-----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, Mjp9/A8TKZ7sfMbI2CNLawNWEF2Ef9PryA/8QMOd8RZTrX6EJwMVcB/1ddD5QdbI APxQJu5/LGtlvieg+mw5Xw== 0000950149-01-501230.txt : 20010815 0000950149-01-501230.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950149-01-501230 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25331 FILM NUMBER: 1710528 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-Q 1 f74608e10-q.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2001 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q ------------------------ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 [ ] 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. A CALIFORNIA CORPORATION I.R.S. EMPLOYER NO. 91-1788300
532 FOLSOM STREET SAN FRANCISCO, CALIFORNIA 94105 415-808-8800 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. [X] Yes [ ] No As of July 31, 2001, the company had outstanding 75,486,730 shares of common stock, $0.001 par value per share. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 CRITICAL PATH, INC. INDEX
PAGE ---- PART I Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of December 31, 2000 and June 30, 2001...................................... 2 Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2000 and 2001................. 3 Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2000 and 2001......................... 4 Notes to Condensed Consolidated Financial Statements........ 5 Management's Discussion and Analysis of Financial Condition Item 2. and Results of Operations................................... 10 Supplemental Pro Forma Financial Data (Unaudited)........... 28 Quantitative and Qualitative Disclosures About Market Item 3. Risk........................................................ 29 Report of Independent Accountants........................... 30 PART II Item 1. Legal Proceedings........................................... 31 Item 4. Submission of Matters to a Vote of Security Holders......... 32 Item 6. Exhibits and Reports on Form 8-K............................ 32
i 3 The following Condensed Consolidated Financial Statements and Notes thereto of Critical Path, Inc. and discussions contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, such as statements regarding our plans related to the sale of certain product lines our plans to exit certain products and services, our plans to reduce costs through a reduction of personnel and a consolidation of office space, our anticipated charges and cost savings as a result of those plans and our belief in our ability to successfully emerge from the restructuring and refocusing of our operations. The words "anticipate," "expect," "intend," "plan," "believe," "seek," and "estimate" and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, turnover of senior management, board of directors members and other key personnel, 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, difficulties in implementing our strategic plan to exit certain non-core products and services, 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 an inability to maintain continued compliance with NASDAQ National Market listing requirements, risks associated with our international operations, unplanned system interruptions and capacity constraints, software defects, and those discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "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. The forward-looking statements speak only as of the date hereof. We expressly disclaim any 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. 1 4 PART I ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CRITICAL PATH, INC. CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS
DECEMBER 31, JUNE 30, 2000 2001 ------------ ----------- (UNAUDITED) Current assets Cash and cash equivalents................................. $ 216,542 $ 114,278 Short-term investments.................................... -- 18,308 Restricted cash........................................... 215 1,032 Accounts receivable, net.................................. 38,938 29,437 Other current assets...................................... 10,252 6,997 ----------- ----------- Total current assets.............................. 265,947 170,052 Long-term investments....................................... 10,610 8,349 Property and equipment, net................................. 85,304 73,000 Intangible assets, net...................................... 77,339 44,298 Other assets................................................ 11,655 11,668 ----------- ----------- Total assets...................................... $ 450,855 $ 307,367 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities Accounts payable.......................................... $ 43,710 $ 34,059 Accrued expenses.......................................... 10,377 7,645 Deferred revenue.......................................... 15,720 15,593 Capital lease and other obligations, current.............. 9,363 6,899 ----------- ----------- Total current liabilities......................... 79,170 64,196 Convertible subordinated notes payable...................... 300,000 295,000 Capital lease and other obligations, long-term.............. 4,687 2,303 ----------- ----------- Total liabilities................................. 383,857 361,499 ----------- ----------- Commitments and contingencies Minority interest in consolidated subsidiary................ 649 -- ----------- ----------- Shareholders' equity (deficit) 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 and 500,000, respectively Shares issued and outstanding: 74,135 and 75,461, respectively.......................................... 2,130,329 2,140,482 Notes receivable from shareholders........................ (1,205) (1,197) Unearned compensation..................................... (80,760) (57,476) Accumulated deficit, including other comprehensive income................................................. (1,982,015) (2,135,941) ----------- ----------- Total shareholders' equity (deficit).............. 66,349 (54,132) ----------- ----------- Total liabilities and shareholders' equity (deficit)...................................... $ 450,855 $ 307,367 =========== ===========
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 2 5 CRITICAL PATH, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED --------------------- ---------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 2001 2000 2001 --------- -------- --------- --------- (UNAUDITED) Net revenues Software license.......................................... $ 13,897 $ 8,913 $ 24,967 $ 14,463 Hosted messaging.......................................... 14,220 11,141 23,315 25,580 Professional service...................................... 3,030 2,900 5,523 6,317 Maintenance and support................................... 2,348 4,131 4,243 7,868 --------- -------- --------- --------- Total net revenues.................................. 33,495 27,085 58,048 54,228 --------- -------- --------- --------- Cost of net revenues Software license.......................................... 737 126 1,744 417 Hosted messaging.......................................... 13,538 17,440 25,418 35,378 Professional service...................................... 1,388 2,594 2,444 5,560 Maintenance and support................................... 1,812 2,414 3,216 5,000 Amortization of purchased technology...................... 4,421 5,672 6,535 11,344 Acquisition-related retention bonuses..................... 390 -- 780 -- Stock-based expense -- Software license................... -- -- -- -- Stock-based expense -- Hosted messaging................... 383 441 876 826 Stock-based expense -- Professional service............... -- 588 -- 1,021 Stock-based expense -- Maintenance and support............ -- 440 -- 925 Impairment of long-lived assets........................... -- 4,207 -- 4,207 --------- -------- --------- --------- Total cost of net revenues.......................... 22,669 33,922 41,013 64,678 --------- -------- --------- --------- Gross profit (loss)......................................... 10,826 (6,837) 17,035 (10,450) --------- -------- --------- --------- Operating expenses Sales and marketing....................................... 17,342 15,694 30,947 34,406 Research and development.................................. 9,213 8,333 15,536 18,267 General and administrative................................ 7,332 11,745 14,098 25,038 Amortization of intangible assets......................... 88,986 4,112 136,685 8,245 Acquisition-related retention bonuses..................... 3,693 793 6,372 963 Stock-based expense -- Sales and marketing................ 8,448 6,681 13,697 13,281 Stock-based expense -- Research and development........... 2,325 1,229 2,802 2,326 Stock-based expense -- General and administrative......... 1,169 6,334 2,146 15,067 Restructuring expense..................................... -- 8,481 -- 8,481 Impairment of long-lived assets........................... -- 9,991 -- 9,991 --------- -------- --------- --------- Total operating expenses............................ 138,508 73,393 222,283 136,065 --------- -------- --------- --------- Loss from operations........................................ (127,682) (80,230) (205,248) (146,515) Interest and other income (expense), net.................... 4,697 2,193 5,954 4,618 Interest expense............................................ (5,260) (5,315) (5,533) (10,382) Minority interest in net income of consolidated subsidiary................................................ (325) -- (325) -- Equity in net loss of joint venture......................... -- (397) -- (1,173) --------- -------- --------- --------- Loss before extraordinary item and income taxes............. (128,570) (83,749) (205,152) (153,452) Provision for income taxes.................................. (1,439) (1,150) (1,799) (1,493) --------- -------- --------- --------- Loss before extraordinary item.............................. $(130,009) $(84,899) $(206,951) $(154,945) Gain on retirement of convertible subordinated notes........ -- 3,818 -- 3,818 --------- -------- --------- --------- Net loss.................................................... $(130,009) $(81,081) $(206,951) $(151,127) ========= ======== ========= ========= Net loss per common share -- basic and diluted Loss before extraordinary item............................ $ (2.22) $ (1.15) $ (3.79) $ (2.12) Gain on retirement of convertible subordinated notes...... -- 0.05 -- 0.05 --------- -------- --------- --------- Net loss................................................ $ (2.22) $ (1.10) $ (3.79) $ (2.07) ========= ======== ========= ========= Weighted average common shares outstanding................ 58,592 73,794 54,581 72,966
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 3 6 CRITICAL PATH, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED ---------------------- JUNE 30, JUNE 30, 2000 2001 --------- --------- (UNAUDITED) Operations Net loss.................................................. $(206,951) $(151,127) Provision for doubtful accounts........................... 575 3,746 Depreciation and amortization............................. 14,604 24,139 Amortization of intangible assets......................... 143,220 19,588 Amortization of stock-based costs and expenses............ 19,552 33,463 Impairment of long-lived assets........................... -- 14,198 Gain on retirement of convertible debt.................... -- (3,818) Minority interest in net income of consolidated subsidiary............................................. 325 -- Equity in net loss of unconsolidated affiliate............ -- 1,173 Accounts receivable....................................... (12,038) 6,333 Other assets.............................................. 3,206 2,384 Accounts payable.......................................... (10,151) (3,570) Accrued expenses.......................................... 7,686 (2,380) Deferred revenue.......................................... 965 (14) --------- --------- Net cash used in operating activities.................. (39,007) (55,885) --------- --------- Investing Notes receivable from officers............................ (241) 85 Property and equipment purchases.......................... (25,972) (10,733) Investments in unconsolidated entities, net............... (13,508) -- Payments for acquisitions, net of cash acquired........... (9,494) (9,898) Promissory note receivable................................ 10,000 -- Short-term investments.................................... -- (18,308) Restricted cash........................................... -- (817) --------- --------- Net cash used in investing activities.................. (39,215) (39,671) --------- --------- Financing Proceeds from issuance of common stock, net............... 7,077 1,599 Proceeds from convertible debt offering, net.............. 289,221 -- Retirement of convertible debt............................ -- (1,182) Principal payments on lease obligations................... (2,498) (4,864) Proceeds from payments of shareholder notes receivable.... -- 33 Purchase of common stock.................................. (49) (54) --------- --------- Net cash provided by (used in) financing activities.... 293,751 (4,468) --------- --------- Net change in cash and cash equivalents..................... 215,529 (100,024) Effect of exchange rates on cash and cash equivalents....... (152) (2,240) Cash and cash equivalents at beginning of period............ 75,932 216,542 --------- --------- Cash and cash equivalents at end of period.................. $ 291,309 $ 114,278 ========= =========
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 4 7 CRITICAL PATH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION 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 the Company has not yet been re-incorporated in Delaware. Critical Path, Inc. along with its subsidiaries (collectively referred to herein as the "Company") provides messaging and directory infrastructure solutions for corporate enterprises and service providers worldwide. The unaudited Condensed Consolidated Financial Statements ("Financial Statements") of Critical Path, Inc. and subsidiaries furnished herein have been reviewed by independent accountants and reflect all adjustments that are, in the opinion of management, necessary to present fairly the financial position and results of operations for each interim period presented. All adjustments are normal recurring adjustments. The Financial Statements should be read in conjunction with the condensed consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, presented in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, as amended. The results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the entire year. With respect to the unaudited condensed consolidated financial information of the Company as of June 30, 2001 and for the six-month periods ended June 30, 2000 and 2001 included herein, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated August 2, 2001, appearing herein, states that they did not audit and they do not express an opinion on the unaudited condensed consolidated financial information. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited condensed consolidated financial information because that report is not a report or a part of this Form 10-Q prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Investments Short-term and long-term investments are accounted for in accordance with Statement of Financial Accounting Standards No. 115 Accounting for Certain Investments in Debt and Equity Securities. This statement requires that securities be classified as "held to maturity," "available-for-sale" or "trading," and the securities in each classification be accounted for at either amortized cost or fair market value, depending upon their classification. The Company currently holds short-term investments of approximately $18.3 million in low risk government securities and corporate bonds and classifies its investments as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as other comprehensive income, a separate component of stockholders' equity. At the time of sale, any gains or losses will be recognized as a component of operating results. 5 8 CRITICAL PATH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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, messaging and directory infrastructure solutions, and management uses one measure of profitability. Revenue information on a product basis has been disclosed in our statement of operations. Included in software license revenue is InScribe Messaging revenue of approximately $4.3 million and $6.9 million for the three- and six-month periods ended June 30, 2001, respectively, and approximately $9.2 million and $17.2 million for the three- and six-month periods ended June 30, 2000, respectively. Reclassifications Certain amounts previously reported have been reclassified to conform to the current period presentation. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. This Statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board ("APB") Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001 and all business combinations accounted for under the purchase method for which the date of acquisition is July 1, 2001, or later. We have engaged in significant acquisition activity in the past, including business combinations. The provisions of this Statement would require all future business combinations to be accounted for using the purchase method. In June 2001, the FASB also issued SFAS No. 142, Goodwill and Other Intangible Assets. This Statement addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) at acquisition and goodwill and other intangible assets subsequent to their acquisition. This Statement supersedes APB Opinion No. 17, Intangible Assets. Under the provisions of this Statement, if an intangible asset is determined to have an indefinite useful life, it shall not be amortized until its useful life is determined to be no longer indefinite. An intangible asset that is not subject to amortization shall be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill shall not be amortized. Goodwill shall be tested for impairment on an annual basis and between annual tests in certain circumstances at a level of reporting referred to as a reporting unit. This Statement is required to be applied starting with fiscal years beginning after December 15, 2001. Goodwill and intangible assets acquired after June 30, 2001 will be subject immediately to the nonamortization and amortization provisions of this Statement. We anticipate that implementation of this Statement will not have a material impact on our financial results. NOTE 2 -- RESTRUCTURING In April 2001, the Company announced a three part strategic restructuring plan that involved reorganizing Critical Path's product and service offerings around a group of core communication solutions. The three elements of the plan include: (i) focusing on core communication solutions; (ii) headcount reduction; and (iii) facilities and operations consolidation. Additionally, the Company has implemented an aggressive expense management plan to further reduce operating costs while maintaining strong customer service for its core solutions. As a result of these strategic initiatives, the Company anticipates that it will realize future annual cost savings of approximately $30.0 to $50.0 million. Current accounting rules only allow for restructuring charges that have been incurred or have been estimated in connection with a formal approved 6 9 CRITICAL PATH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) exit or restructuring plan. Accordingly, there are certain amounts which have been included in our estimated one-time restructuring and impairment charges which have not been recorded as such amounts are part of an exit or restructuring plan not yet formally approved by management. The non-core products and services comprised approximately 23.6% and 30.3% of total revenues in the three- and six-month periods ended June 30, 2001 and approximately 27.5% and 26.5% of total revenues in the three- and six-month periods ended June 30, 2000. It is expected that these products and services will be an insignificant part of the Company's revenue stream by the fourth quarter of 2001. Core Solutions and Services Core communication solutions are the Company's messaging and directory infrastructure platform, including mail, calendar, address book, file storage, secure delivery, directory and meta-directory, and access services supporting wireline and wireless users. During the quarter, the Company announced that new sales of products and related services for resource management, project collaboration, fax messaging, message boards, and data integration products were being discontinued. The Company is in discussions with outside parties related to the sale of several product lines, which are expected to close before the end of the year. During the second quarter, charges related to the exit of these products aggregated $1.4 million, of which $107,000 has been paid. The Company does not anticipate any additional charges during the remainder of the year. Headcount Reduction The Company announced that it would lay off approximately 450 employees as part of the restructuring. The reduction is expected to come from both the discontinuance of non-core products and organizational changes designed to improve general operational efficiencies. During the second quarter, the Company laid off approximately 212 employees and anticipates that another 130 employees will be laid off or will leave the Company as part of the sales of several product lines before the end of the year. Additionally, during the quarter there were approximately 40 voluntary resignations, net of newly hired employees. At June 30, 2001 total headcount was approximately 784. During the second quarter, severance and related charges were approximately $5.0 million, of which approximately $4.7 million has been paid. The Company anticipates that severance and related charges during the remainder of the year will be approximately $3.0 to $5.0 million. Facilities and Operations Consolidation The Company announced that it would reduce its 77 worldwide office facilities by approximately two thirds. During the second quarter, the Company consolidated 33 facilities into existing or new cost effective offices and it anticipates that an additional 17 will be consolidated before the end of the year. During the second quarter, lease terminations and related charges aggregated approximately $2.1 million, of which approximately $900,000 has been paid. The Company anticipates additional charges during the remainder of the year will be approximately $4.0 to $5.0 million. NOTE 3 -- CONVERTIBLE SUBORDINATED NOTES On March 30, 2000, the Company issued $300.0 million of five-year, 5.75% Convertible Subordinated Notes due April 1, 2005 (the "Notes"). In June 2001, the Company retired $5.0 million face value Notes, which resulted in an after-tax extraordinary gain of approximately $3.8 million in the second quarter. Additionally, in July 2001, the Company retired an additional $40.4 million face value Notes, which resulted in a substantial after-tax extraordinary gain. NOTE 4 -- COMMITMENTS AND CONTINGENCIES 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 7 10 CRITICAL PATH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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. The complaints have been consolidated into a single action. The complaints generally allege that, in differing periods from December 1999 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 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 and in the United States District Court for the Northern District of California. The derivative complaints allege that certain of Critical Path's 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. 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 5 -- IMPAIRMENT OF LONG-LIVED ASSETS In connection with the Company's restructuring plan (Note 2 -- Restructuring), an impairment assessment of certain of its long-lived assets was performed. The assessment was performed as a result of the determination by the Company to exit certain products and services that have been determined to be non-core to the Company's business strategy. The Company has reviewed the intangible assets related to these non-core products and services and, as a result of its assessment, has recorded a $14.2 million impairment charge to reduce these intangible assets to their estimated fair values or eliminate them, as appropriate. NOTE 6 -- SHAREHOLDERS' EQUITY WARRANTS Vectis Group, LLC In March 2001, the Company entered into certain agreements with Vectis Group, LLC ("Vectis Group") to engage Vectis Group to act as an advisor to the Company with respect to various strategic 8 11 CRITICAL PATH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) alternatives the Company is currently exploring and assist with other management related services. As part of the agreement, Vectis Group agreed to provide consulting services to the Company in exchange for a monthly retainer fee and warrants to purchase 500,000 shares of the Company's Common Stock with an exercise price of $2.00 per share, issuable upon execution of the agreement. Using the Black-Scholes option-pricing model and assuming a term of three years, the term of the agreement, and expected volatility of 215%, the initial and final fair value of the warrant on the effective date of the agreement approximated $732,000, which was recognized upon the execution of the agreement in March 2001, as the relationship is terminable at any time. NOTE 7 -- OTHER COMPREHENSIVE LOSS The components of other comprehensive loss are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- ---------------------- 2000 2001 2000 2001 --------- -------- --------- --------- Net loss.............................. $(130,009) $(81,081) $(206,951) $(151,127) Unrealized investment gains (losses)............................ (3,399) (687) (6,116) (385) Foreign currency translation adjustments......................... 37 (1,576) (131) (2,414) --------- -------- --------- --------- Other comprehensive loss.............. $(133,371) $(83,344) $(213,198) $(153,926) ========= ======== ========= =========
Accumulated other comprehensive loss consists of unrealized gains (losses) on available-for-sale securities, net of tax, and cumulative translation adjustments, as presented on the accompanying consolidated balance sheet. NOTE 8 -- NET LOSS PER SHARE Net loss per share is calculated as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- --------------------- 2000 2001 2000 2001 --------- -------- --------- --------- NET LOSS Loss before extraordinary item.................... (130,009) (84,899) (206,951) (154,945) Gain on retirement of convertible subordinated notes.......................................... -- 3,818 -- 3,818 --------- -------- --------- --------- Net loss.......................................... $(130,009) $(81,081) $(206,951) $(151,127) ========= ======== ========= ========= WEIGHTED AVERAGE SHARES OUTSTANDING Weighted average shares outstanding............... 62,283 74,968 57,890 74,619 Weighted average shares subject to repurchase agreements..................................... (1,840) (124) (1,849) (325) Weighted average shares held in escrow related to acquisitions................................... (1,851) (1,050) (1,460) (1,328) --------- -------- --------- --------- Shares used in computation of basic and diluted net loss per share............................. 58,592 73,794 54,581 72,966 ========= ======== ========= ========= BASIC AND DILUTED NET LOSS PER SHARE Loss before extraordinary item.................... $ (2.22) $ (1.15) $ (3.79) $ (2.12) Gain on retirement of convertible subordinated notes.......................................... $ -- $ 0.05 $ -- $ 0.05 --------- -------- --------- --------- Net loss.......................................... $ (2.22) $ (1.10) $ (3.79) $ (2.07) ========= ======== ========= =========
For the six-month periods ended June 30, 2000 and 2001 approximately 19.9 million and 31.3 million potential common shares, respectively, 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. 9 12 CRITICAL PATH, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of Critical Path, Inc., and Subsidiaries should be read with the Condensed Consolidated Financial Statements and Notes thereto of Critical Path, Inc. included herein, as well as our Annual Report on Form 10-K for the fiscal year ended December 31, 2000, as amended. The following discussion contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, such as statements regarding our plans related to the sale of certain product lines, our plans to exit certain products and services, our plans to reduce costs through a reduction of personnel and a consolidation of office space and our anticipated charges and cost savings as a result of these plans. Our anticipated charges and cost savings as a result of those plans and our belief in our ability to successfully emerge from the restructuring and refocusing of our operations. The words "anticipate," "expect," "intend," "plan," "believe," "seek," and "estimate" and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, turnover of senior management, board of directors members and other key personnel, 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, difficulties in implementing our strategic plan to exit certain non-core products and services, 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 an inability to maintain continued compliance with NASDAQ National Market listing requirements, risks associated with our international operations, 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. The forward-looking statements speak only as of the date hereof. We expressly disclaim any 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 global leader in messaging and directory infrastructure solutions. 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 and directory infrastructure to support customers' new and existing eBusiness initiatives. Our primary sources of revenue come from providing a wide range of messaging and directory products and services. Critical Path was founded in 1997 and is headquartered in San Francisco, California with offices worldwide. RESULTS OF OPERATIONS In view of the rapidly evolving nature of the our business, prior acquisitions, organizational restructuring, 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 June 30, 2001, we had 784 employees, in comparison with 1041 employees at December 31, 2000 and 945 employees at June 30, 2000. We do not believe that our historical trends for revenue, expenses, or personnel are indicative of future results. Net Revenues We derive most of our revenues through the sale of our messaging and directory infrastructure solutions. These solutions include both licensed software products and hosted messaging services. In addition, we receive 10 13 revenues from professional services and maintenance and support services. Software license revenue is derived from perpetual and term licenses for our messaging, directory and enterprise application integration technologies. Hosted messaging 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. Professional services revenue is derived from fees primarily related to training, installation and configuration services and revenue is recognized as services are performed. Maintenance and support revenue is derived from fees related to post-contract customer support agreements associated with software product licenses and revenue is recognized ratably over the term of the agreement. Software License. We recognized $8.9 million and $14.5 million in software license revenues during the three- and six-month periods ended June 30, 2001, respectively, as compared to $13.9 million and $25.0 million in software license revenues during the same periods in 2000, respectively. This significant decrease from revenues in the same period of 2000 was attributed to several factors which affected our operations in the first and second quarters of 2001. Delays in information technology spending were experienced across many industries due to macroeconomic conditions and these delays were exacerbated by circumstances at Critical Path. Many of our customers who were evaluating our products have delayed making decisions until they could gain a level of comfort in Critical Path as we emerge from our management transition. Additionally, our sales organization was distracted by the termination and resignation of much of its leadership in the first quarter and its focus on rebuilding also has caused a reduction in effectiveness. The evaluation process by our customers and internal rebuilding has begun to take effect and as a result we experienced an increase in software license sales from the first quarter to the second quarter of 2001, however revenues are still lower than the same periods of the prior year. In addition, related to our restructuring initiative, we have identified certain non-core software license products which we are currently in the process of exiting or selling to third parties. Although we have recognized revenue during 2001 related to these non-core products, these initiatives have significantly reduced the revenue for these products offsetting increases in the revenues for our core solutions. We expect to see this trend continue and do not anticipate non-core revenues will be a significant part of our revenues by the end of the year. Hosted Messaging. We recognized $11.1 million and $25.6 million in hosted messaging revenues during the three- and six-month periods ended June 30, 2001, respectively, as compared to $14.2 million and $23.3 million in hosted messaging revenues in the same periods in 2000, respectively. This decrease in the second quarter of 2001 as compared with the second quarter of 2000, resulted primarily from our restructuring initiative, as we have identified certain non-core hosted messaging services, which we are currently in the process of exiting or selling to third parties. Although we have recognized revenue during 2001 related to these non-core services, the restructuring initiative has significantly reduced the revenue related to these non-core services. There was an increase in hosted messaging revenue for the six-months ended June 30, 2001 as compared with the same period in 2000, resulting from completion of certain acquisitions at the end of the first quarter of 2000. Professional Services. We recognized $2.9 million and $6.3 million in professional service revenues during the three- and six-month periods ended June 30, 2001, respectively, as compared to $3.0 million and $5.5 million in professional service revenues in same periods in 2000, respectively. Professional service revenue increased in the final quarter of 2000 and the first quarter of 2001 as a result of the completion of the PeerLogic, Inc. acquisition in September 2000, however these increases were offset in the second quarter of 2001 by the effects of our restructuring initiative and the exit of certain non-core products and services. Although we have recognized revenue during 2001 as a result of these non-core products and services, these restructuring initiatives have significantly reduced the professional services revenue surrounding these non-core products. Maintenance and Support. We recognized $4.1 million and $7.9 million in maintenance and support revenues during the three- and six-month periods ended June 30, 2001, respectively, as compared to $2.3 million and $4.2 million in maintenance and support revenues in same periods in 2000, respectively. Maintenance and support service revenue increased as a result of the completion of several acquisitions during 2000 and additional sales of software license products during 2000 and 2001. 11 14 Critical Path's international operations accounted for approximately 45% and 37% of net revenues in the three- and six-month periods ended June 30, 2001, respectively, as compared to approximately 40% and 40% of net revenues in the same periods of 2000, respectively. There was a decrease in the first quarter of 2001 in international revenues related primarily to a reduction in enterprise information technology spending, and the associated impact on the sales of our license products in our international markets. During the second quarter of 2001, international license product sales increased, resulting in an increase in international revenues. Cost of Net Revenues Software License. Cost of net software license revenues consists primarily of product media duplication, manuals and packaging materials, personnel and facility costs, and third-party royalties. The overall decrease in cost of net software license revenue for the three- and six-month periods ended June 30, 2001 was the result of reduced software license revenue and an overall reduction in royalties paid to third parties. Hosted Messaging. Cost of net hosted messaging 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, and other direct and allocated indirect costs. We added several new hosted messaging clusters to our data centers during 2000, to expand the capacity of our hosting network to manage current customer requirements and any future growth. We also added additional employees in connection with the acquisitions completed in 2000. Additional costs were incurred during the latter half of 2000 to add technology platforms for new service offerings. As a result of these significant acquisitions of equipment and operations resources, depreciation, personnel and other costs have increased substantially in comparison with the first half of 2000. Professional Service. Cost of net professional service revenues consists primarily of personnel costs including custom engineering, installation and training services for both hosted and licensed solutions, and other direct and allocated indirect costs. As a result of the acquisitions completed in 2000, additional costs were incurred in the first and second quarters of 2001 on professional service resources in comparison with the first and second quarters of 2000. Maintenance and Support. Cost of net maintenance and support revenues consists primarily of personnel costs related to the customer support functions for both hosted and licensed solutions, and other direct and allocated indirect costs. As a result of the acquisitions completed in 2000, additional costs were incurred in the first and second quarters of 2001 on customer support resources in comparison with the first and second quarters of 2000. Cost of net service revenues was primarily impacted by the increased compensation and other personnel costs resulting from the additional headcount added through our acquisitions completed during 2000, and through our continued efforts to enhance our portfolio of messaging and directory infrastructure solutions. During the second quarter of 2001, we initiated a strategic restructuring plan which significantly reduced our workforce in addition to impacting several other aspects of our business. Operations, customer support, and professional services staff decreased to 273 employees at June 30, 2001 from 277 employees at June 30, 2000 and 340 employees at December 31, 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 the acquisitions completed during the first quarter and duration of 2000, resulted in the increase in sales and marketing expenses from the first half of 2000 through the first half of 2001. However, during the first quarter of 2001, the termination and resignation of several employees in the sales organization, the termination of certain strategic marketing relationships related to non-core services and certain other cost cutting measures resulted in a reduction in sales and marketing expense in the second quarter of 2001, as compared to the second quarter 12 15 of 2000. Sales and marketing staff decreased to 201 employees at June 30, 2001 from 291 employees at June 30, 2000 and 305 employees at December 31, 2000. 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. Research and development expenses increased during 2000 and the first quarter of 2001 primarily as a result of increased compensation and other personnel costs from the additional headcount added through the acquisitions completed during 2000. These increases caused an increase in research and development expense from the first half of 2000 to the first half of 2001. During the second quarter of 2001, we terminated several employees in research and development in connection with our restructuring initiative and implemented certain other cost cutting measures, which resulted in a reduction in research and development expense in the second quarter of 2001 as compared with the second quarter of 2000. Research and development staff decreased to 199 employees at June 30, 2001 from 222 employees at June 30, 2000 and 252 employees at December 31, 2000. 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. General and administrative expense increased during 2000 and the first quarter of 2001 primarily as a result of increased compensation and other personnel costs from the additional headcount added through the acquisitions completed during 2000. We have incurred higher fees for outside professional services in the first half of 2001, in particular significantly higher legal fees related to the SEC investigation and significantly higher accounting fees related to the extended audit performed for fiscal year 2000. These increases in general and administrative expenses have been offset by the termination of several employees in connection with our restructuring initiative and the implementation of certain other cost cutting measures, however, these increases net of reductions resulted in an overall increase in general and administrative expense in the second quarter of 2001 as compared to the second quarter of 2000. General and administrative staff decreased to 111 employees at June 30, 2001 from 155 employees at June 30, 2000 and 144 employees at December 31, 2000. Amortization of Intangible Assets In connection with acquisitions completed in 1999 and 2000, which were all accounted for using the purchase method of accounting, we recorded goodwill and other intangible assets, primarily for assembled workforce, customer base, and existing technology. During the fourth quarter of 2000, we recognized a $1.3 billion charge related to the impairment of certain goodwill and other intangible assets. As a result of this impairment charge, amortization expense decreased significantly from the first half of 2000 to the first half of 2001. Additionally, in connection with the Company's restructuring plan announced in April 2001, an impairment assessment of certain of our long-lived assets was performed. As a result of this assessment, the Company has recorded an additional $14.2 million impairment charge to reduce these intangible assets to their estimated fair values or eliminate them, as appropriate. Based on the types of identifiable intangibles acquired certain amounts of amortization expense were allocated to cost of net revenues and the remaining amortization expense was allocated to operating expenses. There was an increase in amortization expense related to amounts allocated to cost of net revenues; this increase was the direct result of an acquisition completed in the third quarter of 2000, as certain of the intangible assets allocated to acquired existing technology have not been impaired. Acquisition-Related Retention Bonuses In connection with the acquisitions completed in 1999 and 2000, we established certain retention bonus programs that in the aggregate amounted to approximately $20.7 million in incentives for certain former employees of the acquired companies to encourage their continued employment with Critical Path. The significant decrease in acquisition-related retention bonus expense from the first half of 2000 to the first half of 2001 resulted from the completion, during fiscal year 2000, of all but one of these bonus programs. 13 16 Restructuring In April 2001, we announced a three part strategic restructuring plan that involved reorganizing Critical Path's product and service offerings around a group of core communications solutions. The three elements of the plan include: (i) focusing on core communications solutions; (ii) headcount reduction; and (iii) facilities and operations consolidation. Additionally, we have implemented an aggressive expense management plan to further reduce operating costs while maintaining strong customer service for its core solutions. As a result of these strategic initiatives, we anticipate that we will realize future annual cost savings of approximately $30.0 to $50.0 million. Current accounting rules only allow for restructuring charges that have been incurred or have been estimated in connection with a formal approved exit or restructuring plan. Accordingly, there are certain amounts which have been included in our estimated one-time restructuring and impairment charges which have not been recorded as such amounts are part of an exit or restructuring plan not yet formally approved by management. The non-core products and services comprised approximately 23.6% and 30.3% of total revenues in the three- and six-month periods ended June 30, 2001 and approximately 27.5% and 26.5% of total revenues in the three- and six-month periods ended June 30, 2000. It is expected that these products and services will be an insignificant part of our revenue stream by the fourth quarter of 2001. Core Solutions and Services. Core communications solutions are our messaging and directory infrastructure platform, including mail, calendar, address book, file storage, secure delivery, directory and meta-directory, and access services supporting wireline and wireless users. During the quarter, we announced that new sales of products and related services for resource management, project collaboration, fax messaging, message boards, and data integration products were being discontinued. We are in discussions with outside parties related to the sale of several product lines, which are expected to close before the end of the year. During the second quarter, charges related to the exit of these products aggregated $1.4 million, of which $107,000 has been paid. We do not anticipate any additional charges during the remainder of the year. Headcount Reduction. We announced that we would lay off approximately 450 employees as part of the restructuring. The reduction is expected to come from both the discontinuance of non-core products and organizational changes designed to improve general operational efficiencies. During the second quarter, we laid off approximately 212 employees and anticipate that another 130 employees will be laid off or will leave Critical Path as part of the sales of several product lines before the end of the year. Additionally, during the quarter there were approximately 40 voluntary resignations, net of newly hired employees. At June 30, 2001 total headcount was approximately 784. During the second quarter, severance and related charges were approximately $5.0 million, of which approximately $4.7 million has been paid. We anticipate that severance and related charges during the remainder of the year will be approximately $3.0 to $5.0 million. Facilities and Operations Consolidation. We announced that we would reduce our 77 worldwide office facilities by approximately two thirds. During the second quarter, we consolidated 33 facilities into existing or new cost effective offices and we anticipate that an additional 17 will be consolidated before the end of the year. During the second quarter, lease terminations, and related charges aggregated approximately $2.1 million, of which approximately $900,000 has been paid. We anticipate additional charges during the remainder of the year will be approximately $4.0 to $5.0 million. Stock-Based Expenses Warrants. During 1999 and 2000, we issued warrants to purchase shares of our preferred and common stock pursuant to certain strategic agreements with ICQ, Inc., Qwest Communications Corporation, Worldsport Network Ltd., one of our lessors, and a major telecommunications company. These issuances allowed the warrantholders to purchase an aggregate of 7.1 million shares of our common stock in exchange for sub-branded advertising and various other services. During the three- and six-months ended June 30, 2001, we recognized stock-based expenses related to these warrants of approximately $4.9 million and $9.8 million, respectively, and during the three- and six-months ended June 30, 2000, we recognized amounts of approximately $7.5 million and $11.5 million, respectively. We believe that these warrant agreements could have a significant current and future impact on our operating results. 14 17 In March 2001, the Company entered into certain agreements with Vectis Group, LLC ("Vectis Group") to engage Vectis Group to act as an advisor to the Company with respect to various strategic alternatives the Company is currently exploring and assist with other management related services. As part of the agreement, Vectis Group agreed to provide consulting services to the Company in exchange for a monthly retainer fee and warrants to purchase 500,000 shares of the Company's Common Stock with an exercise price of $2.00 per share, issuable upon execution of the agreement. Using the Black-Scholes option-pricing model and assuming a term of three years, the term of the agreement, and expected volatility of 215%, the initial and final fair value of the warrant on the effective date of the agreement approximated $732,000, which was recognized upon the execution of the agreement in March 2001, as the relationship is terminable at any time. Interest and Other Income (Expense) Interest and other income, net of expense, consists primarily of interest earnings on cash and cash equivalents as well as net realized gains (losses) on foreign exchange transactions. On March 30, 2000, we issued $300.0 million of five-year, 5.75% Convertible Subordinated Notes due April 1, 2005. As a result of this increase in cash available for investing, interest income increased significantly between the first and second quarters of 2000. Our cash balance was significantly reduced between the second quarter of 2000 and the second quarter of 2001 as a result of cash used in operations, causing a decrease in interest income for the first half of 2001. Interest income amounted to $1.6 million and $3.9 million for the three- and six-months ended June 30, 2001, respectively, and $4.8 million and $5.9 million for the three- and six-months ended June 30, 2000, respectively. We also recognized net gains from foreign currency transactions associated with our international operations in the amounts of $1.3 million and $1.5 million for the three- and six-months ended June 30, 2001, respectively, and a $91,000 net loss and $79,000 net gain for the three- and six-months ended June 30, 2000, respectively. Interest Expense Interest expense consists primarily of the interest and amortization of debt issuance costs related to the convertible subordinated notes we issued in March 2000, and interest and stock-based charges on certain capital leases. We incurred approximately $4.3 million and $8.6 million in interest on these notes, and approximately $537,000 and $1.1 million related to amortization of debt issuance costs for the three- and six-month periods ended June 30, 2001, respectively. Additionally, we incurred approximately $4.3 million in interest on these notes, and approximately $537,000 related to amortization of debt issuance costs for the three- and six-month periods ended June 30, 2000. During the three- and six-month periods ended June 30, 2001, amortization of stock-based charges was $4,000 and $20,000, respectively, and interest charges on capital lease obligations amounted to $485,000 and $749,000, respectively. For the three- and six-month periods ended June 30, 2000, amortization of stock-based charges was $16,000 and $32,000, respectively, and interest charges on capital lease obligations amounted to $896,000 and $1.2 million, respectively. 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 the three- and six-month periods ended June 30, 2001, we recorded equity in net loss of joint venture of $397,000 and $1.2 million, respectively. No amounts were recorded in the first and second quarters of 2000. 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 15 18 income taxes during the first and second quarters of 2001 as certain of our European operations generated income taxable in certain European jurisdictions. Convertible Subordinated Notes On March 30, 2000, we issued $300.0 million of five-year, 5.75% Convertible Subordinated Notes due April 1, 2005. In June 2001, we retired $5.0 million face value of our convertible subordinated notes, which resulted in an after-tax extraordinary gain of $3.8 million in the second quarter. Additionally, in July 2001, the Company retired an additional $40.4 million face value convertible subordinated notes, which resulted in a substantial after-tax extraordinary gain. LIQUIDITY AND CAPITAL RESOURCES During 2001 we have begun investing a portion of our cash in high grade, low risk investments with an average maturity of twelve months. As of June 30, 2001, our cash and short-term investments totaled $132.6 million, comprised of $114.3 million in cash and cash equivalents and $18.3 million in short-term investments. Our working capital was approximately $106.2 million. During the first half of 2001, we used approximately $83.9 million in cash. After incurring restructuring charges and realizing the expected quarterly cost savings in connection with our strategic restructuring, implementing certain worldwide cost control policies and procedures, and the potential increase in revenue volume as we continue to move beyond the issues experienced in the first quarter of 2001, we believe that we have sufficient cash to operate for the duration of 2001. We used $55.9 million in cash to fund operating activities during the first and second quarters of 2001 primarily due to our net loss adjusted for non-cash charges, acquisition-related retention bonus payments and payments related to our restructuring plan. Our cash 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. We used $39.7 million in cash to fund investing activities during the first and second quarters of 2001 to enter into certain short-term investments and to purchase property, equipment and other capital expenditures, however the cash used for those capital expenditures in 2001 has significantly reduced from capital expenditure levels in 2000. The primary use of cash during the first half of 2001 was related to short-term investments of approximately $18.3 million, which is comprised primarily of low risk corporate bonds and government securities. Additionally we incurred capital expenditures related to the acquisition of the outstanding equity interest in CP Italia, a consolidated subsidiary, an investment banking fee related to the ISOCOR acquisition and the installation of additional network infrastructure equipment in our data centers. We used $4.5 million in cash from financing activities during the first and second quarters of 2001 to retire principal on capital lease obligations and $5.0 million of our convertible subordinated notes. These uses were offset by net proceeds from the sale of the Company's common stock. Additionally we received $289.2 million in net 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 payments to retire principal on capital lease obligations. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS WE HAVE EXPERIENCED TURNOVER OF SENIOR MANAGEMENT AND OUR CURRENT MANAGEMENT TEAM HAS BEEN TOGETHER FOR A LIMITED TIME, WHICH COULD HARM OUR BUSINESS AND OPERATIONS. We are currently engaged in a search for a new 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. In the first half of 2001, we announced a series of changes in our management and board of directors. In the early part of the second quarter of 2001, we announced a series of additional changes in our management 16 19 and board of directors. It is possible this high turnover at our senior management levels may continue. Because of these recent changes, 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 our 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. The loss of the services of one or more of our current senior executive officers could harm our business and affect our ability to successfully implement our business objectives. 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 messaging and directory 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 the price of our common stock could decline. WE DEPEND ON STRATEGIC RELATIONSHIPS AND OTHER SALES CHANNELS AND THE LOSS OF ANY STRATEGIC RELATIONSHIPS COULD HARM OUR BUSINESS AND NEGATIVELY AFFECT OUR REVENUES. We depend on strategic relationships to expand distribution channels and to undertake joint product development and marketing efforts. Our ability to increase revenues depends upon marketing services through new and existing strategic relationships. We depend on a broad acceptance of outsourced messaging services on the part of potential partners and acceptance of our company as the supplier for these outsourced messaging services. We also depend on joint marketing and product development through strategic relationships to achieve market acceptance and brand recognition. Our agreements with strategic partners typically do not restrict them from introducing competing services. These agreements typically are for terms of one to three years, and automatically renew for additional one-year periods unless either party gives prior notice of its intention to terminate the agreement. In addition, these agreements are terminable by our partners without cause, and some agreements are terminable by us, upon 30 - 120 days' notice. Most of the agreements also provide for the partial refund of fees paid or other monetary penalties in the event that our services fail to meet defined minimum performance standards. Distribution partners may choose not to renew existing arrangements on commercially acceptable terms, or at all. If we lose any strategic relationships, fail to renew these agreements or relationships or fail to develop new strategic relationships, our business will suffer. The loss of any key strategic relationships would have an adverse impact on our current and future revenues. In addition to strategic relationships, we also depend on the ability of our customers to sell and market our services to their end-users. DUE TO OUR LIMITED OPERATING HISTORY, EVOLVING BUSINESS STRATEGY AND THE EMERGING NATURE OF THE MESSAGING AND DIRECTORY INFRASTRUCTURE MARKET, OUR 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, our current strategic restructuring, as well as significant fluctuations in license revenues as a percentage of total revenues from an insignificant percentage in 1999, to 38% in 2000 and to 27% in the first half of 2001. Our revenues could fall short of expectations if we experience delays or cancellations of even a small number of 17 20 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 and directory 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 messaging and directory infrastructure 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 messaging and directory infrastructure market; - 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. Decisions to eliminate or limit our offering of a product or service will involve the expenditure of capital, the realization of losses, a reduction in our workforce, facility consolidation 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. WE HAVE A HISTORY OF LOSSES, EXPECT CONTINUING LOSSES AND MAY NEVER ACHIEVE PROFITABILITY. As of June 30, 2001, we had an accumulated deficit, including other comprehensive income, of approximately $2.1 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 decrease as a result of our strategic restructuring. However, we will continue to spend resources on maintaining and strengthening our business, and this may have a negative effect on our operating results and our 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 messaging and directory 18 21 infrastructure solutions, 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. If we continue to incur net losses in future periods, we may not be able to retain employees, or 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 the price of our common stock to decline. A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF OUR REVENUES, IF WE LOSE A MAJOR CUSTOMER OR IF WE ARE UNABLE TO ATTRACT NEW CUSTOMERS, OUR OPERATING RESULTS COULD BE HARMED. We expect that sales of our services to a limited number of customers will continue to account for a high percentage of our revenue for the foreseeable future. Our future success depends on our ability to retain our current customers, and to attract new customers, in our target markets. The loss of a major customer could harm our business. Our agreements with our customers typically have terms of one to three years with automatic one year renewals and can be terminated without cause upon 30 - 120 days' notice. If our customers terminate their agreements before the end of the contract term, the loss of the customer could have an adverse impact on our current and future revenues. Also, if we are unable to attract and enter into agreements with new customers, our business will not grow and we will not generate additional revenues. IF WE ARE UNABLE TO SUCCESSFULLY COMPETE IN OUR PRODUCT MARKET, OUR OPERATING RESULTS COULD BE HARMED. Because we have a variety of messaging and directory infrastructure products and services, we encounter different competitors at each level of our products and services. Our competitors for corporate customers seeking outsourced hosted messaging solutions are email service providers, such as Commtouch, Easylink, USA.NET and application service providers offering hosted exchange services. Our competitors for service providers seeking insourced or outsourced product-based solutions are iPlanet and OpenWave. For secure delivery services, our competitors include Tumbleweed for product-based solutions and SlamDunk for service-based solutions. In the enterprise/eBusiness directory category, we compete primarily with iPlanet, Microsoft and Novell, and our competitors in the meta-directory market are iPlanet, Microsoft, Novell and Siemens. We believe that competitive factors affecting the market for messaging and directory 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. We believe competition will increase as current competitors increase the sophistication of their offerings and as new participants enter the market. Many of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do and may enter into strategic or commercial relationships with larger, more 19 22 established and better-financed companies. Any delay in our development and delivery of new services or enhancement of existing services would allow our competitors additional time to improve their service or product offerings, and provide time for new competitors to develop messaging and directory 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. WE MAY NEED TO RAISE ADDITIONAL CAPITAL AND TO INITIATE OTHER OPERATIONAL STRATEGIES THAT MAY DILUTE EXISTING SHAREHOLDERS. We believe that existing capital resources will enable us to maintain current and planned operations through December 31, 2001. However, additional capital may be required to continue operations and achieve profitability. In addition, we may be required to raise additional funds due to unforeseen circumstances. If our 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. Additionally, we face a number of challenges in operating our business, including our highly leveraged capital structure and significant contingent liabilities associated with litigation. In the event that resolution of these or other operational matters involve issuance of stock, our existing shareholders may experience significant dilution. 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, financial condition and reputation. 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 the price of our common stock 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 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. THE PENDING SEC 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 the price of our common stock to decline significantly. 20 23 WE MAY NOT BE ABLE TO MAINTAIN OUR LISTING ON THE NASDAQ NATIONAL MARKET AND IF WE FAIL TO DO SO, THE PRICE AND LIQUIDITY OF OUR COMMON STOCK MAY DECLINE. The Nasdaq Stock Market has quantitative maintenance criteria for the continued listing of common stock on The Nasdaq National Market. The current requirements affecting us include having (i) net tangible assets of at least $4 million and (ii) a minimum bid price per share of $1. As of June 30, 2001, we are not complying with the $4 million of net tangible assets requirement. Since July 12, 2001, the closing bid price per share for our common stock has been below $1. If our net tangible assets remain less than $4 million, or if the bid price of our common stock price continues to remain below $1 per share, our common stock may not remain listed on The Nasdaq National Market. The Nasdaq National Market's Audit Committee Rules require audit committees to be comprised of at least three independent directors. We currently comply with this requirement, however, in the event that we are not able to comply with this or any of the other requirements in the future we may be delisted from The Nasdaq National Market. If we are delisted, it could have a material adverse effect on the market price of, and the liquidity of the trading market for, our common stock. The SEC approved certain amendments to The Nasdaq Stock Market Marketplace Rules which are effective June 20, 2001, including but not limited to changing the current net tangible assets listing standard to an equity listing standard. The new equity standard requires net equity of at least $10 million. We may begin to qualify under this standard immediately, but compliance with the new equity listing standard is not required until November 1, 2002. If we do not comply with this standard by November 1, 2002 we may be delisted from The Nasdaq National Market. Such action may negatively affect our standing with The Nasdaq National Market, which in turn would harm our business and its financial condition. OUR STOCK PRICE HAS DECLINED DURING RECENT QUARTERS AND CONTINUED VOLATILITY IN THE STOCK MARKET MAY CAUSE FLUCTUATIONS AND/OR FURTHER DECLINE IN OUR STOCK PRICE. The trading price of our common stock has been and may continue to experience cumulative decline and wide fluctuations. For example, during the second quarter of 2001, the closing sale prices of our common stock on The Nasdaq National Market ranged from $1.72 on May 2, 2001 to $0.84 on April 9, 2001, and the closing sale price of our common stock on July 27, 2001 was $0.42. Our stock price may decline or fluctuate in response to any number of factors and events, such as technological innovations, strategic and sales relationships, new product and service offerings by us or our competitors, changes in financial estimates and recommendations of securities analysts, the operating and stock price performance of other companies that investors may deem comparable, and news reports relating to trends in our markets. In addition, the stock market in general, particularly with respect to technology stocks, has experienced extreme volatility and a significant cumulative decline in recent months. This volatility and decline has affected many companies, including our company, irrespective to the specific operating performance of such companies. These broad market influences and fluctuations may adversely affect the price of our stock, and our ability to remain listed on The Nasdaq National Market, regardless of our operating performance. 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, provides 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. 21 24 WE MAY EXPERIENCE DIFFICULTY IN ATTRACTING AND RETAINING KEY PERSONNEL, WHICH MAY NEGATIVELY AFFECT OUR ABILITY TO DEVELOP NEW SERVICES OR RETAIN AND ATTRACT CUSTOMERS. The loss of the services of key personnel could harm our business results. Our success also 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. If we fail to do so, we may be unable to develop new services or continue to provide a high level of customer service, which could result in the loss of customers and revenues. We do not have long-term employment agreements with any of our 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 key personnel could harm our business and affect our ability to successfully implement our business objectives. OUR FAILURE TO MANAGE GROWTH COULD CAUSE OUR BUSINESS TO SUFFER. In the past, the expansion of our operations has placed a significant strain on managerial, operational and financial resources. To manage any future growth, we may need to improve or replace our existing operational, customer service and financial systems, procedures and controls. Any failure to properly manage these systems and procedural transitions could impair our ability to attract and service customers, and could cause us to incur higher operating costs and delays in the execution of our business plan. We will also need to hire additional personnel including sales personnel. Our management may not be able to hire, train, retain, motivate and manage required personnel. In addition, our management may not be able to successfully identify, manage and exploit existing and potential market opportunities. If we cannot manage growth effectively, our business and operating results could suffer. WE HAVE A STRATEGIC PLAN TO EXIT CERTAIN NON-CORE PRODUCTS AND SERVICES, IF WE ARE NOT SUCCESSFUL IN IMPLEMENTING OUR PLAN, OUR BUSINESS COULD BE NEGATIVELY IMPACTED. In the first quarter of 2001, we developed a strategic plan that involved reorganizing our product and service offerings around a group of core products deemed most imperative to our ability to serve the messaging and directory infrastructure market. In the second quarter of 2001, implementation of the plan commenced and, accordingly, some products and services that have been determined to be non-core to our strategy were strategically exited. Our strategic plan also includes an initiative to reduce operating costs through a reduction of approximately 450 personnel and a consolidation of approximately two-thirds of our office space in keeping with our increased focus on core messaging products and services. During the second quarter, we had a reduction in force of approximately 212 personnel and were able to consolidate about 33 of our facilities. We are continuing to implement these actions and we expect to incur significant one-time charges. The non-core products and services comprised approximately 37% of total revenues in the first quarter of 2001, approximately 24% of revenues in the second quarter of 2001 and 26% of total revenues during fiscal year 2000. It is expected that these products and services will not be a part of our revenue stream by the fourth quarter of 2001. 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 22 25 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. Consequently, we may not be successful in integrating acquired businesses or technologies and may not achieve anticipated revenues 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. Further, due in part to the significant underperformance of some of our acquisitions relative to expectations, we have reviewed 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. As a result of this review, in 2001, we decided 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, including our recent decisions, 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. WE MAY NEED TO LICENSE THIRD-PARTY TECHNOLOGIES AND WE FACE RISKS IN DOING SO. We intend to continue to license certain technology from third parties, including web server and encryption technology. The market is evolving and we may need to license additional technologies to remain competitive. We may not be able to license these technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our services. These third-party in-licenses may expose us to increased risks, including risks related to the integration of new technology, the diversion of resources from the development of proprietary technology, and an inability to generate revenues from new technology sufficient to offset associated acquisition and maintenance costs. An inability to obtain any of these licenses could delay product and service development until equivalent technology can be identified, licensed and integrated. Any delays in services could cause our business and operating results to suffer. WE MAY HAVE LIABILITY FOR INTERNET CONTENT AND WE MAY NOT HAVE ADEQUATE LIABILITY INSURANCE. As a provider of messaging and directory 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 a 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 23 26 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. 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. 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, 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. 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. WE RELY ON TRADEMARK, COPYRIGHT AND TRADE SECRET LAWS AND CONTRACTUAL RESTRICTIONS TO PROTECT OUR PROPRIETARY RIGHTS, AND IF THESE RIGHTS ARE NOT SUFFICIENTLY PROTECTED, IT COULD HARM OUR ABILITY TO COMPETE AND GENERATE REVENUE. We also rely on a combination of trademark, copyright and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. Our ability to compete and grow our business could suffer if these rights are not adequately protected. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. We license our software pursuant to agreements which impose certain restrictions on the licensee's 24 27 ability to utilize the software. We also seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements. Our proprietary rights may not be adequately protected because: - laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies; and - policing unauthorized use of our products and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of this unauthorized use. Also, the laws of other countries in which we market our products may offer little or no protection of our proprietary technologies. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for it, which would harm our competitive position and market share. WE MAY NOT BE ABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE OF THE MESSAGING AND DIRECTORY INFRASTRUCTURE INDUSTRY. The messaging directory infrastructure industry is characterized by rapid technological change, changes in user and customer requirements and preferences, and the emergence of new industry standards and practices that could render our existing services, proprietary technology and systems obsolete. We must continually improve the performance, features and reliability of our services, particularly in response to competitive offerings. Our success depends, in part, on our ability to enhance our existing email and messaging services and to develop new services, functionality and technology that address the increasingly sophisticated and varied needs of prospective customers. If we don't properly identify the feature preferences of prospective customers, or if we fail to deliver email features which meet the standards of these customers, our ability to market our service successfully and to increase revenues could be impaired. The development of proprietary technology and necessary service enhancements entail significant technical and business risks and require substantial expenditures and lead-time. We may not be able to keep pace with the latest technological developments. We may also be unable to use new technologies effectively or adapt services to customer requirements or emerging industry standards. 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. 25 28 IF WE DO NOT SUCCESSFULLY ADDRESS THE RISKS INHERENT IN THE EXPANSION OF OUR INTERNATIONAL OPERATIONS, OUR BUSINESS COULD SUFFER. We derived 37% of our revenue from international sales in the first half of 2001 and 40% of our revenue from international sales in 2000. 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; - potential 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. 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. For example, if the current economic conditions continue to decline or if new or unanticipated government regulations are enacted which affects our customers, they may be unable to pay their bills. In the past, we have experienced significant collection delays from certain customers, and we cannot predict whether we will continue to experience similar or more severe delays in the future. 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. WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES. California is in the midst of a serious energy crisis that may disrupt our operations and increase our expenses. In the event of an acute power shortage, that is, when power reserves for the State of California fall below 1.5%, California has on some occasions implemented, and may in the future continue to implement, rolling blackouts throughout the state. If blackouts interrupt our power supply or the power supply of any of our customers, we, or our customers, may be temporarily unable to operate. Any interruption in our ability to continue operations could delay the development or interfere with the sales of our products. Future interruptions could damage our reputation, harm our ability to retain existing customers and to obtain new customers, and could result in lost revenue, any of which could substantially harm our business and results of operations. Any interruption in the ability of our customers to continue operations could also harm our 26 29 business. We do not carry sufficient business interruption insurance to compensate us for losses that may occur, and any losses or damages we incur could harm our business. Furthermore, the deregulation of the energy industry instituted in 1996 by the California government and shortages in wholesale electricity supplies have caused power prices to increase. If wholesale prices continue to increase, our operating expenses will likely increase, as our headquarters and many employees are based in California. 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 our board of directors without prior shareholder approval, commonly referred to as "blank check" preferred stock, with rights senior to those of our common stock; - prohibit shareholder action by written consent; and - establish advance notice requirements for submitting nominations for election to our 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. 27 30 SUPPLEMENTAL PRO FORMA FINANCIAL DATA The following supplemental pro forma financial information presents Critical Path's condensed consolidated results of operations during the three- and six-month periods of 2001 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, and (iii) stock-based compensation associated with outstanding options and warrants, (iv) one-time charges related to our restructuring initiative, (v) impairment of long-lived assets, (vi) write-down of investments and (vii) gain on the retirement of convertible subordinated debt. 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.
THREE MONTHS ENDED SIX MONTHS ENDED -------------------- -------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 2001 2000 2001 -------- -------- -------- -------- (UNAUDITED) Net revenues Software license.............................. $ 13,897 $ 8,913 $ 24,967 $ 14,463 Hosted messaging.............................. 14,220 11,141 23,315 25,580 Professional service.......................... 3,030 2,900 5,523 6,317 Maintenance and support....................... 2,348 4,131 4,243 7,868 -------- -------- -------- -------- Total net revenues.................... 33,495 27,085 58,048 54,228 -------- -------- -------- -------- Cost of net revenues Software license.............................. 737 126 1,744 417 Hosted messaging.............................. 13,538 17,440 25,418 35,378 Professional service.......................... 1,388 2,594 2,444 5,560 Maintenance and support....................... 1,812 2,414 3,216 5,000 -------- -------- -------- -------- Total cost of net revenues............ 17,475 22,574 32,822 46,355 -------- -------- -------- -------- Gross profit.................................... 16,020 4,511 25,226 7,873 -------- -------- -------- -------- Operating expenses Sales and marketing........................... 17,342 15,694 30,947 34,406 Research and development...................... 9,213 8,333 15,536 18,267 General and administrative.................... 7,332 11,745 14,098 25,038 -------- -------- -------- -------- Total operating expenses.............. 33,887 35,772 60,581 77,711 -------- -------- -------- -------- Loss from operations............................ (17,867) (31,261) (35,355) (69,838) Interest and other income (expense), net........ 4,697 2,895 5,954 5,320 Interest expense................................ (5,244) (5,311) (5,501) (10,362) Minority interest in net income of consolidated subsidiary.................................... (325) -- (325) -- Equity in net loss of joint venture............. -- (397) -- (1,173) -------- -------- -------- -------- Loss before income taxes........................ (18,739) (34,074) (35,227) (76,053) Provision for income taxes...................... (1,439) (1,150) (1,799) (1,493) -------- -------- -------- -------- Net loss........................................ $(20,178) $(35,224) $(37,026) $(77,546) ======== ======== ======== ======== Net loss per share -- basic and diluted......... $ (0.34) $ (0.48) $ (0.68) $ (1.06) Weighted average shares -- basic and diluted.... 58,592 73,794 54,581 72,966
28 31 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of June 30, 2001, our investment portfolio consisted of available-for-sale securities, excluding those classified as cash equivalents, of $26.6 million. These securities consist of $8.3 million of strategic equity investments in corporate partners, certain of which are publicly traded and marketable and certain of which are privately held and $18.3 million of high grade low risk government securities and corporate bonds. These securities are subject to equity price risk. Critical Path's long-term obligations consist of our $295.0 million five-year, 5.75% Convertible Subordinated Notes due April 2005, and certain fixed rate capital leases. 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." 29 32 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Critical Path, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Critical Path, Inc. and its subsidiaries as of June 30, 2001, and the related condensed consolidated statement of operations for each of the three and six-month periods ended June 30, 2000 and June 30, 2001 and the condensed consolidated statement of cash flows for each of the six month periods ended June 30, 2000 and June 30, 2001. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2000, and the related consolidated statements of operations, of shareholders' equity, and of cash flows for the year then ended (not presented herein), and in our report dated April 4, 2001 we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of June 30, 2001, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ PRICEWATERHOUSECOOPERS LLP San Jose, CA August 2, 2001 30 33 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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. The complaints have been consolidated into a single action. The complaints generally allege that, in differing periods from December 1999 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 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 and in the United States District Court for the Northern District of California. The derivative complaints allege that certain of Critical Path's 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. 31 34 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 6, 2001, an Annual Meeting of the Shareholders of Critical Path was held at the Park Hyatt Hotel, 333 Battery Street, San Francisco, California. At the Annual Meeting, the following persons were elected by the Shareholders of Critical Path as directors to serve until the next annual meeting or until their earlier resignation or removal: Kevin R. Harvey, David C. Hayden, William E. McGlashan, Jr., Amy Rao and George Zachary. The following table sets for the number of votes cast for and withheld, including abstentions and broker non-votes, for the persons standing for election as a director:
VOTES FOR WITHHELD ---------- --------- Kevin R. Harvey...................................... 43,546,697 273,184 David C. Hayden...................................... 40,806,168 3,013,713 William E. McGlashan, Jr. ........................... 43,547,925 271,956 Amy Rao.............................................. 41,147,082 2,672,799 George Zachary....................................... 43,538,614 281,267
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1* Amended and Restated Articles of Incorporation. 3.2* Amendment to the Articles of Incorporation. 3.3* Amended and Restated Bylaws. 4.1* Form of Common Stock Certificate. 4.2* Preferred Stock Rights Agreement, dated as of March 29, 2001 between Critical Path, Inc. and Computershare, including the Certificate of Determination, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B and C, respectively. 4.3 Warrant to Purchase Common Stock of Critical Path, Inc. issued to Vectis Group, LLC. 10.1 Finder and Advisory Agreement between Critical Path, Inc. and Vectis Group, LLC dated as of March 29, 2001. 10.2 Strategic Analysis Agreement between Critical Path, Inc. and Vectis Group, LLC dated as of March 29, 2001. 10.3 Advisory Services Agreement between Critical Path, Inc. and Vectis Group LLC dated as of May 30, 2001. 15.1 Letter of PricewaterhouseCoopers LLP on Unaudited Interim Financial Information.
- --------------- See Exhibit Index attached hereto, which is incorporated herein by reference. (b) Reports on Form 8-K On April 2, 2001, we filed a report on Form 8-K under Item 5 and Item 7, announcing the Company's Board of Directors had approved the adoption of a Shareholder Rights Plan. On April 26, 2001, we filed a report on Form 8-K under Item 5 and Item 7, announcing a strategic reorganization, including the appointment of William McGlashan, Jr. as interim Chief Operating Officer and Amy Rao as interim Vice President for Sales, and the termination of Diana Whitehead, former President and Mari Tangredi, former Executive Vice President of Business Development, Sales and Professional Services. On June 20, 2001, we filed a report on Form 8-K under Item 5 and Item 7, announcing the appointment of Stephen C. Richards to the Company's Board of Directors. 32 35 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 14, 2001 CRITICAL PATH, INC. By: /s/ LAWRENCE P. REINHOLD ------------------------------------ Lawrence P. Reinhold Executive Vice President, Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) 33 36 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 3.1(1) Amended and Restated Articles of Incorporation. 3.2(2) Amendment to the Articles of Incorporation. 3.3(1) Amended and Restated Bylaws. 4.1(3) Form of Common Stock Certificate. 4.2(4) Preferred Stock Rights Agreement, dated as of March 29, 2001 between Critical Path, Inc. and Computershare, including the Certificate of Determination, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B and C, respectively. 4.3 Warrant to Purchase Common Stock of Critical Path, Inc. issued to Vectis Group, LLC. 10.1 Finder and Advisory Agreement between Critical Path, Inc. and Vectis Group, LLC dated as of March 29, 2001. 10.2 Strategic Analysis Agreement between Critical Path, Inc. and Vectis Group, LLC dated as of March 29, 2001. 10.3 Advisory Services Agreement between Critical Path, Inc. and Vectis Group LLC dated as of May 30, 2001. 15.1 Letter of PricewaterhouseCoopers LLP on Unaudited Interim Financial Information.
- --------------- (1) Incorporated by reference from Exhibits 3(i)(b) and 3(ii)(b) of Critical Path, Inc.'s Registration Statement on Form S-1 (File Number 333-71499) filed with the Securities and Exchange Commission on January 29, 1999. (2) Incorporated by reference from Exhibit 3.2 of Critical Path, Inc.'s Form 10-K for the year ended December 31, 2000. (3) Incorporated by reference from Exhibit 4.1 of Critical Path, Inc.'s Registration Statement on Form S-1, Amendment Number 1 (File Number 333-71499) filed with the Securities and Exchange Commission on February 24, 1999. (4) Incorporated by reference from Exhibit 4.5 of Critical Path, Inc.'s Form 8-A filed on May 7, 2001. EX-4.3 3 f74608ex4-3.txt WARRANT TO PURCHASE COMMON STOCK 1 EXHIBIT 4.3 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES AND ANY SECURITIES OR SHARES ISSUED HEREUNDER MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE ISSUANCE OF THESE SECURITIES MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD HEREOF TO THE SECRETARY OF THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES. WARRANT TO PURCHASE COMMON STOCK OF CRITICAL PATH, INC. This certifies that, for value received, Vectis Group, LLC or its registered assigns ("Holder") is entitled, subject to the terms and conditions set forth below, to purchase from Critical Path, Inc. (the "Company"), in whole or in part 500,000 fully paid and nonassessable shares (the "Warrant Shares") of Common Stock of the Company (the "Common Stock") at a purchase price of $2.00 per share (as adjusted from time to time hereunder, the "Exercise Price"). The number, character and Exercise Price of such shares of Common Stock are subject to adjustment as provided below and all references to "Warrant Shares" and "Exercise Price" herein shall be deemed to include any such adjustment or series of adjustments. The term "Warrant" as used herein shall mean this Warrant, and any warrants delivered in substitution or exchange therefor as provided herein. 1. Term of Warrant. Subject to the terms and conditions set forth herein, this Warrant shall be exercisable, in whole or in part, at any time and from time to time during the term commencing on the date hereof and ending at 5:00 p.m., Pacific daylight savings time, on March 29, 2004, and shall be void thereafter (the "Exercise Period"). 2. Exercise of Warrant. (a) Cash Exercise. This Warrant may be exercised by the Holder by (i) the surrender of this Warrant to the Company, with the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company) during the Exercise Period and (ii) the delivery of payment to the Company, for the account of the Company, by cash, wire transfer of immediately available funds to a bank account specified by the Company, or by certified or bank cashier's check, of the Exercise Price for the number of Warrant Shares specified in the Exercise Form in lawful money of the United States of America. The Company agrees that such Warrant Shares shall be deemed to be issued to the Holder as the record holder of such Warrant Shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for the Warrant Shares as aforesaid. A stock certificate or certificates for the Warrant -1- 2 Shares specified in the Exercise Form shall be delivered to the Holder as promptly as practicable, and in any event within twenty (20) days, thereafter. If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of the stock certificate or certificates, deliver to the Holder a new Warrant evidencing the rights to purchase the remaining Warrant Shares, which new Warrant shall in all other respects be identical with this Warrant. No adjustments shall be made on Warrant Shares issuable on the exercise of this Warrant for any cash dividends paid or payable to holders of record of Common Stock prior to the date as of which the Holder shall be deemed to be the record holder of such Warrant Shares. (b) Net Issue Exercise. In lieu of exercising this Warrant pursuant to Section 2(a), this Warrant may be exercised by the Holder by the surrender of this Warrant to the Company, with a duly executed Exercise Form marked to reflect net issue exercise and specifying the number of shares of Common Stock to be purchased, during normal business hours on any business day during the Exercise Period. The Company agrees that such shares of Common Stock shall be deemed to be issued to the Holder as the record holder of such shares of Common Stock as of the close of business on the date on which this Warrant shall have been surrendered as aforesaid. Upon such exercise, the Holder shall be entitled to receive shares equal to the value of this Warrant (or the portion thereof being canceled) by surrender of this Warrant to the Company together with notice of such election in which event the Company shall issue to Holder a number of shares of Common Stock computed as of the date of surrender of this Warrant to the Company using the following formula: X = Y(A-B) ------ A Where X = the number of shares of Common Stock to be issued to Holder under this Section 2(b); Y = the number of shares of Common Stock otherwise purchasable under this Warrant (as adjusted to the date of such calculation); A = the Fair Market Value (as defined below) of one share of the Common Stock at the date of such calculation; B = the Exercise Price (as adjusted to the date of such calculation). (c) Fair Market Value. For purposes of Section 2(b), the "Fair Market Value" of one share of Common Stock shall mean, as of any date, the average of the closing prices of the Common Stock's sales on all domestic securities exchanges on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices for the Company's Common Stock on all such exchanges at the end of such day, or, if on any day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time, on such day, or, if on any day the Common Stock is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices for the Company's Common Stock on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case -2- 3 averaged over a period of eleven (11) days consisting of the day as of which "Fair Market Value" is being determined and the ten (10) consecutive business days prior to such day; provided that if the Common Stock is listed on any domestic securities exchange the term "business days" as used in this sentence means business days on which such exchange is open for trading. If at any time the Common Stock is not listed on any domestic securities exchange or quoted in the NASDAQ System or the domestic over-the-counter market, the "Fair Market Value" shall be the Fair Market Value thereof determined jointly by the Company and the Holders of this Warrant representing a majority of the Common Stock purchasable upon exercise this Warrant; provided that if such parties are unable to reach agreement within a reasonable period of time, such fair value shall be determined by an appraiser jointly selected by the Company and the Holders of this Warrant representing a majority of the Common Stock purchasable upon exercise of this Warrant. The determination of such appraiser shall be final and binding on the Company and the Holders of this Warrant, and the fees and expenses of such appraiser shall be paid by the Company. (d) This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As promptly as practicable on or after such date and in any event within ten (10) days thereafter, the Company at its expense shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of shares issuable upon such exercise. In the event that this Warrant is exercised in part, the Company at its expense will execute and deliver a new Warrant of like tenor exercisable for the number of shares for which this Warrant may then be exercised. (e) The Company shall from time to time take all such action as may be necessary to ensure that the par value per share of the unissued Warrant Shares acquirable upon exercise of this Warrant is at all times equal to or less than the Exercise Price then in effect. In the event that the Company fails to comply with its obligations set forth in the foregoing sentence, the Purchaser may (but shall not be obligated to) purchase Warrant Shares hereunder at par value, and the Company shall be obligated to reimburse the Purchaser for the aggregate amount of consideration paid in connection with such exercise in excess of the Exercise Price then in effect. 3. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the Exercise Price multiplied by such fraction. 4. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor and amount. -3- 4 5. Rights of Stockholders; Limitation of Liability. Subject to Sections 8 and 10 of this Warrant, the Holder shall not be entitled to vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company that may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, or change of stock to no par value, consolidation, merger, conveyance, or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Warrant shall have been exercised as provided herein. No provision hereof, in the absence of affirmative action by the Holder to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder shall give rise to any liability of such Holder for the Exercise Price of Warrant Shares acquirable by exercise hereof or as a stockholder of the Company. 6. Transfer of Warrant. (a) Warrant Register. The Company will maintain a register (the "Warrant Register") containing the names and addresses of the Holder or Holders. Any Holder of this Warrant or any portion thereof may change his address as shown on the Warrant Register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be delivered or given by mail to such Holder as shown on the Warrant Register and at the address shown on the Warrant Register. Until this Warrant is transferred on the Warrant Register of the Company, the Company may treat the Holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. (b) Warrant Agent. The Company may, by written notice to the Holder, appoint an agent for the purpose of maintaining the Warrant Register referred to in Section 6(a) above, issuing the Warrant Shares or other securities then issuable upon the exercise of this Warrant, exchanging this Warrant, replacing this Warrant, or any or all of the foregoing. Thereafter, any such registration, issuance, exchange, or replacement, as the case may be, shall be made at the office of such agent. (c) Transferability and Nonnegotiability of Warrant. This Warrant may not be transferred or assigned in whole or in part without compliance with all applicable federal and state securities laws by the transferor and the transferee (including the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, if such are requested by the Company). Notwithstanding the foregoing, no investment representation letter or opinion of counsel shall be required for any transfer of this Warrant (or any portion thereof) or any shares of Common Stock issued upon exercise hereof or conversion thereof (i) in compliance with Rule 144 or Rule 144A of the Act, (ii) by gift, will or intestate succession by the Holder to his or her spouse or lineal descendants or ancestors or any trust for any of the foregoing, or (iii) to an affiliate of the Holder, which for purposes of this Warrant shall be deemed to include any consultant rendering services to Holder in connection with Holder's services to the Company, provided that such consultant delivers an investment representation letter to the Company; provided that in each of the foregoing cases the transferee agrees in writing to be subject to the -4- 5 terms of this Section 6(c). Subject to the provisions of this Warrant with respect to compliance with the Securities Act of 1933, as amended (the "Act"), title to this Warrant may be transferred by endorsement (by the Holder executing the Assignment Form annexed hereto) and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery. (d) Exchange of Warrant Upon a Transfer. On surrender of this Warrant for exchange, properly endorsed on the Assignment Form and subject to the provisions of this Warrant with respect to compliance with the Act and with the limitations on assignments and transfers and contained in this Section 6, the Company at its expense shall issue to or on the order of the Holder a new warrant or warrants of like tenor, in the name of the Holder or as the Holder (on payment by the Holder of any applicable transfer taxes) may direct, for the number of shares issuable upon exercise hereof. (e) Compliance with Securities Laws. (i) The Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant and the shares of Common Stock to be issued upon exercise hereof or conversion thereof are being acquired solely for the Holder's own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any shares of Common Stock to be issued upon exercise hereof or conversion thereof except under circumstances that will not result in a violation of the Act or any applicable state securities laws. Upon exercise of this Warrant, the Holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of Common Stock so purchased are being acquired solely for the Holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale. (ii) This Warrant and all shares of Common Stock issued upon exercise hereof or conversion thereof shall be stamped or imprinted with a legend in substantially the following form (in addition to any legend required by state securities laws): THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES AND ANY SECURITIES OR SHARES ISSUED HEREUNDER MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE ISSUANCE OF THESE SECURITIES MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD HEREOF TO THE SECRETARY OF THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES. (iii) The Company agrees to remove promptly, upon the request of the holder of this Warrant and Securities issuable upon exercise of the Warrant, the legend set forth in Section 6(e)(ii) above from the documents/certificates for such securities upon full compliance with this Agreement and Rules 144 and 145. -5- 6 7. Reservation of Stock. The Company covenants that during the Exercise Period, the Company will reserve from its authorized and unissued Common Stock or other shares issuable upon exercise of this Warrant a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of this Warrant and, from time to time, will take all steps necessary to amend its Amended and Restated Articles of Incorporation (the "Restated Articles") to provide sufficient reserves of shares of Common Stock issuable upon exercise of this Warrant. The Company further covenants that all shares that may be issued upon the exercise of rights represented by this Warrant and payment of the Exercise Price, all as set forth herein, will be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously or otherwise specified herein). The Company shall take all such actions as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Common Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Company upon each such issuance). The Company shall not take any action which would cause the number of authorized but unissued shares of Common Stock or other shares issuable upon exercise of this Warrant to be less than the number of such shares required to be reserved hereunder for issuance upon exercise of this Warrant. 8. Notices. (a) Whenever the Exercise Price or number of shares purchasable hereunder shall be adjusted pursuant to Section 10 hereof, the Company shall issue a certificate signed by its Chief Financial Officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Exercise Price and number of shares purchasable hereunder after giving effect to such adjustment, and shall cause a copy of such certificate to be mailed (by first-class mail, postage prepaid) to the Holder of this Warrant. (b) In case: (i) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercise of this Warrant) for the purpose of entitling them to receive any dividend or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; (ii) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation; (iii) of any voluntary dissolution, liquidation or winding-up of the Company; or (iv) of any redemption or conversion of all outstanding Common Stock; -6- 7 then, and in each such case, the Company will mail or cause to be mailed to the Holder or Holders a notice specifying, as the case may be, (A) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right or (B) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation, winding-up, redemption or conversion is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such stock or securities at the time receivable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least fifteen (15) days prior to the date therein specified. (c) All such notices, advices and communications shall be deemed to have been received (i) in the case of personal delivery, on the date of such delivery and (ii) in the case of mailing, on the third business day following the date of such mailing if sent to a U.S. address and on the tenth (10th) business day following the date of such mailing if sent to an address outside the U.S. 9. Amendments. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 10. Adjustments. The Exercise Price and the number of Warrant Shares purchasable hereunder are subject to adjustment from time to time as follows: (a) Reorganization, Reclassification, Consolidation, Merger or Sale. If any recapitalization, reclassification or reorganization of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets or other transaction shall be effected in such a way that holders of Common Stock shall be entitled to receive (either directly or upon subsequent liquidation) stock, securities, or other assets or property (a "Change"), then, as a condition of such Change, lawful and adequate provisions shall be made by the Company whereby the Holder hereof shall thereafter have the right to purchase and receive (in lieu of the shares of the Common Stock of the Company immediately prior to such Change purchasable and receivable upon the exercise of the rights represented hereby) such shares of stock, securities or other assets or property as may be issued or paid with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately prior to such Change purchaseable and receivable upon the exercise of the rights represented hereby at the Exercise Price, appropriately adjusted for such Change. In any such case, the Company shall make appropriate provision with respect to such holders' rights and interests to insure that the provisions of this Section 10 shall thereafter be applicable to the Warrants. The Company shall not effect any such Change, unless prior to the consummation thereof, the successor entity (if other than the Company) resulting from consolidation or merger or the entity purchasing such assets assumes by written instrument, the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. Promptly following any Change, and in any event within 20 days thereafter, upon delivery for cancellation of this Warrant, the Holder shall be issued a successor warrant -7- 8 which provides that Holder may exercise such successor warrant, subject to the same requirements set forth herein, for the kind and amount of stock, securities or other assets or property as may be issued or payable with respect to or in exchange immediately after such Change. (b) Split, Subdivision or Combination of Shares. If the Company at any time while this Warrant, or any portion thereof, remains outstanding and unexpired shall split, subdivide or combine the securities as to which purchase rights under this Warrant exist, into a different number of securities of the same class, then (i) in the case of a split or subdivision, the Exercise Price for such securities shall be proportionately decreased and the securities issuable upon exercise of this Warrant shall be proportionately increased, and (ii) in the case of a combination, the Exercise Price for such securities shall be proportionately increased and the securities issuable upon exercise of this Warrant shall be proportionately decreased. (c) Adjustments for Dividends in Stock or Other Securities or Property; Purchase Rights. If while this Warrant, or any portion hereof, remains outstanding and unexpired the holders of the securities as to which purchase rights under this Warrant exist at the time shall have received, or, on or after the record date fixed for the determination of eligible Stockholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Company by way of dividend, then and in each case, this Warrant shall represent the right to acquire, in addition to the number of shares of the security receivable upon exercise of this Warrant, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property (other than cash) of the Company that such holder would hold on the date of such exercise had it been the holder of record of the security receivable upon exercise of this Warrant on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock available by it as aforesaid during such period, giving effect to all adjustments called for during such period by the provisions of this Section 10. If at any time the Company grants, issues or sells any security or right to purchase stock, warrants, securities or other property pro rata to the holders of the securities as to which purchase rights under this Warrant exist (the "Purchase Rights"), then the Holder of this Warrant shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the holders of the securities as to which purchase rights under this Warrant exist are to be determined for the grant, issue or sale of such Purchase Rights. (d) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment pursuant to this Section 10, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each Holder of this Warrant a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request, at any time, of any such Holder, furnish or cause to be furnished to such Holder a like certificate setting forth: (i) such adjustments and readjustments; (ii) the Exercise Price at -8- 9 the time in effect; and (iii) the number of shares and the amount, if any, of other property that at the time would be received upon the exercise of the Warrant. (e) No Impairment; Certain Events. The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 10 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holders of this Warrant against impairment. If any event occurs of the type contemplated by the provisions of this Section 10 but not expressly provided for by such provisions, then the Company's board of directors shall make an appropriate adjustment in the Exercise Price or the number of Warrant Shares obtainable upon exercise of this Warrant so as to protect the rights of the holders of this Warrant; provided, that no such adjustment shall increase or decrease the number of Warrant Shares obtainable as otherwise determined pursuant to this Section 10. 11. Miscellaneous. (a) This Warrant shall be governed by the laws of the State of California as applied to agreements entered into in the State of California by and among residents of the State of California. (b) In the event of a dispute with regard to the interpretation of this Warrant, the prevailing party may collect the cost of attorney's fees, litigation expenses or such other expenses as may be incurred in the enforcement of the prevailing party's rights hereunder. (c) This Warrant shall be exercisable as provided for herein, except that in the event that the expiration date of this Warrant shall fall on a Saturday, Sunday and or United States federally recognized Holiday, this expiration date for this Warrant shall be extended to 5:00 p.m. Pacific standard time on the business day following such Saturday, Sunday or recognized Holiday. -9- 10 IN WITNESS WHEREOF, CRITICAL PATH, INC. has caused this Warrant to be executed by its officers thereunto duly authorized. Dated: March 29, 2001 CRITICAL PATH, INC. By /s/ David C. Hayden ------------------------------- Title ------------------------------ VECTIS GROUP, LLC By /s/ Matthew Hobart -------------------------------- Title CFO ------------------------------ -10- 11 NOTICE OF EXERCISE To: CRITICAL PATH, INC. (1) The undersigned hereby elects to purchase __________ shares of Common Stock of CRITICAL PATH, INC., pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price for such shares in full. (2) In exercising this Warrant, the undersigned hereby confirms and acknowledges that the shares of Common Stock are being acquired solely for the account of the undersigned and not as a nominee for any other party, or for investment, and that the undersigned will not offer, sell or otherwise dispose of any such shares of Common Stock except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any applicable state securities laws. (3) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: ------------------------------ (Name) ------------------------------ (Name) (4) Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below: ------------------------------ (Name) - ----------------------------- ------------------------------ (Date) (Signature) 12 ASSIGNMENT FORM FOR VALUE RECEIVED, the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock set forth below:
No. of Name of Assignee Address Shares ---------------- ------- ------
and does hereby irrevocably constitute and appoint Attorney ________________ to make such transfer on the books of CRITICAL PATH, INC., maintained for the purpose, with full power of substitution in the premises. The undersigned also represents that, by assignment hereof, the Assignee acknowledges that this Warrant and the shares of stock to be issued upon exercise hereof are being acquired for investment and that the Assignee will not offer, sell or otherwise dispose of this Warrant or any shares of stock to be issued upon exercise hereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended, or any applicable state securities laws. Further, the Assignee has acknowledged that upon exercise of this Warrant, the Assignee shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of stock so purchased are being acquired for investment and not with a view toward distribution or resale. Dated: , . -------------- ---- ------------------------ Signature of Holder EX-10.1 4 f74608ex10-1.txt FINDER AND ADVISORY AGREEMENT 1 EXHIBIT 10.1 March 29, 2001 Mr. David H. Hayden Executive Chairman and Founder Critical Path 320 First Street San Francisco, CA 94105 Re: Finder and Advisory Agreement Dear David: This letter agreement sets forth the terms pursuant to which Critical Path, Inc. (the "Company") has agreed to engage Vectis Group, LLC and its subsidiaries and affiliates (collectively referred to herein as "Vectis Group") to act as a finder and advisor in connection with the private placement by the Company to Qualified Institutional Buyers (as defined in Rule 144A of Regulation D promulgated by the Securities and Exchange Commission) of up to $100 million of any capital stock (common, preferred, preference or otherwise) or other equity or ownership interest in the Company and any securities, warrants, options or other rights to acquire any such capital stock or other equity or ownership interest (the "Securities"). 1. Appointment and Acceptance. The Company hereby appoints Vectis Group as a non-exclusive finder and advisor in connection with the proposed private placement of the Securities with one or more Qualified Prospective Purchasers (as defined below). Vectis Group hereby accepts such appointment, subject to the terms and conditions of this letter agreement. Vectis Group agrees that in its capacity hereunder it will use its commercially reasonable efforts to arrange introductions and provide such other advisory services and activities as may be agreed upon by Vectis Group and the Executive Chairman of the Company from time to time in connection with the private placement of the Securities. Such services include, without limitation, contacting potential purchasers of the Company's securities and assisting in the preparation of the Information (as defined below) and participating in discussions with potential purchasers of the Company's securities. For purposes of this Agreement, a "Qualified Prospective Purchaser" shall mean entities who are Qualified Institutional Buyers who Vectis Group and the Executive Chairman of the Company from time to time agree in writing are to be deemed Qualified Prospective Purchasers for purposes of this letter agreement. 2. Fees and Expenses. (a) As compensation to Vectis Group for its services hereunder, the Company hereby agrees to pay Vectis Group as follows: promptly upon a closing (each, a "Closing") of a sale of the Securities to Vectis Group or any Qualified Prospective Purchaser, the Company hereby agrees to pay to Vectis Group a fee (each, a "Finder's Fee") in an amount equal to five percent 2 Mr. David H. Hayden March 29, 2001 Page 2 (5%) of the gross proceeds raised by the Company pursuant to each such sale. Each Finder's Fee shall, at the option of Vectis Group, be payable in (i) cash; (ii) shares of the Securities (of the type issued by the Company at such Closing) in an amount equal to (A) the Finder's Fee divided by (B) the gross proceeds raised divided by the number of Securities issued to Qualified Prospective Purchasers; or (iii) a combination of cash and shares of the Securities. (b) Promptly upon the request of Vectis Group, the Company will reimburse Vectis Group for its reasonable out-of-pocket expenses incurred during the term of this engagement with respect to or arising from the services rendered by Vectis Group hereunder, including, without limitation, the professional fees and disbursements of its advisors, including its legal counsel (it being understood that the retention of any advisor (other than legal counsel) by Vectis Group shall only be made with the prior approval of the Company). (c) All fees and expenses payable hereunder shall be paid net of all applicable withholding and similar taxes. 3. Information. (a) The Company will furnish Vectis Group with all financial and other information concerning the Company as Vectis Group reasonably deems necessary or appropriate in connection with the performance by Vectis Group of the services contemplated by this engagement and in that connection will provide Vectis Group with access to the Company's officers, directors, employees, accountants, counsel and other representatives. The Company acknowledges and confirms that Vectis Group (i) will rely solely on such information in the performance of the services contemplated by this engagement without assuming any responsibility for independent investigation or verification thereof; (ii) assumes no responsibility for the accuracy or completeness of such information or any other information regarding the Company; and (iii) will not make any independent appraisal of the assets, operations or financial condition of the Company. (b) The Company will be solely responsible for any and all information concerning the Company used in connection with the placement of the Securities contemplated hereby and any and all other written or oral communications provided by or on behalf of the Company to any actual or prospective purchaser of the Securities (all such information and communications are hereinafter referred to as the "Information"). The Company represents and warrants that the Information will not, as of the date of the offer or sale of the Securities or the Closing of any such sale, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company authorizes Vectis Group to provide the Information to Qualified Prospective Purchasers of the Securities. If at any time prior to the completion of the offer and sale of the Securities or the Closing of any such sale an event occurs as a result of which the Information (as then supplemented or amended) would 3 Mr. David H. Hayden March 29, 2001 Page 3 include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, the Company will promptly notify Vectis Group of such event and Vectis Group will suspend solicitations of Qualified Prospective Purchasers of the Securities until such time as the Company shall prepare (and the Company agrees that, if it shall have notified Vectis Group to suspend solicitations after the Company has accepted orders from Qualified Prospective Purchasers, it will promptly prepare) a supplement or amendment to the Information which corrects such statement(s) or omission(s). 4. Exemption from Registration; Offer and Sale of Same or Similar Securities. It is understood that the offer and sale of the Securities will be exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to section 4(2) thereof. The Company will not directly or indirectly, make any offer or sale of the Securities or of securities of the same or a similar class as the Securities if as a result the offer and sale of the Securities contemplated hereby would fail to be entitled to the exemption from the registration requirements of the Act provided for in section 4(2) of the Act. As used herein, the terms "offer" and "sale" have the meanings specified in section 2(3) of the Act. 5. Additional Restrictions on Company. In connection with all offers and sales of the Securities: (a) The Company will not offer or sell the Securities by means of any form of general solicitation or general advertising. The Company will not at any time during the term of this engagement, or for a period of six months following completion of the placement of the Securities contemplated hereby, make any reference publicly to the transactions contemplated hereby, by way of the issuance of a press release, the placement of an advertisement or otherwise, without the prior consent of Vectis Group. (b) The Company will not offer or sell the Securities to any person who is not an "accredited investor" as defined in Rule 501 under the Act. (c) The Company will exercise reasonable care to ensure that the purchasers of the Securities are not underwriters within the meaning of section 2(11) of the Act and, without limiting the foregoing, that such purchases will comply with Rule 502(d) under the Act. (d) The Company will not make any Form D or other filings with the Securities and Exchange Commission with respect to the offer and sale of the Securities without Vectis Group's prior written consent, except where in the reasonable judgement of the Company or its counsel such filing is necessary in order to comply with securities laws. (e) The Company will cause to be delivered to Vectis Group the same opinions of counsel and accountants' letter agreements that it provides to purchasers of the Securities. 4 Mr. David H. Hayden March 29, 2001 Page 4 (f) The Company shall be deemed to make to Vectis Group all representations and warranties which it makes to purchasers of Securities in any purchase agreement or other document. 6. Compliance with State Securities Laws. The Company will take such action as is necessary to qualify the Securities for offer and sale under the securities laws of such states and other jurisdictions of the United States. 7. Indemnification. Since Vectis Group will be acting on behalf of the Company in connection with its engagement hereunder, the Company and Vectis Group have entered into a separate letter agreement (the "Indemnification Agreement"), dated as of the date hereof, providing for the indemnification by the Company of Vectis Group and certain related persons and entities. 8. Termination. (a) The engagement of Vectis Group hereunder (i) may be terminated at any time, with or without cause, by either the Company or Vectis Group, upon ten days' prior written notice thereof to the other party and (ii) shall terminate immediately upon the completion of the placement of all of the Securities contemplated hereby. (b) In the event of the termination of Vectis Group's engagement hereunder pursuant to clause (a)(i) above, Vectis Group shall be entitled to a full Finder's Fee in the event that at any time during the twelve-month period after any such termination the Company sells the Securities (or securities of the same or a similar class as the Securities) to any Qualified Prospective Purchaser which was contacted by Vectis Group in its capacity as a finder hereunder regarding the placement of the Securities contemplated hereby. Within fifteen days following any termination hereunder Vectis will confirm in writing the Qualified Prospective Purchasers contacted by Vectis Group prior to any such termination. (c) The provisions of Paragraphs 2, 7, 8 and 9 of this letter agreement shall survive any termination of the engagement of Vectis Group under this letter agreement and shall remain in full force and effect. Furthermore, no termination of Vectis Group's engagement hereunder shall affect the Company's obligation (i) to pay Vectis Group its Finder's Fee(s) or reimburse Vectis Group for expenses as provided for herein or (ii) under the Indemnification Agreement. 9. General. (a) In connection with this engagement, Vectis Group is acting as an independent contractor and not in any other capacity, with duties owing solely to the Company. 5 Mr. David H. Hayden March 29, 2001 Page 5 (b) No advice rendered by Vectis Group hereunder, whether formal or informal, may be disclosed, in whole or in part, or summarized, excerpted from or otherwise referred to without Vectis Group's prior written consent. (c) This letter agreement supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied between the parties hereto with respect to the subject matters herein. This letter agreement, together with the Strategic Analysis Letter Agreement dated as of March 29, 2001, the Advisory Services Letter Agreement dated as of May 30, 2001, and each of the indemnification letter agreements, constitutes the full, complete and exclusive agreement between you and Critical Path with respect to the subject matters herein. This agreement cannot be changed unless in writing, signed by an authorized officer of the Company and Vectis Group. The Company has all requisite power and authority to enter into this Agreement and the transactions contemplated hereby. This Agreement has been duly and validly authorized by all necessary action on the part of the Company and has been duly executed and delivered by the Company and constitutes a legal, valid and binding agreement of the Company, enforceable in accordance with its terms. (d) The validity and interpretation of this letter agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California applicable to agreements made and to be fully performed therein (excluding the conflicts of law rules). Each of the Company and Vectis Group (and, to the extent permitted by law, on behalf of their respective equity holders and creditors) hereby knowingly, voluntarily and irrevocably waives any right it may have to a trial by jury in respect of any claim based upon, arising out of or in connection with this letter agreement or the Indemnification Agreement or any of the agreements or transactions contemplated hereby or thereby. (e) The benefits of this letter agreement shall inure to the parties hereto, their respective successors and assigns, and to the indemnified parties hereunder (and under the Indemnification Agreement) and their respective successors and assigns and representatives, and the obligations and liabilities assumed in this letter agreement (and under the Indemnification Agreement) by the parties hereto shall be binding upon their respective successors and assigns. (f) The invalidity or unenforceability of any provision of this letter agreement or the Indemnification Agreement shall not affect the validity or enforceability of any other provisions of this letter agreement or the Indemnification Agreement, which shall remain in full force and effect. [The remainder of this page is intentionally left blank.] 6 Mr. David H. Hayden March 29, 2001 Page 6 We are delighted to accept this engagement and look forward to working with the Company on this assignment. If this letter agreement correctly sets forth your understanding of the agreement between Vectis Group and the Company with respect to this engagement, please sign and return to one of the enclosed copies of this letter agreement to the undersigned. This letter agreement, when executed and delivered by the Company, shall constitute a binding agreement between Vectis Group and the Company as of the date first above written. Very truly yours, VECTIS GROUP, LLC By /s/ Matthew Hobart ----------------------------------------------- Matthew T. Hobart Managing Director and Chief Financial Officer Accepted and Agreed to as of the date first written above: CRITICAL PATH, INC. By /s/ David Hayden ------------------------------------------ David H. Hayden Executive Chairman and Founder EX-10.2 5 f74608ex10-2.txt STRATEGIC ANALYSIS AGREEMENT 1 EXHIBIT 10.2 March 29, 2001 Mr. David H. Hayden Executive Chairman and Founder Critical Path 320 First Street San Francisco, CA 94105 RE: Strategic Analysis Dear David: This letter agreement (the "Strategic Analysis Letter Agreement") made and entered into as of March 19, 2001 sets forth the terms pursuant to which Critical Path, Inc. (the "Company" or "you") has agreed to engage Vectis Group, LLC and its subsidiaries and affiliates (collectively referred to herein as "Vectis Group" or "we"), to act as an advisor with respect to a restructuring of, and/or one or more Sale (as defined below) transactions involving the Company. As part of our engagement hereunder, we will, if appropriate and if requested: (a) assist you in analyzing and evaluating the business, operations and financial position of the Company; (b) assist you in the preparation and implementation of a business plan for the Company; (c) assist you in a restructuring of, and/or Sale of specified assets of the Company or any of its subsidiaries, businesses, operations or divisions of the Company; and (d) be available at your request to meet with your Board of Directors to discuss the proposed business plan and the restructuring and their financial implications. In connection with our engagement hereunder, the Company will furnish Vectis Group with all information concerning the Company which Vectis Group reasonably deems appropriate and will provide Vectis Group with access to the Company's officers, directors, employees, accountants, counsel and other representatives (collectively, the "Representatives"), it being understood that Vectis Group will rely solely upon such information supplied by the Company and its Representatives without assuming any responsibility for independent investigation or verification thereof. All non-public information concerning the Company, which is given to Vectis Group will be used solely in the course of the performance of our services hereunder and will be treated confidentially by Vectis Group for so long as it remains non-public. Except as 2 Mr. David H. Hayden March 29, 2001 Page 2 otherwise required by law or judicial or regulatory process, Vectis Group will not disclose this information to a third party without the prior written consent of the Company. As compensation for our services hereunder: (a) During the term of this Strategic Analysis Letter Agreement, the Company agrees to pay Vectis Group a monthly retainer fee (the "Strategic Analysis Retainer Fee") equal to $50,000, payable on the first of every month beginning on the first of the month immediately after the execution of this Strategic Analysis Letter Agreement. (b) In addition to the payment of the initial Strategic Analysis Retainer Fee pursuant to paragraph (a) above, the Company agrees to pay Vectis Group an amount equal to $122,727.27 for services provided by Vectis Group during March, April and May 2001, payable on the first of the month immediately after the execution of this Strategic Analysis Letter Agreement. (c) The Company agrees to pay Vectis Group a transaction fee (each, a "Transaction Fee") of 5% of the Aggregate Consideration (as defined below) in connection with a Sale, with a maximum Transaction Fee of $1,000,000 in respect of each Sale. Each Transaction Fee shall be payable immediately upon the closing of each Sale consummated by the Company during the term of this Strategic Analysis Letter Agreement. (d) The Company agrees to issue to Vectis Group a warrant (the "Warrant") to purchase 500,000 shares of the Company's common stock at a price of $2.00 per share. The Warrant shall be issued immediately after the execution of this Strategic Analysis Letter Agreement and shall be exercisable at any time during the three-year period beginning on the date of issuance of the Warrant. (e) The Company agrees to reimburse Vectis Group for all reasonable and customary out-of-pocket expenses incurred during the term of this engagement with respect to or arising from the services rendered by Vectis Group hereunder, including, without limitation, the professional fees and disbursements of its advisors, including its legal counsel (it being understood that the retention of any advisor by Vectis Group shall only be made with the prior approval of the Company). All fees and expenses payable hereunder are net of all applicable withholding and similar taxes. For purposes of this Strategic Analysis Letter Agreement, the term "Sale" shall mean the sale (whether in one or a series of transactions) of any assets of the Company or any of its subsidiaries, businesses, operations or divisions agreed upon in writing between Vectis Group and the Executive Chairman of the Company from time to time, as well as any re-capitalization, restructuring, liquidation or other form of disposition which results in the effective sale thereof. Also for purposes of this Strategic Analysis Letter Agreement, the term "Aggregate Consideration" shall mean in the case of a Sale, the total fair market value (at the time of the 3 Mr. David H. Hayden March 29, 2001 Page 3 closing of a Sale) of all consideration (including cash, securities, property, all indebtedness and obligations assumed by the purchaser and any other form of consideration) paid or payable, or otherwise to be distributed, directly or indirectly, to the Company or the Company's stockholders in connection with a Sale. No advice rendered by Vectis Group, whether formal or informal, may be disclosed, in whole or in part, or summarized, excerpted from or otherwise referred to without our prior written consent. In addition, Vectis Group may not be otherwise referred to without its prior written consent. Since Vectis Group will be acting on behalf of the Company in connection with its engagement hereunder, the Company and Vectis Group have entered into a separate letter agreement (the "Indemnification Agreement"), dated as of the date hereof, providing for the indemnification by the Company of Vectis Group and certain related persons and entities. Vectis Group's engagement hereunder may be terminated at any time, with or without cause, by either Vectis Group or the Company upon sixty days' prior written notice thereof to the other party; provided, however, that in the event of any termination of Vectis Group's engagement hereunder, Vectis Group will continue to be entitled to its full Transaction Fee provided for herein in the event that at any time prior to the expiration of twelve months after any such termination the Company consummates, or enters into an agreement providing for, a Sale which involves a purchaser identified in writing to the Company by Vectis Group during the term of Vectis Group's engagement hereunder and confirmed on a list provided to the Company by Vectis Group within fifteen (15) days of a termination of such engagement; provided, further, that no termination of Vectis Group's engagement hereunder shall affect the Company's obligations to pay the Strategic Analysis Retainer Fee through the date of termination, any other fees and expenses, and to honor any rights of Vectis Group pursuant to the Warrant to the extent provided for herein, and to indemnify Vectis Group and certain related persons and entities as provided in the Indemnification Agreement. In connection with this engagement, Vectis Group is acting as an independent contractor and not in any other capacity with duties owing solely to the Company. All aspects of the relationship created by this Strategic Analysis Letter Agreement shall be governed by and construed in accordance with the laws of the State of California, applicable to contracts made and to be performed therein (excluding the conflicts of laws rules). The Company has all requisite power and authority to enter into this Strategic Analysis Letter Agreement and the transactions contemplated hereby. This Strategic Analysis Letter Agreement has been duly and validly authorized by all necessary action on the part of the Company and has been duly executed and delivered by the Company and constitutes a legal, valid and binding agreement of the Company, enforceable in accordance with its terms. Please note that this Strategic Analysis Letter Agreement supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied between the parties hereto with respect to the subject matters herein. This Strategic Analysis Letter 4 Mr. David H. Hayden March 29, 2001 Page 4 Agreement, together with the Advisory Services Letter Agreement dated as of May 30, 2001, the Finder Letter Agreement dated as of March 29, 2001, and each of the indemnification letter agreements constitutes the full, complete and exclusive agreement between you and Critical Path with respect to the subject matters herein. This Strategic Analysis Letter Agreement cannot be changed unless in writing, signed by an authorized officer of the Company and Vectis Group. We are delighted to accept this engagement and look forward to working with you on this assignment. Please confirm that the foregoing is in accordance with your understanding by signing and returning to us the enclosed duplicate of this Strategic Analysis Letter Agreement. Very truly yours, VECTIS GROUP, LLC By: /s/ Matthew Hobart --------------------------------------------- Matthew T. Hobart Managing Director and Chief Financial Officer Accepted and Agreed to as of the date first written above: CRITICAL PATH, INC. By: /s/ David Hayden ------------------------------- David H. Hayden Executive Chairman and Founder EX-10.3 6 f74608ex10-3.txt ADVISORY SERVICES AGREEMENT 1 EXHIBIT 10.3 May 30, 2001 Mr. David H. Hayden Executive Chairman and Founder Critical Path 320 First Street San Francisco, CA 94105 Re: Advisory Services Dear David: This letter agreement (the "Advisory Services Letter Agreement") made and entered into effective as of April 9, 2001 sets forth the terms pursuant to which Critical Path, Inc. (the "Company" or "you") has agreed to engage Vectis Group, LLC and its subsidiaries and affiliates (collectively referred to herein as "Vectis Group" or "we"), to act as an advisor to the Company with respect to, among other things, the management and a potential restructuring of the Company and/or any of its subsidiaries, businesses, operations or divisions. As part of our engagement, we will, if appropriate and if requested: (a) assist you in analyzing and evaluating the business, operations and financial position of the Company; (b) assist you in the preparation and implementation of a business plan for the Company; (c) assist you in a restructuring, and provide advisory services with respect to the management, of the Company and/or any of its subsidiaries, businesses, operations or divisions; and (d) be available at your request to meet with your Board of Directors to discuss the proposed business plan and the restructuring and their financial implications and other management related issues. In connection with our engagement hereunder, the Company will furnish Vectis Group with all information concerning the Company which Vectis Group reasonably deems appropriate and will provide Vectis Group with access to the Company's officers, directors, employees, accountants, counsel and other representatives (collectively, the "Representatives"), it being understood that Vectis Group will rely solely upon such information supplied by the Company and its Representatives without assuming any responsibility for independent investigation or verification thereof. All non-public information concerning the Company, which is given to Vectis Group will be used solely in the course of the performance of our services hereunder and 2 Mr. David H. Hayden May 30, 2001 Page 2 will be treated confidentially by Vectis Group for so long as it remains non-public. Except as otherwise required by law or judicial or regulatory process, Vectis Group will not disclose this information to a third party without the prior written consent of the Company. As compensation for our services hereunder: (a) During the term of this Advisory Services Letter Agreement, the Company agrees to pay Vectis Group a monthly retainer fee (the "Advisory Services Retainer Fee") equal to $125,000, payable on the first of every month beginning the first of the month immediately after the execution of this Advisory Services Letter Agreement. (b) In addition to the payment of the initial Advisory Services Retainer Fee pursuant to paragraph (a) above, the Company agrees to pay Vectis Group an amount equal to $216,667.67 for services provided by Vectis Group during April and May 2001 payable on the first of the month immediately after the execution of this Advisory Services Letter Agreement. (c) The Company agrees to reimburse Vectis Group for all reasonable and customary out-of-pocket expenses incurred during the term of this engagement with respect to or arising from the services rendered by Vectis Group hereunder, including, without limitation, the professional fees and disbursements of its advisors, including its legal counsel (it being understood that the retention of any advisor by Vectis Group shall only be made with the prior approval of the Company). All fees and expenses payable hereunder are net of all applicable withholding and similar taxes. No advice rendered by Vectis Group, whether formal or informal, may be disclosed, in whole or in part, or summarized, excerpted from or otherwise referred to without our prior written consent. In addition, Vectis Group may not be otherwise referred to without its prior written consent. Since Vectis Group will be acting on behalf of the Company in connection with its engagement hereunder, the Company and Vectis Group have entered into a separate letter agreement (the "Indemnification Agreement"), dated as of the date hereof, providing for the indemnification by the Company of Vectis Group and certain related persons and entities. Vectis Group's engagement hereunder may be terminated at any time, with or without cause, by either Vectis Group or the Company upon sixty days' prior written notice thereof to the other party; provided, however, that no termination of Vectis Group's engagement hereunder shall affect the Company's obligations to pay any other fees and expenses or to indemnify Vectis Group and certain related persons and entities as provided in the Indemnification Agreement. In connection with this engagement, Vectis Group is acting as an independent contractor and not in any other capacity with duties owing solely to the Company. All aspects of the relationship created by this Advisory Services Letter Agreement shall be governed by and construed in 3 Mr. David H. Hayden May 30, 2001 Page 3 accordance with the laws of the State of California, applicable to contracts made and to be performed therein (excluding the conflicts of laws rules). The Company has all requisite power and authority to enter into this Advisory Services Letter Agreement and the transactions contemplated hereby. This Advisory Services Letter Agreement has been duly and validly authorized by all necessary action on the part of the Company and has been duly executed and delivered by the Company and constitutes a legal, valid and binding agreement of the Company, enforceable in accordance with its terms. Please note that this Advisory Services Letter Agreement supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied between the parties hereto with respect to the subject matters herein. This Advisory Services Letter Agreement, together with the Strategic Analysis Letter Agreement dated as of March 29, 2001, the Finder Letter Agreement dated as of March 29, 2001, and each of the indemnification letter agreements constitutes the full, complete and exclusive agreement between you and Critical Path with respect to the subject matters herein. This Advisory Services Letter Agreement cannot be changed unless in writing, signed by an authorized officer of the Company and Vectis Group. We are delighted to accept this engagement and look forward to working with you on this assignment. Please confirm that the foregoing is in accordance with your understanding by signing and returning to us the enclosed duplicate of this Advisory Services Letter Agreement. Very truly yours, VECTIS GROUP, LLC By: /s/ Matthew Hobart --------------------------------------------- Matthew T. Hobart Managing Director and Chief Financial Officer Accepted and Agreed to as of the date first written above: CRITICAL PATH, INC. By: /s/ David Hayden -------------------------------- David H. Hayden Executive Chairman and Founder EX-15.1 7 f74608ex15-1.txt LETTER OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 15.1 August 3, 2001 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Commissioners: We are aware that our report dated August 2, 2001 on our review of interim financial information of Critical Path, Inc. (the "Company") as of and for the period ended June 30, 2001 and included in the Company's quarterly report on Form 10-Q for the quarter then ended is incorporated by reference in the Company's Registration Statements on Form S-8 (Nos. 333-63080, 333-51504, 333-44418, 333-36228, 333-95279, 333-95933, 333-40476, 333-87553) and on Form S-3 (Nos. 333-39958, 333-38006, 333-38000, 333-36382). Very truly yours, /s/ PricewaterhouseCoopers, LLP -----END PRIVACY-ENHANCED MESSAGE-----