to include not only claims that are known, anticipated or disclosed, but also claims that are unknown, unanticipated and undisclosed. 2. Except as to claims relating to the validity of this Release under the ADEA as amended by the OWBPA, Executive agrees not to bring any action, suit or administrative 11 12 proceeding contesting the validity of this Release or attempting to negate, modify or reform it, nor to sue any Releasee for any reason with regard to any released matter. 3. Executive understands that, pursuant to the Older Workers Benefit Protection Act, he has the right to (and should) consult with an attorney before signing this Release and represents that he has done so. Executive understands that he has up to twenty-one (21) days to consider the Release before signing it and he may revoke the Release within seven (7) calendar days after signing it. Revocation can be made by delivering a written notice of revocation to: Brett Robertson, Esq., Critical Path, Inc., 320 First Street, San Francisco, California 94105. BY SIGNING THIS RELEASE, EXECUTIVE STATES THAT: a) HE HAS READ IT AND HAS HAD SUFFICIENT TIME TO CONSIDER ITS TERMS; b) HE UNDERSTANDS IT AND KNOWS THAT HE IS GIVING UP IMPORTANT RIGHTS; c) HE ACCEPTS ITS TERMS; d) HE IS AWARE OF HIS RIGHT TO (AND THAT HE SHOULD) CONSULT AN ATTORNEY BEFORE SIGNING IT AND HAS DONE SO; AND 12 13 e) HE HAS SIGNED IT KNOWINGLY AND VOLUNTARILY. /s/ DOUGLAS HICKEY ---------------------------- Douglas Hickey Date: 13 14 EXHIBIT B 1. Critical Path, Inc. on behalf of itself and its subsidiaries (which right to act on behalf of it represents and warrants it has) hereby unconditionally releases and discharges Douglas Hickey ("Executive") and his heirs, executors, administrators, successors and assigns (collectively "Releasees" and individually "Releasee") from all known and unknown claims (including claims for attorneys' fees and costs), charges, actions and causes of action, demands, damages, and liabilities of any kind or character, in law or equity, suspected or unsuspected, past or present, that it or they ever had, may now have, or may later assert against any Releasee, other than with regard to any acts or omissions related to the Issues, as defined in the Agreement and Release effective February 9, 2001 between the Company and Executive (the "Agreement") or as provided in the Agreement. Section 1542 of the Civil Code of the State of California states: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." Notwithstanding the provisions of Section 1542, and for the purpose of implementing a full and complete release and discharge of all Releasees with respect to claims in California as well as all other jurisdictions, the Company expressly acknowledges that this Release is intended to include not only claims that are known, anticipated or disclosed, but also claims that are unknown, unanticipated and undisclosed. 2. The Company agrees not to bring any action, suit or administrative proceeding contesting the validity of this Release or attempting to negate, modify or reform it, nor to sue any Releasee for any reason with regard to any released matter. 14 15 BY SIGNING THIS RELEASE, THE COMPANY STATES THAT; a) IT HAS READ IT AND HAS HAD SUFFICIENT TIME TO CONSIDER ITS TERMS; b) IT UNDERSTANDS IT AND KNOWS THAT IT IS GIVING UP IMPORTANT RIGHTS; c) IT ACCEPTS ITS TERMS; d) IT IS AWARE OF ITS RIGHT TO (AND THAT IT SHOULD) CONSULT AN ATTORNEY BEFORE SIGNING IT AND HAS DONE SO; AND e) IT HAS SIGNED IT KNOWINGLY AND VOLUNTARILY. Critical Path, Inc. By: /s/ BRETT ROBERTSON ------------------------------------------- Brett Robertson, Esq. Vice President of Strategic Development, General Counsel Date: February 28, 2001 ----------------------------------------- 15 EX-10.32 6 f70514ex10-32.txt EX-10.32 1 EXHIBIT 10.32 [FORM OF INDEMNIFICATION AGREEMENT FOR CURRENT OFFICERS AND DIRECTORS] INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is made as of this ____ day of __________, 2001 by and between Critical Path, Inc., a California corporation (the "Company"), and ____________________ ("Indemnitee"). WHEREAS, the Company and Indemnitee recognize the increasing difficulty in obtaining directors' and officers' liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers, directors and key employees to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; WHEREAS, Indemnitee currently has an indemnification agreement with the Company that the Company and Indemnitee wish to replace with this Agreement so as to provide Indemnitee with the maximum protection permitted by law. NOW, THEREFORE, the Company and Indemnitee hereby agree as follows: 1. Indemnification. (a) Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to or witness in any threatened, pending or completed action or Proceeding, whether civil, criminal, administrative or investigative (other than an action by the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against Expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action or Proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the best interests of the Company, and, with respect to any criminal action or Proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action or Proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that (i) Indemnitee did not act in good faith and in a manner which Indemnitee 2 reasonably believed to be in the best interests of the Company, or (ii) with respect to any criminal action or Proceeding, Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful. (b) Proceedings by or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to or witness in any threatened, pending or completed action or Proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against Expenses (including attorneys' fees) and, to the fullest extent permitted by law, amounts paid in settlement, in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or Proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the best interests of the Company and its shareholders, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company in the performance of Indemnitee's duty to the Company and its shareholders unless and only to the extent that the court in which such action or Proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for Expenses and then only to the extent that the court shall determine. 2. Expenses; Indemnification Procedure. (a) Advancement of Expenses. The Company shall advance all Expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action or Proceeding referenced in Section 1(a) or (b) hereof (but not amounts actually paid in settlement of any such action or Proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby or elsewhere. The advances to be made hereunder shall be paid by the Company to Indemnitee within twenty (20) days following delivery of a written request therefor by Indemnitee to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). Notice shall be deemed received as set forth in Section 14 hereof. In addition, Indemnitee shall give the Company such information and cooperation in the defense of any pending, threatened or completed action or Proceeding as shall be within Indemnitee's power, except that Indemnitee shall not be required to give the Company information that is privileged or confidential as to Indemnitee. The giving of notice required under his Section 2(b) shall be a condition precedent to Indemnitee's right -2- 3 to be indemnified under this Agreement if the failure to give such notice materially prejudices any right, claim or defense available to the Company. (c) Procedure. Any indemnification provided for in Section 1 shall be made no later than forty-five (45) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company's Articles of Incorporation or By-laws providing for indemnification, is not paid in full by the Company within forty-five (45) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 8 of this Agreement, Indemnitee shall also be entitled to be paid for the Expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for Expenses incurred in connection with any action or Proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company, and Indemnitee shall be entitled to receive interim payments of Expenses pursuant to Subsection 2(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide on a de novo basis, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its shareholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its shareholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (d) Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 2(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such Proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated under Section 2(a) hereof to pay the Expenses of any Proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such Proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Proceeding, provided that (i) Indemnitee shall have the right to employ his or her counsel in any such Proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have -3- 4 reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such Proceeding, then the fees and Expenses of Indemnitee's counsel shall be at the expense of the Company. (f) Settlement of Claims. The Company shall not settle any claim, action or Proceeding (in whole or in part) which would impose any Expense, judgment, fine, penalty or limitation on Indemnitee without the Indemnitee's prior written consent. 3. Additional Indemnification Rights; Nonexclusivity. (a) Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Articles of Incorporation, the Company's By-laws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute or rule which expands the right of a California corporation to indemnify a member of its board of directors or an officer, such changes shall be, ipso facto, within the purview of Indemnitee's rights and Company's obligations, under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a California corporation to indemnify a member of its Board of Directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) Nonexclusivity. The indemnification and advancement provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Articles of Incorporation, its By-laws, any agreement, any vote of shareholders or disinterested directors, the California General Corporation Law, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification and advancement provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action or other covered Proceeding. 4. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement or otherwise to indemnification by the Company for some or a portion of the Expenses, judgments, fines or penalties actually or reasonably incurred by him in the investigation, defense, appeal or settlement of any civil or criminal action or Proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses, judgments, fines or penalties to which Indemnitee is entitled. 5. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that in certain instances, applicable law or public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. -4- 5 6. Directors' and Officers' Liability Insurance. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of directors' and officers' liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director, or of the Company's officers, if Indemnitee is not a director of the Company but is an officer, or of the Company's key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Company. 7. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 7. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 8. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Acts. To indemnify Indemnitee for any acts or omissions or transactions from which a director may not be relieved of liability under the California General Corporation Law; or (b) Claims Initiated by Indemnitee. To indemnify or advance Expenses to Indemnitee with respect to Proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 317 of the California General Corporation Law, but such indemnification or advancement of Expenses may be provided by the Company in specific cases if the Board of Directors has approved the initiation or bringing of such suit; or (c) Lack of Good Faith. To indemnify Indemnitee for any Expenses incurred by the Indemnitee with respect to any Proceeding instituted by Indemnitee to enforce or interpret this -5- 6 Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such Proceeding was not made in good faith or was frivolous; or (d) Insured Claims. To indemnify Indemnitee for Expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee by an insurance carrier under a policy of directors' and officers' liability insurance maintained by the Company; or (e) Claims Under Section 16(b). To indemnify Indemnitee for Expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 9. Effectiveness of Agreement. This Agreement shall be effective as of the date set forth on the first page and may apply to acts or omissions of Indemnitee which occurred prior to such date if Indemnitee was an officer, director, employee or other agent of the Company, or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, at the time such act or omission occurred. 10. Construction of Certain Phrases. (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries. (c) For purposes of this Agreement, references to "Expenses" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding. Expenses also shall include Expenses incurred in connection with any appeal resulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedeas bond, or other appeal bond or its equivalent. Expenses, -6- 7 however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee. (d) For purposes of this Agreement, references to "Proceeding" shall include any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee was, is or will be involved as a party or otherwise by reason of the fact that Indemnitee is or was a director or officer of the Company, by reason of any action taken by him or of any inaction on his part while acting as director or officer of the Company, or by reason of the fact that he is or was serving at the request of the Company as a director, officer, trustee, general partner, managing member, fiduciary, employee or agent of any other enterprise, in each case whether or not serving in such capacity at the time any liability or expense is incurred for which indemnification, reimbursement or advancement of Expenses can be provided under this Agreement. 11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns. 13. Attorneys' Fees. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and Expenses, including reasonable attorneys' fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and Expenses, including attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. 14. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee, on the date of such receipt, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 15. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of California for all purposes in connection with any action or Proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of California. -7- 8 16. Choice of Law. This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of California as applied to contracts between California residents entered into and to be performed entirely within California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. CRITICAL PATH, INC. By: ------------------------------------------- Title: ---------------------------------------- Address: 320 First Street San Francisco, CA 94105 AGREED TO AND ACCEPTED: INDEMNITEE: By: ----------------------------------------- Name: --------------------------------------- Address: ------------------------------------ -8- EX-21.1 7 f70514ex21-1.txt EX-21.1 1 EXHIBIT 21.1 Critical Path, Inc. Subsidiaries Domestic: dotOne Acquisition Corp. FaxNet Netmosphere, Inc. RemarQ Communities, Inc. Peer Logic India International: 3034996 Nova Scotia Company, A Nova Scotia Company 3034997 Nova Scotia Company, A Nova Scotia Company Amplitude Software UK Ltd. Compass Acquisition Corp. Compass Holding Corp. CP AG (Switzerland) CP A/S (Denmark) CP B.V. CP Data Centre UK CP Germany CP Ireland CP Latin America CP SA (aka FaxNet SA) CP SA (France) CP SpA (Italy) Critical Path Data Center Critical Path GmbH Critical Path Messaging Co. Critical Path SA (aka FaxNet SA) Critical Path Technologies (formerly PL UK) Critical Path UK Ltd. FaxNet Argentina FaxNet Services Corp. Fisher Technology Group Inc. Licoln Software Ltd. Lookforth Ltd. Nihon PeerLogic KK Peer Logic Canada, Inc. RemarQ UK Ltd. UI Telecom, Inc. Unicom Int'l. LLC EX-23.1 8 f70514ex23-1.txt EX-23.1 1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-95933, 333-95279, 333-87553, 333-36228, 333-40476, 333-44418, 333-51504) and on Form S-3 (Nos. 333-36382, 333-38000, 333-39958) of Critical Path, Inc. of our report dated April 4, 2001 relating to the financial statements and financial statement schedule, which appears in this Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP San Francisco, California April 4, 2001 -----END PRIVACY-ENHANCED MESSAGE-----