FORM 10-K

-----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, LFue0LLPkQuMG2UU1GCm21dGoa5ieB4PuOPMqxpQ5gAWf8bhmZaPqMNSu9bvn9x1 YtZPVxKEpCUR9tzdhG+/Mg== 0000950149-02-000597.txt : 20020415 0000950149-02-000597.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950149-02-000597 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRITICAL PATH INC CENTRAL INDEX KEY: 0001060801 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 911788300 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25331 FILM NUMBER: 02595351 BUSINESS ADDRESS: STREET 1: 320 FIRST STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4158088800 MAIL ADDRESS: STREET 1: 320 FIRST STREET CITY: SAN FRNACISCO STATE: CA ZIP: 94105 10-K 1 f80193e10-k.htm FORM 10-K FORM 10-K

________________________________________________________________________________

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


(Mark One)
x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended: December 31, 2001
OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 000-25331

CRITICAL PATH, INC.

(Exact name of Registrant as specified in its charter)


California (State or other jurisdiction of incorporation or organization)		911788300 (I.R.S. Employer Identification Number)

350, The Embarcadero San Francisco, California (address of principal executive offices)		94105 (zip code)

Registrant’s telephone number, including area code: (415) 541-2500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, Series C

Participating Preferred Stock Purchase Rights

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $185,776,193 as of March 25, 2002, based on the closing price of the Common Stock as reported on the Nasdaq National Market for that date. There were 77,406,747 shares of the Registrant’s Common Stock issued and outstanding on March 25, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10 (as to Section 16(a) Beneficial Ownership Reporting Compliance), 11, 12 and 13 of Part III incorporate by reference information from Critical Path, Inc.’s definitive Proxy Statement, to be filed with the Securities and Exchange Commission, in connection with the solicitation of proxies for the 2002 Annual Meeting of Shareholders scheduled to be held on June 5, 2002.

CRITICAL PATH, INC.

INDEX


		Page

PART I
Item 1.	Business		3
Item 2.	Properties		16
Item 3.	Legal		16
Item 4.	Submission of Matters to a Vote of Security Holders		18
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		19
Item 6	Selected Financial Data		20
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		52
Item 8.	Financial Statements and Supplemental Data		53
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		55
PART III
Item 10.	Directors and Executive Officers of the Registrant		55
Item 11.	Executive Compensation		57
Item 12.	Security Ownership of Certain Beneficial Owners and Management		57
Item 13.	Certain Relationships and Related Party Transactions		57
PART IV
Item 14.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		58

PART I

Item 1. Business

This Annual Report and the following disclosure contain forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended and in effect from time to time. The words “anticipates,” “expects,” “intends,” “plans,” “believes,” “seek,” and “estimate” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements regarding our future strategic, operational and financial plans, anticipated or projected revenues, expenses and operational growth, markets and potential customers for our products and services, plans related to sales strategies and global sales efforts, the anticipated benefits of our relationships with strategic partners, growth of our competition, our ability to compete, investments in product development, the adequacy of our current facilities and our ability to obtain additional space, our litigation strategy, use of future earnings, the feature, benefits and performance of our current and future products and services, plans to reduce operating costs through continued expense reduction, anticipated effects of restructuring and retirement of debt, and our belief as to our ability to successfully emerge from the restructuring and refocusing of our operations, are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, difficulties of forecasting future results due to our limited operating history, failure to meet sales and revenue forecasts, evolving business strategy and the emerging nature of the market for our products and services, finalization of pending litigation and the settlement of the SEC investigation, turnover within and integration of senior management, board of directors members and other key personnel, difficulties in our strategic plans to exit certain products and services offerings, failure to expand our sales and marketing activities, potential difficulties associated with strategic relationships, investments and uncollected bills, general economic conditions in markets in which the Company does business, risks associated with our international operations, foreign currency fluctuations, unplanned system interruptions and capacity constraints, software defects, and 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 the 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.

All references to “Critical Path,” “we,” “our,” or the “Company” mean Critical Path, Inc. and its subsidiaries, except where it is clear from the context that such terms means only the parent company and excludes subsidiaries.

This Annual Report on Form 10-K includes numerous trademarks and registered trademarks of Critical Path. Products or service names of other companies mentioned in this Annual Report on Form 10-K may be trademarks or registered trademarks of their respective owners.

Company Overview

Critical Path, Inc., a global leader in Internet communications, delivers software and services that are designed to maximize the value of Internet communications. We provide messaging and collaboration solutions — from wireless, secure and unified messaging to basic email and personal information management — as well as identity management solutions that simplify user profile management and strengthen information security. The standards-based Critical Path Communications Platform^TM, built to perform reliably at the scale of public networks, delivers the industry’s lowest total cost of ownership for messaging solutions, as noted by industry experts, and lays a solid foundation for next-generation communications services. As of December 31, 2001, our customers include more than 700 enterprises, 180 carriers and service providers, eight

national postal authorities and 40 government agencies. Critical Path is headquartered in San Francisco, with offices throughout North America, Europe, Asia and Latin America.

We were incorporated as a California corporation in 1997. Our principal executive offices are located at 350, The Embarcadero, San Francisco, California 94105-1204. Our telephone number is (415) 541-2500 and our website is located at www.cp.net. The information contained in our website does not form any part of this Annual Report on Form 10-K.

Recent Developments

Financing Transaction. In November 2001, the Company announced that it had entered into a financing transaction with a group of investors that resulted in gross cash proceeds to the Company of approximately $30 million as well as the retirement of $65 million in face value of our 5 3/4% Convertible Subordinated Notes. In connection with this transaction, the Company issued and sold four million shares of convertible preferred stock (convertible into approximately 52.4 million shares of our common stock) and warrants to purchase 2.5 million shares of our common stock. The financing transaction was led by General Atlantic Partners LLC and its affiliates, and also included Cheung Kong Limited and affiliates, Hutchison Whampoa Limited and affiliates, and Vectis Group LLC and affiliates. In connection with this financing, a representative of General Atlantic Partners, as well as an additional independent director, also joined the Board of Directors.

Management Changes. Throughout 2001, we underwent several series of changes in our management, including the replacement of virtually all of the senior management of the Company in the first half of 2001. In May 2001, after joining the Board, William E. McGlashan, Jr. was appointed Interim President and Chief Operating Officer. In August 2001, Mr. McGlashan was named Interim Chief Executive Officer and later in the year he accepted the appointment as Chief Executive Officer and Vice Chairman of the Board. The Company also added a number of senior executive officers between April and September 2001 replacing the executives who departed during that period. Specifically, Laureen DeBuono joined the Company as Interim Chief Financial Officer in September 2001 and Pierre Van Beneden joined the Company as President in October 2001. In January 2002, Ms. DeBuono was named Executive Vice President and Chief Financial Officer.

Strategic and Operational Restructuring. In April 2001, the Company announced a broad strategic restructuring initiative that involved organizing the Company’s product and service offerings around a group of core communication solutions and an operational restructuring effort related to its business infrastructure and overhead. The Company implemented an aggressive expense management program designed to further reduce operating costs, including the divestiture of many non-core products, a significant reduction in headcount, the closing of numerous facilities around the world and the termination of consulting and other service contracts. The Company incurred significant charges related to the restructuring including employee severance and benefits payments associated with terminations and costs associated with the buy out of existing property and equipment leases. As a result of those strategic and operational initiatives, the Company expects to reduce future quarterly costs, excluding special charges, by nearly $30.0 million as compared to the first quarter of 2001.

Class Action and Shareholder Derivative Litigation. 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, in the United States District Court for the Northern District of California. Additionally, beginning on February 5, 2001, we were named as a nominal defendant in a number of derivative actions, purportedly brought on our behalf, filed in the Superior Court of the State of California. In November 2001, the Company announced that it had reached an agreement in principle to settle these cases. In February 2002, the Court gave preliminary approval to the settlement of the class action litigation. The Court also set the final hearing date for approval of the Court of the settlement agreement for May 23, 2002.

SEC Investigation. In February 2001, the Securities and Exchange Commission issued a formal order of investigation of our company and certain unidentified individuals associated with us with respect to non-specified accounting matters, financial reports, other public disclosures and trading activity in our securities. The Company fully cooperated with the SEC in its investigation. The SEC investigation was concluded as

against the Company in January 2002 with no imposition of fines or penalties against the Company. The Company consented, without admitting or denying liability, to an administrative order stating that the Company violated certain non-fraud provisions of the federal securities laws and to a cease and desist order. We understand that the investigation with respect to former officers and directors of the Company is continuing. The Company is fully cooperating with such investigation, however, the status of the investigation of the former officers and directors is not known at this time.

Critical Path’s Business

Market Overview

The growth and pervasiveness of global public networks (the Internet and wireless networks) has fueled dramatic growth in electronic communications. Experts predict that soon more people will access the Internet with a wireless device than with wireline personal computers. Already, industry experts believe that 400 million people use cellular phones and 300 million people are online. Those same experts estimate that in 2002, more than one third of the global document delivery market will be moved electronically. As a result, today’s corporations and service providers face an increasing number of technological challenges, as well as new business imperatives, that demand a new breed of communications solutions.

In today’s market, communications solutions for corporations and service providers must serve a much larger user base than in the past. In the corporate environment, employees are receiving company communications in electronic form, and Internet messaging services are increasingly used to streamline communications with customers, partners and suppliers. Furthermore, service providers are expanding beyond consumer markets as an increasing number of small- to medium-sized businesses turn to Internet Service Providers (ISPs), telecommunications companies and mobile operators for turn-key communications solutions. Today’s communications solutions must not only meet the varying needs of different types of users, they must also provide efficient ways for organizations to manage growing and diverse user populations.

In the evolving area of Internet communication, corporations and service providers must provide richer communications applications. As the complexity of digital media expands, users need not only basic email, but services such as secure messaging for online business transactions, wireless messaging for mobile commerce, and multimedia messaging for new media content and entertainment. Communications solutions must support a wide array of content from text messages to encrypted and digitally signed documents, to audio, video and other multimedia.

Today’s users demand ubiquitous access to communications services. Users expect to access email and other communications services through multiple devices — from laptops and cellular phones to wireless handhelds, palm devices and pagers. As a result, communications services must support a growing range of devices, protocols and technologies.

Along with today’s technological challenges, corporations and service providers also face new business imperatives. To stay competitive, mobile operators, telecommunications companies and other service providers must expand and differentiate their service offerings, moving beyond basic connectivity services and email to offer value-added services that increase average revenue per user and reduce churn. Furthermore, corporations must support a growing number of e-business initiatives and deploy innovative Web services that make information and communications readily accessible to employees, partners and customers around the globe. Our solutions allow corporations and service providers to provide these communications services to their employees, customers and partners.

Critical Path’s Solutions

Critical Path’s Communications Platform provides a complete range of solutions that help corporations and service providers tackle technological challenges and respond to new business imperatives and opportunities. Through the Critical Path Communications Platform, corporations and service providers can deliver a broad spectrum of wireless and wireline communications services — from mobile, secure and unified messaging to basic email and personal information management. In addition, Critical Path’s platform provides

a solid infrastructure for user management, streamlining the costs and complexities of deploying communications services, providing security and enabling the customization of services at the end-user level.

Our platform allows us to provide Messaging and Collaboration solutions, as well as Identity Management solutions.

Messaging and Collaboration Solutions

Core Messaging

With more than 145 million licensed electronic mailboxes as of December 31, 2001, our Core Messaging solution provides highly reliable email services that users can access via the Web, with standards-based email clients and with wireless devices. For corporations, the Core Messaging solution presents a cost-effective alternative to groupware, providing only the functionality that typical users need. For service providers, Core Messaging provides essential email services at the industry rated lowest cost of ownership and very large scalability.

Personal Information Management (PIM)

Critical Path’s PIM solution provides users with a personal calendar, personal address book, task lists and notes. Users can access these services via the Web and wireless devices and also use them offline with Personal Digital Assistant and PIM clients. With Critical Path’s PIM solution, service providers can easily offer value-added services in addition to email.

Business Communications Suite

Most users today need messaging and collaborative applications without the added functionality and expense of full groupware solutions. Critical Path’s Business Communications Suite combines our Core Messaging and PIM solutions to provide users with business email, calendaring, personal address books and secure online file storage in one suite. Built-in features enhance collaboration and allow users to share schedules, personal contacts and files with other users. In addition, the Business Communications Suite supports Web, wireless, voice and client-based access. The Suite integrates easily with third-party applications and existing infrastructure and helps minimize corporations’ costs by eliminating costly groupware where those features are not required. The Suite is also ideal for service providers seeking to penetrate the lucrative small- to medium-sized business market with a cost-effective service offering.

Secure Messaging

Critical Path’s Secure Messaging solution provides a secure way to send and receive messages and files through the Internet. It enables secure and auditable delivery, online file collaboration and Public Key Infrastructure (PKI)-enabled messaging that allows users to digitally sign documents and conduct legally binding online transactions. For corporations, Secure Messaging provides a cost-effective and efficient alternative to physical mail, courier services and paper contracts, and for service providers, it offers yet another way to offer value-added services that generate more revenue per user.

Mobile Messaging

Our Mobile Messaging enables Short Message Services (SMS) for more than 44 telecommunications carriers around the globe. Our Mobile Messaging solution, with an interface that bridges the gap between SMS and Internet email, enables users to send and receive simple text messages via any SMS-enabled device. Additionally, our Mobile Messaging solution supports the emerging multimedia messaging market. Critical Path provides message album and smart message filtering to protect, store, access and route complex file types, combined with strategic partners’ solutions that provide [MMSC]s and media converter technology to provide a complete multimedia messaging solution that enables users to send and receive rich, integrated content (including digital video, audio, color images and animations) over wireless devices.

Unified Communications

Critical Path helps service providers capitalize on this very large market with a Unified Communications solution that offers centralized access to voice, fax and email messages. Our Core Messaging solution provides the central message store, while partner technologies are readily integrated to enable voice and fax capabilities.

Identity Management Solutions

Core Directory

Critical Path’s Core Directory solution provides a central repository for user profile data. Consisting of a standard Lightweight Directory Access Protocol, or LDAP, directory with superior fault tolerance and business continuity assurance, Critical Path’s Core Directory solution provides single-point user management, simplifying user authentication and administration and laying a solid foundation for extranet, e-commerce and distributed application services.

Unified User Management

Critical Path’s Unified User Management solution enables organizations to unify user profiles across distributed applications, realizing an immediate return on investment through the elimination of manual, redundant and scattered user administration tasks. Accurate and consistent user profiles are shared by heterogeneous systems, strengthening information security, improving information access and streamlining services provisioning. The Unified User Management solution eliminates information silos and is essential for next-generation, directory-enabled services, such as Web services, single sign-on and access management.

Single Sign-On

Critical Path’s directory and meta-directory technology is combined with strategic partner solutions to provide centralized access management, Web single sign-on, policy-based delegated administration and user self-service.

Public Key Infrastructure (PKI)

Critical Path’s PKI solution facilitates successful PKI deployments by leveraging the reliability, scalability and high performance of Critical Path’s directory and meta-directory technology. The CP^TM Directory Server stores user digital certificates, enabling fast search access and supporting user authentication, while the CP^TM Meta-Directory Server keeps user profiles up-to-date and ensures the data consistency and accuracy necessary for secure communications.

The Critical Path Communications Platform

All of the components of our Messaging and Collaboration and Identity Management solutions are delivered through a common Internet communications platform. The Critical Path Communications Platform is designed for expanding Internet communications, offering:

• Support for 24 hour, 7 day a week high-availability environments.

• Scalability designed to adjust from just a few thousand users to tens of millions of users.

• Standards-based technology, enabling rapid deployment of communications services.

• The industry rated lowest total cost of ownership.

With its foundation centered on our messaging and directory technology, the Critical Path Communications Platform consists of three product layers: Access, Services and Management.

The Access Layer. The Access layer provides universal wireless/ wireline access to communications services, making services accessible from PCs, telephones and mobile devices, on Web browsers and standard clients. The Access layer includes:

CP^TM Presentation Server

The CP Presentation Server is a standards-based, carrier-class application server that enables the delivery of tightly integrated collaborative applications into a highly customized and personalized workspace. The CP Presentation Server provides single sign-on, an integrated user interface, Web, wireless and voice access, and out-of-the-box integration with Critical Path servers. Additionally, the CP Presentation Server enables the integration of third-party applications, providing a common interface to virtually any communications service that can be presented on a Web (HTML) or wireless (WML) device.

CP^TM SMS Access Server

The CP SMS Access Server provides a network-independent, feature-rich gateway between SMS (Short Message Service) and the Internet mail protocol, SMTP (Simple Mail Transfer Protocol), bridging the gap between numerous applications and wireless technologies.

CP^TM Digital Certification Services

CP^TM Digital Certification Services provide the added security and functionality of client-side digital signatures, encryption and digital receipts to messages and documents transferred through the CP Messaging Server and CP Registered Mail Server.

The Services Layer. The Services layer powers a broad range of communications services, including email, personal information management, mobile messaging, multimedia messaging, secure messaging and unified communications.

CP^TM Messaging Server

At the core of the Services layer is the CP Messaging Server — a scalable and robust messaging solution, enabling standards-based email (Web, SMTP, POP3 and IMAP4). The CP Messaging Server offers high levels of performance, reliability and scalability.

CP^TM Calendar Server

The CP Calendar Server is a powerful Web-based solution that fully integrates personal and group calendaring. Ease of use and a diverse range of features make the CP Calendar Server a valuable solution for both corporations and service providers who want to offer value-added calendaring services to generate more revenue per user.

CP^TM Personal Address Book Server

The CP^TM Personal Address Book Server stores contact information in a central location, giving end users always available access to personal address books from any device or application. A standards-based, Web- and wireless-accessible product, the CP Personal Address Book Server allows end users to easily access important phone numbers or email addresses from a Web browser, PC client or mobile phone.

CP^TM Registered Mail Server

The CP Registered Mail Server enables users to efficiently send and receive documents through the Internet without compromising security. End-to-end encryption and real-time tracking information protect messages and file deliveries.

The Management Layer. The Management layer unifies user profiles, simplifying user management, enabling customization at the user level and increasing security across communications services.

CP^TM Directory Server

The CP Directory Server provides a central repository for user profile information and other data shared by multiple systems and applications. This state-of-the-art LDAP directory is currently deployed in primarily mission-critical environments, including corporate intranets/ extranets, online banking services, Internet postal services and government services.

CP^TM Meta-Directory Server

The CP Meta-Directory Server enables more effective communication and streamlines business processes by ensuring that user profiles throughout an organization are both consistent and current, and by allowing administrators to maintain strict access controls for sensitive information. The CP Meta-Directory Server automatically propagates data from one application, database or directory to others across the entire enterprise, and it automates the tedious tasks of transferring data from one system to another. The CP Meta-Directory Server technology integrates multiple data sources into an LDAP directory, such as the CP Directory Server, and a powerful set of connectors exchange the information between the CP Meta-Directory Server and various data stores.

Target Markets, Customers and Strategic Partners

Customers and Target Markets

Our customers and target customers are corporate enterprises, wireless and telecommunications providers, broadband and service providers, governments and postal authority markets.

• Corporate Enterprises. Communications infrastructure products and services are an increasingly important concern for businesses. Enterprises need to control costs of messaging in the face of tightening budgets and expanding message volume. With the globalization of the workforce, enterprises have become increasingly reliant upon digital communication. With such globalization, critical business information is leveraged across an enterprise in eBusiness applications and the need for reliable messaging and security access controls expands significantly. Additionally, such enterprises require identity management solutions to ensure security and to enable portals, extranets and Web-based services.

• Wireless and Telecommunications Providers. Wireless users require access to the Internet and the ability to send and receive messages through chosen platforms and devices. Wireless and telecommunications providers are challenged with meeting ever evolving customer needs, decreasing voice revenues and heightened global competition. We provide the necessary access and messaging capability to provide wireless service providers with a low total cost of ownership, increased scalability, improved reliability and an open, easily integrated standards based platform. Additionally, to increase the value of their own service, and to grow the value of and retain their customers, telecommunications providers often add our advanced Internet messaging solutions to their connectivity and data management offerings.

• Broadband and Service Providers. Broadband providers, such as cable, ISDN and DSL operators, face increasing messaging and identity management complexity as their businesses grow and evolve. Large bandwidth providers offer increased multimedia capabilities and services. These services require highly scalable and reliable infrastructure to handle the increasing user numbers and message volume for both individual message size and message quantity. Critical Path provides reliable and scalable messaging infrastructure to handle this growth. Additionally, broadband service providers’ (XSPs) basic connection services have become increasingly commoditized. XSPs are aggressively expanding value-added services, including wireless messaging, unified messaging and mobile commerce. Application service providers (ASPs) offer application hosting services and custom application development for corporate customers. Many ASPs offer email messaging as one of their core applications and can

take advantage of our outsourced offering and “brand-behind-the-brand” strategy to reduce costs and provide high-quality service.

• Governments and Postal Authorities. Governments and postal authorities are increasingly entering into digital services. Their challenges are to provide services at a national level that can support large volume, very large scale and complex applications. Postal authorities worldwide use our email solutions to provide country-wide “email for life” and our directory and meta-directory products to serve as central repositories of user profile information that provide security and access control over trusted third party services for hundreds of millions of postal customers. Government agencies use our directories to help identify users and the services they should be allowed to access. By leveraging our highly scalable directory products, countries are able to build eBusiness infrastructures that enable such authorities to reduce business costs, create new revenue streams, and deliver the trackability, security, and reliability needed for information exchange with national agencies.

Strategic Partners

A key element of Critical Path’s sales strategy is to expand distribution channels through strategic reseller or joint sales relationships. Our current strategic partners fall into two primary categories: i) telecommunications, Internet and wireless infrastructure service providers, and ii) Internet security and privilege management infrastructure partners. The following are examples of existing strategic relationships that we believe will position us to increase market presence and penetration:

• Telecommunications, Internet and Wireless Infrastructure Service Providers. Our technology supports one-way and two-way messaging services to millions of wireless devices and we are one of only a few companies able to provide end-users with the means to send and receive messages to and from mobile phones, pagers and other wireless devices. We have relationships with leading telecommunications and Internet infrastructure providers as a means to develop the growing market for messaging. We believe these relationships provide vital, value-added services that enable our strategic partners to retain customers, grow into new business areas, and increase revenue from their installed customer bases. Strategic partners include: Mediagate, Nokia Networks OY and Logica UK Limited, among others.

• Internet Security and Privilege Management Infrastructure Partners. Critical Path has established relationships with major public key infrastructure and Internet security vendors. Our InJoin Directory Server is included in several of our customers’ security solutions. Additionally, our InJoin Meta-Directory plays a growing role in large corporations’ efforts to develop comprehensive privilege management systems. By working with leading public key infrastructure, secure relationship management, and provisioning vendors as well as systems integrators that specialize in this area, we are expanding our channel of large corporations and enterprises. Strategic partners include Netegrity, Inc., EDS and Entrust Technologies Limited, among others.

Information regarding customers and sales by geographic area is included in Note 19 of Notes to the Consolidated Financial Statements — Product and Geographic Information.

Sales and Marketing

Sales Strategies

Direct Sales. In addition to our channel relationships, we maintain our own direct sales force to introduce prospective customers and partners to our products and services and to work in tandem with our business partners. Our worldwide direct sales team is organized in each of our key geographic regions around our target markets. Currently, we have sales staff located in domestic offices in San Francisco, Los Angeles, Austin, Chicago, Milwaukee, Boston, Pensacola, New York and other cities throughout the United States. Internationally we have members of our sales organization located in Australia, Brazil, Canada, France, Germany, Hong Kong, India, Ireland, Italy, Malaysia, Netherlands, Spain, Switzerland and the United Kingdom.

Channel Partner Sales. The Company embraces and integrates partners and alternative channels with the goal of gaining market presence and share in its target markets. Our flexible solutions are well suited for partner and channel execution. Critical Path teams with Global System Integrators (GSIs), Independent Software Vendors (ISVs), Original Equipment Manufacturers (OEMs) and Hardware vendors that have strong industry backgrounds and market presence in their respective markets and geographic regions. These partners include Nokia Networks OY, Logica UK Limited, Hewlett-Packard, Bull, Entrust Technologies Limited, EDS and Ernst & Young Cap Gemini. In addition, Critical Path maintains partner relationships to resell its products and services throughout most of Asia and Latin America.

Marketing Strategies

We are focused on industry marketing, media relations and public relations to educate our key markets about the business value of Internet communications, and to reinforce Critical Path’s reputation as a leading solutions provider. The Company intends to continue to focus on industry events, trade-show participation and solutions seminars to promote our brand presence and acquire customers. Additionally, joint programs with strategic partners promote focused offerings for specific market segments.

Competition

Because we have numerous Internet communications solutions and services, we are not aware of a single company that competes across all of our products and services. However, we encounter different competitors at each level of our solutions. For customers seeking messaging solutions, we compete with Sun Microsystems’ iPlanet division, OpenWave Systems, Inc., Mirapoint Inc., Oracle Corporation, Microsoft Corporation and IBM Corporation’s Lotus division. For secure delivery services, competitors include Tumbleweed Communications Corp., Slam Dunk Networks, Atabok Inc. and Zix it Corporation. In the identity management market, we encounter primarily Sun Microsystems’ iPlanet division, Microsoft and Novell Corporation in the enterprise/eBusiness directory category; and Sun Microsystems’ iPlanet division, Microsoft, Novell and Siemens Corporation are among our competitors in the meta-directory market. In the market for outsourced hosted email services, we compete with such corporations as EasyLink Services Corporation (formerly Mail.com), CommTouch Corporation, USA.net and other smaller application service providers offering hosted exchange services.

While these competitors and others exist in each of our individual product markets, we believe our complete solution of products and services serves as a competitive advantage, because our customers can easily integrate their infrastructure with our broad product line, selecting multiple products and services from Critical Path as their requirements demand.

We believe that competitive factors affecting the market for our Internet communications solutions include:

• Breadth of platform features and functionality;

• Ease of integration into customers’ existing systems;

• Scalability, reliability, performance and 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; and

• Total cost of ownership and operation.

The relative importance of each of these factors depends upon the specific customer environment. Although we believe that our products and services currently compete favorably with respect to such factors, we may not be able to maintain our competitive position against current and potential competitors.

We believe competition will increase as current competitors increase the sophistication of their offerings and as new participants enter the market. Many current and potential competitors have longer operating

histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do and may enter into strategic or commercial relationships with larger, more established and better-financed companies. Any delay in the development or introduction of products or services or updates, would also allow competitors additional time to improve their service or product offerings, and provide time for new competitors to develop Internet messaging infrastructure products and services and solicit prospective customers within our target markets. Increased competition could result in pricing pressures, reduced operating margins and loss of market share, any of which could cause our business to suffer.

Technology

CP Communications Platform

Our core expertise is in messaging and directory technology. This allows us to deliver highly scalable digital communications software, services and solutions with our Critical Path Communications Platform.

The CP Communications Platform is divided into three layers: Access, Services and Management. Each layer contains a number of server software components that together can provide a broad range of digital communications solutions like email, mobile messaging, personal information management, unified messaging, multimedia messaging and the integration necessary to enable and provision communications solutions to large populations of users in the corporate enterprise and the service provider.

All CP Communications Platform components are designed to support mission critical environments. Our high performance, scalable and reliable servers operate in installations ranging from hundreds of thousands to tens of millions of users. Our components are all designed to deliver custom solutions and thus include a range of tools including software development kits (SDKs). They can be used alone or together, in many combinations. They are often used with third party components and therefore are developed to support interoperability with many best of breed technologies. All of our Communications Platform components operate on Sun Microsystems’ Solaris and Microsoft’s Windows NT/2000 operating systems and a subset of our components also operate on Hewlett Packard HPUX, IBM AIX and Linux operating systems.

Access Layer

Our Access Layer is anchored by our CP Presentation Server, a powerful application framework that is integrated with all CP Platform components. The CP Presentation Server allows for the creation of customized, personalized application user interfaces to Communications Platform components and third party technologies using a powerful SDK. It enables mixed mode communications, so that services can be accessed from a multitude of devices ranging from the desktop, laptop, PDA, mobile handset or telephone using text, voice, and video. The CP Presentation Server is based on Java 2 Enterprise Edition (J2EE) and Java Server Pages (JSP) technologies, and supports Hypertext Markup Language (HTML), Wireless Markup Language (WML), VoiceXML and a range of other interface markup languages.

Alongside our CP Presentation Server is our CP Short Message Service Access Server, a powerful application framework that enables the development of applications which send Short Message Service (SMS) messages. CP SMS Access Server includes an application development SDK (SMASI) that applications can use to drive SMS traffic to a number of SMS-C’s. To date, support is provided for a number of SMS-Cs through protocols like SMPP. The CP SMS Access Server also includes WAP-Push support to enable next generation wireless applications like Multimedia Messaging Service (MMS).

Services Layer

Our Services Layer is anchored by our CP Messaging Server, a highly scalable, standards-based, messaging server. The CP Messaging Server enables services from Core Email to Unified Messaging and next generation Multimedia Messaging Services through its powerful native IMAP mail store and SMTP relay. It has a scalable architecture, allowing single or multiple domains to be split over multiple servers, geographically distributed and setup as clusters. It also has support for security features including secure-socket-layer (SSL), anti-virus and anti-spam.

Alongside our CP Messaging Server, our CP Personal Address Book Server, CP Calendar Server, CP File Storage Server and CP Registered Mail Server provide access to personal and group information such as contacts, calendars, files and secure, trackable messages. These servers can be combined to provide a Personal Information Management Suite, a Business Messaging Suite, an Electronic Bill Presentment Service, a Multimedia Messaging Service and many other solutions, reliably and on a large scale.

Management Layer

Our Management Layer is anchored by our CP Meta Directory Server and CP Directory Server. Our CP Meta Directory software enables user/ resource provisioning, keeping information consistent between disparate messaging and business systems, and is designed to improve security, data integrity and reduce overall administration cost. At the core of our technology is the join engine, with plug-ins that connect to various business systems, including CP Platform components. CP Meta Directory includes wide support for connected systems including SQL Server, Sybase, Oracle, Microsoft Exchange, Lotus Notes, Peoplesoft, Siebel and mainframe applications. It also includes wide interoperability with directory software including CP Directory Server, Microsoft Active Directory, Novell eDirectory and iPlanet Directory Server. The CP Meta Directory includes a powerful SDK that enables the development of custom connectors using Perl, Java and XML.

The CP Directory Server is useful in providing a common store of user or resource information that can be accessed via standard LDAP and X.500 protocols. The CP Directory Server can be used to store user profiles, digital certificates from PKI, PKI software and eBusiness information. The CP Directory Server is a distributed database, meaning that it can be partitioned both logically and physically, in order to provide improved performance and ease of replication and updates. Both CP Directory Server and CP Meta Directory Server incorporate security technology like SSL for secure transport and authentication.

Alongside CP Directory and CP Meta Directory, our CP System Console provides systems management functionality to the CP Platform. This includes system start/stop, systems monitoring, and configuration. CP Systems Console uses Sun JDMK technology and is designed to be interoperable with SNMP standards-based systems like Hewlett Packard OpenView.

Hosted Messaging

We also provide a hosted messaging service that offers standards-based email service for Internet service providers, telecommunications providers, Web hosting companies, Web portals and corporate enterprises providing accounts to their end-users for activities such as trading securities, shopping or participating in online communities. We have developed proprietary load-balancing and messaging software that uses Oracle databases for account provisioning and management. Our hosted messaging service is comprised of multiple groups of servers and routers acting as a single, virtual point of contact to customers for messaging services. Our hosted messaging service hardware and software consists of Sun Microsystems servers running Solaris, Cisco routers, EMC redundant storage arrays, Veritas software and rack-mounted Intel processor-based servers. All aspects of our hosted messaging service are deployed in a redundant configuration with the goal that if any process or system goes down, another will be available to handle customer traffic seamlessly. This behavior is called “transparent failover” and is designed to increase the availability of messaging services to the customer. Our hosted messaging service also includes a dynamic load-balancing system that acts as proxy servers for firewall safety. The load balancers are configured in parallel so that if one goes down, the load is transferred to the remaining systems. We have created a proprietary account provisioning protocol for account creation and maintenance. This enables account transitioning from other services or legacy systems to be bulk-loaded, tested, replicated and deployed on our service automatically. This protocol addresses a critical time to market issue by enabling organizations to quickly transition to the new standards-based email service with minimal down-time and degradation to their existing internal systems. In addition, it can be used by customers and partners to facilitate automatic account sign-ups from web sites, typically in less than three minutes.

Data Centers. Our hardware for operating production services currently is located throughout in two data centers. With multiple high-speed connections to diverse backbone providers and a robust network

architecture, we aim to eliminate single points of failure, thus reducing the likelihood that our customers will suffer downtime as a result of network outages. Our backbone architecture and interconnect strategy consists of multiple clear channel OC-3 and DS-3 circuits. We currently have bilateral peering arrangements in place with over 35 networks. Our data centers feature redundant systems for power, raised floors, HVAC temperature control systems, seismically braced racks, fire protection, and physical security and surveillance 24 hours a day, seven days a week.

Security. We have a diverse set of firewall solutions that are specifically tailored for each of our hosted services, reducing the likelihood of security breaches. To enhance security for our network, our staff members monitor the network hardware 24 hours a day, seven days a week. Suspicious activity is reported and investigated immediately.

Spam and Viruses. Our messaging services include Spam Blocking to guard against unsolicited commercial email and Virus Scanning to prevent the spread of Internet viruses and worms. Our message filtering technology has been enhanced with partnerships with Brightmail and Symantec, allowing our hosted messaging customers to benefit from new spam and virus filters as they are created in response to attacks worldwide.

Research and Development

Our products and services are mostly based on systems which were internally developed or acquired through acquisitions. We must continually improve these systems to accommodate the level of use of our products and services. In addition, we may add new features and functionality to our products and services that could result in the need to develop, license or integrate additional technologies. Our inability to add additional software and hardware or to upgrade our technology or network infrastructure could have adverse consequences, which include service interruptions, impaired quality of the users’ experience and the diversion of development resources. Our failure to provide new features or functionality to our products and services also could result in these consequences. We may not be able to effectively upgrade and expand our systems in a timely manner or to integrate smoothly any newly developed or purchased technologies with our existing systems. These difficulties could harm or limit our ability to improve our business.

We invested $7.7 million in research and development in 1999, $31.0 million in 2000 and $30.7 million in 2001. Additionally, we incurred $3.7 million of in-process research and development expense in 2000 related to technologies acquired through two of our acquisitions. We anticipate that we will continue to devote significant resources to product development in the future as we add new features and functionality to our products and services. The market in which we compete is characterized by rapidly changing technology, evolving industry standards, frequent new service and product announcements, introductions and enhancements and changing customer demands. Accordingly, our future success will depend on our ability to adapt to rapidly changing technologies, to adapt our services to evolving industry standards and to continually improve the performance, features and reliability of our products and services. The failure to adapt to such changes would harm our business. In addition, the widespread adoption of new Internet, networking or telecommunications technologies or other technological changes could require us to undertake substantial expenditures to modify or adapt our services or infrastructure.

Intellectual Property

We regard the protection of our trade secrets, patents, patent applications, copyrights and trademarks as critical to our success. We rely on a combination of statute, common law and contractual restrictions to establish and protect our proprietary rights and developed intellectual property in our product and service offerings. We have entered into proprietary information and invention assignment agreements with our employees, contractors and consultants, and nondisclosure agreements with customers, partners and third parties to whom we disclose confidential and proprietary information. Despite our efforts in this regard, former employees or third parties may infringe or misappropriate our proprietary rights which could harm our business. The validity, enforceability and scope of protection of our intellectual property can be tested and in some areas is still evolving.

We have registered and/or used as a trademark “Critical Path” in the United States. We have also registered and used “Critical Path” in a variety of foreign countries where we have operations or do business. We plan to continue to enforce that mark and other trademarks in both the United States and internationally, although protection of the marks cannot be assured.

We license our software and proprietary service offerings and despite all efforts to protect that property and ensure the quality of our brand and patented or copyrighted products or processes, current or future licensees could take actions that might harm the value of our intellectual property portfolio, our brand or reputation.

We have been involved in claims by third parties of patent, copyright and trademark infringement against us in the past. Any claim like this, regardless of the merits, could be time consuming to defend, result in costly and distracting litigation, cause delays in rollouts of services, products or updates or require us to enter into licensing agreements with third parties. Such licensing agreements may include payment of large royalties or may not be available to us on commercially reasonable terms. Additionally, enforcing our intellectual property rights could entail significant expense, with such costs also potentially harming our results of operations.

Employees

At December 31, 2001, we had 562 employees, including 192 in operations, 131 in sales and marketing, 148 in research and development and 91 in general corporate and administration. Our future success depends, in significant part, upon the continued service of our key technical and senior management personnel and our continuing ability to attract and retain highly qualified and experienced technical, sales and managerial personnel. Competition for such personnel is intense, and we cannot guarantee that we can retain our key technical and managerial employees or that we will be able to attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.

Government Regulation

Although there are currently a limited number of laws and regulations directly applicable to the Internet and the operation of commercial messaging services, it is probable that laws and regulations will continue to be adopted with respect to the Internet or commercial email services covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust and characteristics and quality of products and services. Further, the growth and development of the market for online email may prompt calls for more stringent consumer and copyright protection and privacy laws that may impose additional burdens on those companies conducting business online. The adoption of any additional laws or regulations may impair the growth of the Internet or commercial online services, which could, in turn, decrease the demand for our products and services and increase our cost of doing business, or otherwise harm our business, operating results and financial condition. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any such new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the Internet could harm our business, operating results and financial condition.

Certain of our service offerings include operations subject to the Digital Millenium Copyright Act of 1998. The Company has expended resources and implemented processes and controls in order to remain in compliance with DMCA, but there can be no assurance that our efforts will be sufficient and/ or new legislation and case law will not affect the operation of and liability associated with a portion of our services.

assist them in remaining in compliance with this evolving area of regulation. In particular the Gramm-Leach-Blilely Act contains restrictions with respect to the use and protection of banking records for end-users whose information may pass through our system.

Item 2. Properties

Our current corporate headquarters and primary operations and development facilities are located in two office buildings in San Francisco, California. We have several leases that relate to our San Francisco locations, including one that expires on March 31, 2002, another that expires on June 30, 2002 and the lease for our new office space that expires on March 25, 2012. The Company took occupancy of a total of 45,467 square feet of that new leased space on March 25, 2002. We are in the process of consolidating all of our San Francisco-based operations into our new headquarters. In addition to this principal location, we currently occupy a 24,300 square foot building in Dublin, Ireland under a lease expiring on July 14, 2014. We lease additional facilities in Brazil, Canada, France, Germany, Ireland, Italy, Malaysia, Spain, Sweden, Switzerland, the United Kingdom and several cities throughout the United States. We continually evaluate the adequacy of our existing facilities, and we believe that the current facilities will be suitable for our needs for at least the next 12 months, or that additional space will be available on commercially reasonable terms, if necessary.

Item 3. Legal

We are a party to lawsuits in the normal course of our business. Litigation in general, and securities and intellectual property litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Other than as described below, we are not a party to any other material legal proceedings.

Securities Class Actions in Northern District of California. Beginning on February 2, 2001, a number of securities class action complaints were filed against the Company and certain of our current and former officers and directors in the United States District Court for the Northern District of California. The complaints were filed as purported class actions by individuals who allege that they purchased the Company’s common stock during a purported class period and sought an unspecified amount in damages; the alleged class periods vary among the complaints. The complaints were consolidated into a single action which alleged that, during the period from September 26, 2000 to February 1, 2001, the Company and certain of its former officers made false or misleading statements of material fact about the Company’s financial statements, including its revenues, revenue recognition policies, business operations and prospects for the year 2000 and beyond. In addition, on September 24, 2001, certain former shareholders of PeerLogic, Inc. filed a putative class action in the Superior Court of the State of California alleging that Critical Path breached representations and warranties made in connection with the acquisition of PeerLogic. The complaint sought an unspecified amount in damages. We subsequently removed the PeerLogic action to the United States District Court for the Northern District of California. On November 8, 2001, Critical Path announced that it had reached an agreement in principle to settle these cases. In February 2002, the Court gave preliminary approval to the settlement of the class action litigation. The Court also set the hearing date for final approval of the settlement agreement for May 23, 2002.

Derivative Actions in Northern District of California. Beginning on February 5, 2001, Critical Path was named as a nominal defendant in a number of derivative actions, purportedly brought on the Company’s 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 alleged that certain of Critical Path’s current and former officers and directors breached their fiduciary duties to the Company, engaged in abuses of their control of the Company, were unjustly enriched by their sales of the Company’s common stock, engaged in insider trading in violation of California law or published false financial information in violation of California law. The plaintiffs sought unspecified damages on the Company’s behalf from each of the defendants. Because of the nature of derivative litigation, any recovery in the action would inure to the Company’s benefit. Contemporaneously with settlement of the securities class action described above, an agreement in principle has been reached to settle the derivative action.

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 of the Company’s current and former officers and directors associated with the Company with respect to non-specified accounting matters, financial reports, other public disclosures and trading activity in the Company’s securities. The Company fully cooperated with the SEC in its investigation. The SEC’s investigation was concluded against the Company in January 2002 with no imposition of fines or penalties against the Company. The Company consented, without admitting or denying liability, to an administrative order that the Company violated certain non-fraud provisions of the federal securities laws and to a cease and desist order.

Securities Class Action in Southern District of New York. Beginning on July 18, 2001, a number of securities class action complaints were filed against the Company, and certain of our current and former officers and directors and underwriters connected with our initial public offering of common stock in the United States District Court for the Southern District of New York. The purported class action complaints were filed by individuals who allege that they purchased common stock at the initial public offering of common stock between March 26, 1999 and December 6, 2000. The complaints allege generally that the Prospectus under which such securities were sold contained false and misleading statements with respect to discounts and commissions received by the underwriters. The complaints have been consolidated into a single action. The complaints seek an unspecified amount in damages on behalf of persons who purchased Critical Path stock during the specified period.

Breach of Contract Action. On January 18, 2001, we entered into a non-exclusive licensing agreement with Comverse Network Systems, Inc. (“Comverse”) with respect to our CP Messaging and Directory software, with rights of distribution to Comverse’s customers. On October 9, 2001, we notified Comverse that we were terminating the Software License Agreement based on our belief that Comverse materially breached the contract. On or about October 15, 2001, Comverse filed a complaint in the United States District Court for the Southern District of New York against the Company, challenging the Company’s right to terminate the agreement. Comverse asserted causes of action for specific performance, requesting that the Company be required to perform and to recognize Comverse’s alleged rights under the Agreement, and injunctive relief, prohibiting the Company from taking action to suspend, terminate or interfere with Comverse’s alleged rights, remedies or privileges. Concurrently with the filing of the Complaint, Comverse also filed a Demand for Arbitration with the American Arbitration Association, seeking a determination that Critical Path did not have the right to terminate the agreement. Comverse does not seek money damages in either the Complaint or the Demand for Arbitration. In December 2001, the District Court issued a preliminary injunction prohibiting us from taking various actions relative to the termination, including demanding the return of the licensed software or publicly indicating that Comverse’s rights under the license agreement were terminated. The Company has appealed the preliminary injunction and has also succeeded in having the arbitration moved to San Francisco. No date has yet been set for the arbitration or hearing of the appeal. While it is difficult to determine what the eventual outcome of this matter will be, the Company intends to defend its rights vigorously.

Securities Class Action in Northern District of California. Beginning on February 1, 2002, a number of securities class action complaints were filed against the Company, and certain of our former officers. The purported class action complaints allege that during a period from April 21, 2000 through September 25, 2000 and in same cases April 31 (sic), 2000 through October 19, 2000, the Company reported materially misleading financial statements and made materially misleading statements about the Company’s ability to collect on recognized revenue from our customers based on the current economic climate and uncertainty about continued viability of many Internet based businesses as well as in recognition of changes in accounting regulations. The suit further alleges that the Company knew these issues would severely impair future revenue growth and the ability to make future stock sales and extract future bonuses tied to the Company’s performance. The complaints seek an unspecified amount in damages. The Company believes that these allegations are without merit and intends to vigorously defend such suits.

The continued defense of the lawsuits could also result in the diversion of management’s time and attention away from business operations, which could harm the Company’s business. Although some of the named lawsuits are in the final stages of settlement, there can be no assurance that the applicable courts will accept the final settlement as executed, or at all. Negative developments with respect to the settlements or the lawsuits 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 payments could seriously harm the Company’s financial condition.

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

None.

PART II


Item 5.	*Market for Registrant’s Common Equity and Related Stockholder Matters*

Our common stock has been quoted on the Nasdaq National Market under the symbol “CPTH” since March 29, 1999. The following table presents, for the periods indicated, the high and low sales prices per share of our common stock as reported on the Nasdaq National Market.


		High		Low

Year Ended December 31, 2000
	First Quarter (from January 1, 2000 to March 31, 2000)	$	119.50	$	60.00
	Second Quarter (from April 1, 2000 to June 30, 2000)	$	87.00	$	26.00
	Third Quarter (from July 1, 2000 to September 30, 2000)	$	79.38	$	46.13
	Fourth Quarter (from October 1, 2000 to December 31, 2000)	$	59.75	$	19.38

Year Ended December 31, 2001
	First Quarter (from January 1, 2001 to March 31, 2001)	$	26.13	$	1.56
	Second Quarter (from April 1, 2001 to June 30, 2001)	$	2.00	$	0.84
	Third Quarter (from July 1, 2001 to September 30, 2001)	$	1.16	$	0.26
	Fourth Quarter (from October 1, 2001 to December 31, 2001)	$	2.83	$	0.51

As of March 25, 2002, there were approximately 1,461 holders of record of our common stock. Most shares of our common stock are held by brokers and other institutions on behalf of shareholders.

Dividend Policy

We have never declared or paid any dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and the expansion of our business. Any future determination to pay cash dividends will be at the discretion of the board of directors and will depend upon our financial condition, operating results, capital requirements and other factors the board of directors deems relevant.

Recent Sales of Unregistered Securities

1. On July 20, 2001 and December 7, 2001, respectively, we issued an aggregate of 9,000 shares and 15,000 shares of common stock in connection with the settlement of two separate lawsuits against the Company by former employees alleging wrongful termination. The shares of common stock were issued at fair market value, as determined by the closing price listed on the Nasdaq National Market, on the date of issuance which was the settlement date as indicated. These securities were issued in reliance on the exemption from the registration requirements of the Securities Act provided in Section 4(2) thereof.

2. On November 8, 2001, we issued 4,000,000 shares of Series D Cumulative Redeemable Convertible Participating Preferred Stock and warrants to purchase common stock of the Company, to a group of investors that included General Atlantic Partners LLC and its affiliates, Cheung Kong Limited and affiliates, Hutchison Whampoa Limited and affiliates and Vectis Group LLC and its affiliated entities. The Preferred Stock will accrue and cumulate dividends at eight percent (8%) and is convertible into shares of the Company’s common stock at the option of the holder. The warrants are exercisable at any time from November 8, 2002 until November 8, 2006. The exercise price of the common stock underlying the warrants is $1.05. The securities were issued in reliance upon the exemption from registration requirements from the Securities Act provided in Section 4(2) thereof.

Item 6. Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL INFORMATION

(in thousands, except per share data and footnotes)

The selected consolidated statement of operations data for the period from February 19, 1997 (our inception) to December 31, 1997, and during the years ended December 31, 1998, 1999, 2000 and 2001, and selected consolidated balance sheet data as of December 31, 1997, 1998, 1999, 2000 and 2001, have been derived from our Consolidated Financial Statements. The data set forth below should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this document.



	Year Ended December 31,

	1997			1998			1999			2000(1)			2001(2)

Consolidated Statement of Operations Data:
Net revenues	$	—		$	897		$	16,157		$	135,653		$	104,173
Gross profit (loss)		—			(1,449	)		(5,400	)		13,732			(18,868	)
Operating expenses		(1,056	)		(9,999	)		(117,850	)		(1,831,449	)		(222,830	)

Loss from operations		(1,056	)		(11,448	)		(123,250	)		(1,817,717	)		(241,698	)
Non-operating expenses		(18	)		(13	)		6,309			(28,235	)		(11,442	)

Loss before extraordinary item and income taxes		(1,074	)		(11,461	)		(116,941	)		(1,845,952	)		(253,140	)
Provision for income taxes		—			—			—			(6,513	)		(5,606	)

Loss before extraordinary item	$	(1,074	)	$	(11,461	)	$	(116,941	)	$	(1,852,465	)	$	(258,746	)
Gain on retirement of convertible subordinated notes, net(3)	$	—		$	—		$	—		$	—		$	179,282

Net loss	$	(1,074	)	$	(11,461	)	$	(116,941	)	$	(1,852,465	)	$	(79,464	)
Accretion on redeemable convertible preferred shares	$	—		$	—		$	—		$	—		$	(356	)

Net loss attributable to common shares	$	(1,074	)	$	(11,461	)	$	(116,941	)	$	(1,852,465	)	$	(79,820	)

Net loss per common share — basic and diluted:
Net loss before extraordinary item	$	(0.54	)	$	(2.94	)	$	(3.93	)	$	(30.67	)	$	(3.50	)

Net loss per common share	$	(0.54	)	$	(2.94	)	$	(3.93	)	$	(30.67	)	$	(1.08	)

Weighted average shares — basic and diluted		1,994			3,899			29,770			60,399			73,981



	At December 31,

	1997			1998		1999		2000		2001

Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	1		$	14,791	$	75,932	$	216,542	$	69,165
Working capital (deficit)	$	(1,524	)	$	12,524	$	76,060	$	186,777	$	57,983
Total assets	$	550		$	20,663	$	673,805	$	497,610	$	199,952
Convertible subordinated notes payable	$	—		$	—	$	—	$	300,000	$	38,360
Capital lease obligations, long-term portion	$	42		$	2,454	$	5,669	$	4,687	$	1,149
Mandatorily redeemable preferred stock	$	—		$	—	$	—	$	—	$	5,373
Shareholders’ equity (deficit)	$	(1,021	)	$	15,358	$	616,992	$	113,104	$	109,155


(1)	Operating expenses for the year ended December 31, 2000, include a $1.31 billion charge related to impairment of intangible assets including the deferred costs associated with our ICQ and Qwest

relationships. See also Note 16 to the Notes to Consolidated Financial Statements — Impairment of Long-Lived Assets.

(2) Operating expenses for the year ended December 31, 2001, include a $26.6 million charge related to impairment of certain long lived assets and an $18.3 million charge related to costs incurred as a result of our strategic restructuring. See also Note 4 to the Notes to Consolidated Financial Statements — Strategic Restructuring and Employee Severance and Note 16 to the Notes to Consolidated Financial Statements — Impairment of Long-Lived Assets.

(3) Extraordinary gains of $179.3 million, net of applicable taxes and write downs of related debt issuance costs, were recorded for the year ended December 31, 2001 related to gains recognized on the retirement of $261.4 million of face value of Critical Path’s convertible subordinated notes. See also Note 10 to the Notes to Consolidated Financial Statements — Convertible Subordinated Notes.


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

The following discussion contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended and in effect from time to time. The words “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” and “estimate” and similar expressions are intended to identify forward-looking statements. These are statements, which include statements as to the Company’s future strategic, operational and financial plans, anticipated or projected revenues, sources of revenues, net losses, expenses and operational growth, future revenues derived from non-core product and services, investments in sales and marketing, operating losses, the need for additional financing, competition in and competitive factors affecting our markets, historical trends for revenue, expenses and personnel as indicative of future results, our critical accounting policies, changes in the price of our common stock, the impact of stock-based expenses, period-to-period comparisons of our operating results as an indicator of future performance, markets and potential customers for Critical Path products and services, plans related to sales strategies and global sales efforts, plans to reduce operating costs through continued expense reduction, anticipated effects of restructuring and retirement of debt, anticipated charges and cost savings as a result of these plans, our belief as to our ability to successfully emerge from the restructuring and refocusing of our operations and our intellectual property strategy are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, difficulties of forecasting future results due to our limited operating history, failure to meet sales and revenue forecasts, evolving business strategy and the emerging nature of the market for our product and service, finalization of pending litigation and the settlement of the SEC investigation, turnover within and integration of senior management, board of directors members and other key personnel, difficulties in our strategic plans to exit certain products and services offerings, failure to expand our sales and marketing activities, potential difficulties associated with strategic relationships, investments and uncollected bills, general economic conditions in markets in which the Company does business, risks associated with our international operations, foreign currency fluctuations, unplanned system interruptions and capacity constraints, software defects, 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 the 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.



												Change Over Prior Year


			Historical Amounts									2000						2001

			1999			2000			2001			$			%			$			%


			(in thousands, except percentages)
Period Ended December 31
Net revenues
	Software license		$	—		$	51,607		$	30,960		$	51,607			(1	)	$	(20,647	)		(40	)%
	Hosted messaging			16,157			58,553			43,821			42,396			262	%		(14,732	)		(25	)%
	Professional services			—			14,527			12,573			14,527			(1	)		(1,954	)		(13	)%
	Maintenance and support			—			10,966			16,819			10,966			(1	)		5,853			53	%

		Total net revenues		16,157			135,653			104,173			119,496			740	%		(31,480	)		(23	)%

Cost of net revenues
	Software license			—			2,731			1,533			2,731			(1	)		(1,198	)		(44	)%
	Hosted messaging			16,505			59,104			59,124			42,599			258	%		20			0	%
	Professional services			—			5,945			10,315			5,945			(1	)		4,370			74	%
	Maintenance and support			—			8,060			10,081			8,060			(1	)		2,021			25	%
	Amortization of purchased technology			—			18,140			21,284			18,140			(1	)		3,144			17	%
	Acquisition-related retention bonuses			520			1,040			—			520			100	%		(1,040	)		(100	)%
	Stock-based expenses			4,532			1,586			4,050			(2,946	)		(65	)%		2,464			155	%
	Impairment of long-lived assets			—			25,315			16,654			25,315			(1	)		(8,661	)		(34	)%

		Total cost of net revenues		21,557			121,921			123,041			100,364			466	%		1,120			1	%

Gross profit (loss)				(5,400	)		13,732			(18,868	)		19,132			(1	)		(32,600	)		(237	)%

Operating expenses
	Sales and marketing			13,811			66,125			53,356			52,314			379	%		(12,769	)		(19	)%
	Research and development			7,682			31,022			30,744			23,340			304	%		(278	)		(1	)%
	General and administrative			14,051			30,444			42,260			16,393			117	%		11,816			39	%
	Amortization of intangible assets			32,259			355,868			13,216			323,609			1003	%		(342,652	)		(96	)%
	Acquisition-related retention bonuses			3,587			8,294			1,381			4,707			131	%		(6,913	)		(83	)%
	Stock-based expenses			46,460			50,598			53,615			4,138			9	%		3,017			6	%
	Acquired in-process research and development			—			3,700			—			3,700			(1	)		(3,700	)		(100	)%
	Restructuring and other expenses			—			3,248			18,267			3,248			(1	)		15,019			462	%
	Impairment of long-lived assets			—			1,282,150			9,991			1,282,150			(1	)		(1,272,159	)		(99	)%

		Total operating expenses		117,850			1,831,449			222,830			1,713,599			1454	%		(1,608,619	)		(88	)%

Loss from operations				(123,250	)		(1,817,717	)		(241,698	)		(1,694,467	)		(1	)		1,576,019
Interest and other income (expense), net				7,061			12,970			5,840			5,909			84	%		(7,130	)		(55	)%
Interest expense				(752	)		(15,948	)		(14,714	)		(15,196	)		2021	%		1,234			(8	)%
Equity in net loss of joint venture				—			(1,019	)		(1,866	)		(1,019	)		(1	)		(847	)		83	%
Minority interest in net income of consolidated subsidiary				—			(649	)		—			(649	)		(1	)		649			(100	)%
Loss on investments				—			(23,589	)		(702	)		(23,589	)		(1	)		22,887			(97	)%

Loss before extraordinary item and income taxes				(116,941	)		(1,845,952	)		(253,140	)		(1,729,011	)		1479	%		1,592,812			(86	)%
Provision for income taxes				—			(6,513	)		(5,606	)		(6,513	)		(1	)		907			(14	)%

Loss before extraordinary item			$	(116,941	)	$	(1,852,465	)	$	(258,746	)		(1,735,524	)		1484	%		1,593,719			(86	)%
Gain on retirement of convertible subordinated notes, net				—			—			179,282			-			(1	)		179,282

Net loss			$	(116,941	)	$	(1,852,465	)	$	(79,464	)		(1,735,524	)		1484	%		1,773,001			(96	)%
Accretion on redeemable convertible preferred shares				—			—			(356	)		—			(1	)		(356	)

Net loss attributable to common shares			$	(116,941	)	$	(1,852,465	)	$	(79,820	)	$	(1,735,524	)		1484	%	$	1,772,645			(96	)%

(1) Non-material percentage.

Overview

Critical Path, Inc. is a global leader in Internet communications that delivers software and services that are designed to maximize the value of Internet communications. We provide messaging and collaboration solutions from wireless, secure and unified messaging to basic email and personal information management, as well as identity management solutions that simplify user profile management and strengthen information

security. Our standards-based Critical Path Communications Platform, built to perform reliably at the scale of public networks, delivers the industry’s lowest total cost of ownership for messaging solutions and lays a solid foundation for next-generation communications services. Critical Path’s customers are corporate enterprises, carriers and service providers, postal authorities and government agencies.

Critical Path was founded in 1997 and is headquartered in San Francisco, California with offices throughout North America, Europe, Asia and Latin America. From inception through 1999, our primary source of revenue came from service fees related to hosted messaging. Through a series of acquisitions during 1999 and 2000, we expanded our product offerings to include a wide range of messaging and collaboration licensed software and solutions.

During 2001 we evaluated our various products, services, facilities and the business plan under which we were operating. As part of this evaluation, we 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. In connection with this review, we implemented and completed 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 primary elements of the plan included:

• Focusing on core communication solutions;

• Workforce reduction; and

• Facilities and operations consolidation.

Additionally, we implemented an aggressive expense management plan to further reduce operating costs while maintaining strong customer service for our core solutions. As of December 31, 2001 we had divested all of our non-core products and services, reduced headcount by 44%, reduced facilities and operations by 65% and implemented other cost cutting measures, resulting in a significant reduction in overall operating expenses. The non-core products and services which were divested during 2001, comprised approximately 26% and 21% of total revenues in the years ended December 31, 2000 and 2001 and were insignificant in 1999. These products and services are expected to be an insignificant part of Critical Path’s revenue stream going forward. Additionally as of December 31, 2001, we had substantially completed an extensive assessment of our core hosted messaging services, which resulted in a $12.4 million impairment charge during the fourth quarter of 2001 associated with excess capacity and equipment. As a result of these strategic initiatives, we have significantly reduced our overall operating expenses and we expect to realize significant future annual cost savings, as our quarterly operating cost structure, excluding special charges, has been reduced by nearly $30 million since the first quarter of 2001.

During the fourth quarter of 2001, we closed a financing transaction with a group of investors led by General Atlantic Partners LLC and its affiliates, and other investors including Hutchison Whampoa Limited and affiliates and Vectis Group LLC. Vectis Group had previously been retained by the Company to provide advice with respect to strategic alternatives and other management related services. Mr. McGlashan, our Chief Executive Officer, is a principal in the Vectis Group. The financing transaction consisted of approximately $30 million in gross cash proceeds and the retirement of $65 million in face value of our 5 3/4 Convertible Subordinated Notes. In connection with this transaction, we issued and sold four million shares of convertible preferred stock to several investors and warrants to purchase 2.5 million shares of common stock to General Atlantic and its affiliates. The related proceeds will be used for working capital and general corporate purposes.

We have incurred significant losses since our inception, and as of December 31, 2001, we had an accumulated deficit of approximately $2.06 billion, inclusive of a $1.31 billion charge for impairment of long-lived assets recorded in the fourth quarter of 2000. We intend to continue to invest in sales and marketing, development of our technology and solution offerings, and related enhancements. We expect to continue to incur operating losses through the end of 2002, however we do not anticipate the need for additional financing prior to December 31, 2002.

In view of the rapidly evolving nature of our business, acquisitions, recent 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 December 31, 2001, we had 562 employees, in comparison with 1,041 employees at December 31, 2000 and 488 employees at December 31, 1999. We do not believe that our historical trends for revenues, expenses, or personnel are indicative of future results.

Critical Accounting Policies

The following discussion and analysis of Critical Path’s financial condition and results of operations is based on its consolidated financial statements and results of operations, which have been prepared in accordance with accounting principles generally accepted in the United States. Critical Path believes the following are the most critical accounting policies underlying Critical Path’s presentation of its financial condition and related operating results:

• Revenue recognition

• Valuation and impairment of long-lived assets and identifiable intangible assets; and

• Estimating allowance for doubtful accounts and contingencies.

Revenue recognition

Revenues are recognized once the related products or services have been delivered and collection of all fees is considered probable. We recognize revenues related to the sale of our licensed software products, hosted messaging and communication services, professional services and post-contract customer support.

Software license. We derive software license revenues from perpetual and term licenses for our messaging, collaboration and identity management solutions. Software license revenues are recognized when persuasive evidence of an arrangement exists, delivery of the licensed software to the customer has occurred and the collection of a fixed or determinable license fee is considered probable. Our revenue recognition policies require that revenues recognized from software arrangements be allocated to each element of the arrangement based on the fair values of the elements, such as software products, upgrades and enhancements, post contract customer support, installation, training or other services. License software sales that involve multiple elements, including software license and undelivered maintenance and support and professional services, are recognized such that we allocate revenues to each component of the arrangement using the residual value method based on evidence of the fair value of the undelivered elements. The vendor specific objective evidence of fair values for the ongoing maintenance obligations are based upon the prices paid for the separate renewal of these services by the customer or upon substantive renewal rates stated in the contractual arrangements. Vendor specific objective evidence of the fair value of other services, primarily professional services, is based upon substantive rates stated in the contractual arrangements or upon separate sales of these services at substantive rates.

If a multiple element arrangement includes services that are deemed essential to the functionality of a delivered element, we recognize the entire arrangement fee using the percentage of completion method. Under this method, individual contract revenues are recorded based on the percentage relationship of the contract costs incurred as compared to management’s estimate of the total cost to complete the contract. If fair value cannot be determined for more than one individual element of a multiple element arrangement, revenues are recognized ratably over the term of the agreement.

We also receive license fees from resellers under arrangements that do not provide product return or exchange rights. Revenues from reseller agreements may include a nonrefundable, advance royalty which is payable upon the signing of the contract and license fees based on the contracted value of our products purchased by the reseller. Guaranteed license fees from resellers, where no right of return exists, are recognized when persuasive evidence of an arrangement exists, delivery of the licensed software has occurred and the collection of a fixed or determinable license fee is considered probable. Non-guaranteed per-copy

license fees from resellers are initially deferred and are recognized when they are reported as sold to end-users by the reseller.

Hosted messaging services. We derive hosted messaging revenues related to fees for hosting services we offer related to our messaging and collaboration solutions. These are primarily based upon monthly contractual per unit rates for the services involved, which are recognized on a monthly basis over the term of the contract beginning with the month in which service delivery starts. Amounts billed or received in advance of service delivery, including but not limited to branding and set-up fees, are initially deferred and subsequently recognized on a ratable basis over the expected term of the relationship beginning with the month in which service delivery starts.

Professional services. We derive professional service revenues from fees primarily related to training, installation and configuration services. The associated revenues are recognized in the period in which the services are performed.

Maintenance and support. We derive maintenance and support service revenues from fees for post-contract customer support agreements associated with product licenses. Such services typically include rights to future update and upgrade product releases and dial-up phone services. Fees are deferred and recognized ratably over the term of the support contract, which is generally one year.


	Valuation and impairment of long-lived assets and identifiable intangible assets

We periodically evaluate the carrying value of long-lived assets and identifiable intangible assets for impairment, when events and circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized whenever the evaluation demonstrates that the carrying amount of a long-lived asset is not recoverable. In connection with the impairment analysis performed in the fourth quarter of 2000, the estimates of fair values were based upon the discounted estimated cash flows of Critical Path for the succeeding three years using a discount rate of 25% and an estimated terminal value. The assumptions supporting the estimated cash flows, including the discount rate and an estimated terminal value, reflect management’s best estimates. The discount rate was primarily based upon the weighted average cost of capital for comparable companies. During 2001 and in connection with our strategic restructuring effort, an additional assessment of impairment was performed on certain of our remaining long-lived assets. The restructuring plan identified and formulated a plan to exit certain products and services that were determined to be non-core to Critical Path’s business strategy. We reviewed the intangible assets related to these non-core products and services and, as a result of the assessment, recorded an impairment charge in the second quarter to these assets. Additionally during the fourth quarter of 2001, we performed an evaluation of long-lived assets within our core business. As a result of this assessment we recorded a further impairment charge. This charge resulted from an impairment of assets associated with our core business, primarily the hosted messaging services, as we determined that we had excess capacity and equipment related to certain core products and services.


	Estimating allowance for doubtful accounts and contingencies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingencies at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. For this reason, actual results could differ from those estimates. Management must make estimates surrounding collectibility of our revenues and related accounts receivable. Management specifically analyzes accounts receivable, historical and current economic trends, previous bad debts, customer concentrations, credit worthiness of customers, and payment terms of customer accounts, when evaluating adequacy of the allowance for doubtful accounts.

Management estimates liabilities and contingencies at the end of each period. The current financial statement presentation reflects management’s best estimates of liabilities and pending litigation which are probable and where the amount and range of loss can be estimated. We record the minimum liability related to those claims where there is a range of loss. Because of the uncertainties related to the probability of loss and

the amount and range of loss on the pending litigation, management may not be able to make an accurate estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, we will continue to assess the potential exposure related to our pending litigation and update our estimates and related disclosures. Such future revisions in our estimates could materially impact the financial results of Critical Path.

Results of Operations

The following table presents Critical Path’s net revenue and selected cost of net revenue data during 1999, 2000 and 2001 and the relative composition of net revenues and the selected cost of net revenue data as a percentage of net revenues during 1999, 2000 and 2001.



			Historical Amounts						Percentage of Total Net Revenues

			1999		2000		2001		1999			2000			2001


			(in thousands)
Period Ended December 31,
Net revenues
	Software license		$	—	$	51,607	$	30,960		—	%		38	%		30	%
	Hosted messaging			16,157		58,553		43,821		100			43			42
	Professional services			—		14,527		12,573		—			11			12
	Maintenance and support			—		10,966		16,819		—			8			16

		Total net revenues	$	16,157	$	135,653	$	104,173		100	%		100	%		100	%



										Percentage of Related Net Revenues

Cost of net revenues
	Software license		$	—		$	2,731	$	1,533		—	%	5	%	5	%
	Hosted messaging			16,505			59,104		59,124		102		101		135
	Professional services			—			5,945		10,315		—		41		82
	Maintenance and support			—			8,060		10,081		—		73		60

		Total cost of net revenues	$	16,505		$	75,840	$	81,053		102	%	56	%	78	%

Gross profit (loss)			$	(348	)	$	59,813	$	23,120		(2	)%	44	%	22	%

Net Revenues

Software License. We recognized $30.1 million in software license revenues during 2001, as compared to $51.6 million in 2000 and none in 1999. The significant decrease in software license revenues between 2001 and 2000 was attributed to several factors that impacted our operating results during 2001. Delays in information technology spending were experienced across many industries due to unfavorable macroeconomic conditions and these delays were exacerbated by circumstances at the Company. Many potential customers who were evaluating our products delayed making decisions until they could gain a level of comfort in us as we emerged from our management transition and restructuring initiatives. Additionally, our sales organization was distracted by the termination and resignation of much of its leadership in the first quarter of 2001 and its focus on rebuilding also has caused a reduction in effectiveness. The decrease in software license revenues was further exacerbated as a result of the terrorist attacks of September 11, 2001. These tragic events significantly impacted the world economic markets and delayed some of our licensed software sales with enterprise customers who operated in the affected areas or whose operations were disrupted by these events. Additionally, in connection with our restructuring initiative, we identified certain non-core software license products, of which all have either been exited or sold to third parties. Software license revenues related to these non-core products were approximately $2.5 million in 2001, down from $4.5 million in 2000. We anticipate non-core product revenues will be insignificant during 2002. Software license revenues increased in 2000 as compared to 1999 as a result of the introduction of our software license product offerings related to messaging, directory and meta-directory through our acquisitions of Amplitude Software Corporation, ISOCOR Corporation, and PeerLogic, Inc.

Hosted Messaging. We recognized $43.8 million in hosted messaging revenue during 2001, as compared to $58.6 million in 2000 and $16.2 million in 1999. This decrease in 2001 as compared with 2000 resulted from our restructuring initiative, as we identified certain non-core hosted messaging services, of which all have either been exited or sold to third parties. Hosted messaging revenues related to these non-core services was approximately $13.6 million in 2001, down from $27.0 million in 2000. We anticipate non-core service revenues will be insignificant during 2002. Hosted messaging revenues increased in 2000 as compared to 1999 as a result of the introduction of new product offerings, primarily attributable to our acquisitions of FaxNet Corporation and RemarQ Communities, Inc. Additionally, we experienced penetration into the hosted messaging services market, and significantly increased the number of email boxes hosted.

Professional Services. We recognized $12.6 million in professional services revenues during 2001, as compared to $14.5 million in 2000. This decrease in 2001 as compared with 2000 resulted primarily from our restructuring initiative, as we identified certain non-core products and services, of which all have either been exited or sold to third parties. Professional services revenues related to these non-core products and services was approximately $1.7 million in 2001, down from $3.0 million in 2000. We anticipate non-core service revenues will be insignificant during 2002. Additionally, as a result of the reduction in software license sales during 2001, we experienced a similar decline in professional services revenues. There were no professional services revenues in 1999. Professional services revenues increased in 2000 as compared to 1999 as a result of the introduction of our software license product and professional services offerings related to messaging, directory and meta-directory software products added through our acquisitions of Amplitude Software Corporation, ISOCOR Corporation, and PeerLogic, Inc.

Maintenance and Support. We recognized $16.8 million in maintenance and support revenues during 2001, as compared to $11.0 million in 2000. Maintenance and support revenues increased as a result of the completion of several acquisitions during 2000 and additional sales of software license products during 2000 and 2001. However, these increases were offset by the effects of our restructuring, as we identified certain non-core products and services, of which all have either been exited or sold to third parties. Maintenance and support revenues related to these non-core products and services was approximately $3.8 million in 2001, as compared to $1.1 million in 2000. We anticipate non-core service revenues will be insignificant during 2002. There were no maintenance and support revenues in 1999. Maintenance and support revenues increased in 2000 as compared to 1999 as a result of the introduction of our software license product and maintenance and support service offerings related to messaging, directory and meta-directory software products added through our acquisitions of Amplitude Software Corporation, ISOCOR Corporation, and PeerLogic, Inc.

Critical Path’s international operations accounted for approximately 40% and 38% of net revenues during 2001 and 2000, respectively. Revenues from international operations were insignificant in 1999. This significant increase in international revenues from 1999 to 2000 related primarily to the acquisition of ISOCOR Corporation.

Cost of Net Revenues

Software License. Cost of net software license revenues consists primarily of product media duplication, manuals and packaging materials, personnel and facilities costs, and third-party royalties. The overall decrease in 2001 from 2000 was directly related to the reduction in software license revenues between these two periods. In 2000, cost of net software license revenues increased significantly from 1999 levels as a result of the introduction of our software license product offerings related to messaging, directory and meta-directory through our acquisitions of Amplitude Software Corporation, ISOCOR Corporation, and PeerLogic, Inc.

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. These costs remained flat in 2001 as compared to 2000. Costs associated with hosted messaging increased significantly during the end of 2000 and the first quarter of 2001 as a result of adding 15 new hosted messaging clusters to our data centers during 2000, expanding the capacity of our hosting network to manage current

customer requirements and future growth. Additionally, costs were incurred to add technology platforms for new service offerings. As a result of these initiatives we acquired equipment and increased related support and professional services resources, causing depreciation and other costs to increase substantially in comparison with 1999. However, these increases were offset in the second half of 2001 by the effects of our restructuring initiative and the exiting of certain non-core products and services. As a result of the sale and divestiture of several non-core services, the termination of employees through our restructuring initiative and the implementation of other cost cutting measures, we significantly reduced the cost of net hosted messaging revenues in 2001.

Professional Services. Cost of professional services 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, primarily related to personnel costs, were incurred on professional services resources resulting in a 74% increase in 2001 from 2000. There were no professional services revenues or related costs in 1999.

Maintenance and Support. Cost of 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, primarily related to personnel costs, were incurred on maintenance and support resources resulting in an increase in 2001 from 2000. There were no maintenance and support revenues or related costs in 1999.

Operations, customer support, and professional services staff decreased to 192 employees at December 31, 2001 from 340 employees at December 31, 2000, but increased from 174 employees at December 31, 1999. Headcount decreased in 2001 as a result of our strategic restructuring initiative and increased in 2000 as a result of our numerous acquisitions.

The following table presents selected operating expenses of Critical Path during 1999, 2000 and 2001.



			Historical Amounts						Percentage of Total Net Revenues

			1999		2000		2001		1999			2000			2001
Period Ended December 31,

			(in thousands)
Operating expenses
	Sales and marketing		$	13,811	$	66,125	$	53,356		85	%		49	%		51	%
	Research and development			7,682		31,022		30,744		48			23			30
	General and administrative			14,051		30,444		42,260		87			22			41

		Total operating expenses	$	35,544	$	127,591	$	126,360		220	%		94	%		121	%

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. These costs decreased in 2001 from 2000 primarily due to the termination and resignation of several employees in our sales organization during the first quarter of 2001, the termination of certain strategic marketing relationships related to non-core services and other cost cutting measures in connection with our restructuring plan, primarily a reduction in headcount. The significant increase in 2000 from 1999 related to marketing and promotional expenses, incentive compensation payments to sales personnel, and increases in compensation associated with additional headcount added through our ten acquisitions completed during 1999 and 2000. Sales and marketing staff decreased to 131 employees at December 31, 2001 from 305 employees at December 31, 2000, but increased from 168 employees at December 31, 1999. Headcount decreased in 2001 as a result of our strategic restructuring initiative and increased in 2000 primarily as a result of our numerous acquisitions.

Research and Development. Research and development expenses consist primarily of compensation for technical staff, payments to outside contractors, depreciation of capital equipment associated with research and development activities, and, to a lesser extent, related overhead. These costs decreased in 2001 from 2000 as a result of our restructuring initiative, including the termination of several employees as well as certain

contracts with outside consultants, and the implementation of other cost cutting measures. The significant increase in 2000 from 1999 resulted primarily from increased compensation and other personnel costs from the additional headcount added through our ten acquisitions completed during 1999 and 2000. Additionally, during 1999 and 2000 we increased headcount to continue to develop and enhance our portfolio of messaging, directory and security solutions. Research and development staff decreased to 148 employees at December 31, 2001, from 252 employees at December 31, 2000, but increased from 94 employees at December 31, 1999. Headcount decreased in 2001 as a result of our strategic restructuring initiative and increased in 2000 primarily as a result of our numerous acquisitions.

General and Administrative. General and administrative expenses consist primarily of compensation for personnel, fees for outside professional services, occupancy costs and, to a lesser extent, related overhead. General and administrative expenses increased in 2001 from 2000 primarily as a result of increased compensation and other personnel costs from the additional headcount added through the acquisitions completed during 2000. Additionally, we incurred higher fees for outside professional services in 2001, in particular significantly higher legal and accounting fees related to the SEC investigation and shareholder litigation which included legal fees reimbursed with respect to indemnification obligations to former officers and directors. These increases in general and administrative expenses were partially offset by the termination of several employees in connection with our restructuring initiative and the implementation of other cost cutting measures. The significant increase in 2000 from 1999 resulted primarily from increased compensation and other personnel costs associated with additional headcount added through our ten acquisitions completed during 1999 and 2000, and higher fees for outside professional services. General and administrative staff decreased to 91 employees at December 31, 2001, from 144 employees at December 31, 2000, but increased from 52 employees at December 31, 1999. Headcount decreased in 2001 as a result of our strategic restructuring initiative and increased in 2000 primarily as a result of our numerous acquisitions.

Management expects operating expenses to moderately increase during 2002, primarily related to higher personnel costs associated with adding to the Company’s sales and marketing organization.

Intangible Assets

Amortization of Intangible Assets. In connection with our 1999 and 2000 acquisitions, which were all accounted for using the purchase method of accounting, we recorded goodwill and other intangible assets, primarily including assembled workforce, customer base, and existing technology. Based on the types of identifiable intangibles acquired, during 2000 and 2001 amortization expense of $18.1 million and $21.3 million was allocated to the cost of net revenues and amortization expense of $355.9 million and $13.2 million was allocated to operating expenses, respectively. All amortization expense was allocated to operating expenses in 1999. Additionally, during 2000 and 2001, we recorded charges of $1.3 billion and $26.6 million, respectively, related to the impairment of certain long-lived assets, including intangible assets. This was the primary cause of the significant reduction in amortization expense in 2001 from 2000.

Acquired In-Process Research And Development. In connection with the acquisitions of ISOCOR and PeerLogic during 2000, we recognized $3.7 million representing the value attributable to acquired in-process research and development that had not yet reached technological feasibility and had no alternative future use. These values were determined by estimating the future net cash flows of the acquired in-process research and development over their respective estimated useful lives and discounting the net cash flows back to their present value. At December 31, 2001, actual results were consistent, in all material respects, with our assumptions at the time of the acquisitions. All acquired in-process research and development was expensed at the date of acquisition. No amounts were recognized resulting from acquired in-process research and development during 1999 or 2001.

Acquisition-Related Retention Bonuses

In connection with the acquisitions of dotOne, Amplitude, Xeti, FaxNet, ISOCOR, and docSpace, we established various retention bonus programs that in the aggregate amounted to approximately $20.7 million in incentives for certain former employees of these companies to encourage their continued employment with

Critical Path. Based on the employees participating in these programs, during 1999 and 2000 expenses of $520,000 and $1.0 million were allocated to cost of net revenues and expenses of $3.6 million and $8.3 million were allocated to operating expenses, respectively. During 2001, expenses of $1.4 million were allocated to operating expenses related to these retention bonus programs. The significant decrease in acquisition-related retention bonus expense from 2000 to 2001 resulted from the completion, during 2000, of all but one of these bonus programs. The remaining program is expected to conclude in April 2002.

Stock-Based Expenses

Stock-based expenses totaled $51.0 million, $52.2 million, $57.7 million in 1999, 2000 and 2001, respectively. These amounts were comprised of stock-based charges related to stock options granted and warrants issued. Stock-based expenses related to stock options granted to employees, directors and consultants amounted to $19.9 million, $25.1 million and $37.5 million during 1999, 2000, and 2001, respectively. Stock-based expenses related to warrants issued to strategic partners and consultants amounted to $31.1 million, $27.1 million and $20.2 million during 1999, 2000, and 2001, respectively. The consecutive increases in stock-based expense from 1999 through 2001 was primarily caused by the increase in stock option grants with exercise prices below fair market value in each of these successive fiscal years and issuance of warrants. We expect that future changes in the trading price of our common stock at the end of each quarter, and if certain milestones are ever achieved, will cause additional substantial changes in the ultimate amount of the related stock-based charges.

Stock Options. We granted certain stock options with exercise prices below market value on the date of grant and issued certain common stock to employees, directors and advisors during 1999 and 1998. As a result, we recorded unearned compensation totaling $22.3 million in 1999 and $19.9 million in 1998. These amounts are being amortized over the vesting periods of the related options. In March 2001, in connection with an employee retention program, we granted options with exercise prices below market value on the date of grant to certain employees. As a result of this program, we recorded unearned compensation totaling approximately $21.4 million. During 2001 certain of these unearned compensation balances were significantly reduced as a result of employee terminations throughout the year, affecting a reduction in future stock-based expenses of $8.2 million.

Additionally, during 2001, we incurred stock-based charges of approximately $1.7 million in connection with certain severance agreements for terminated employees and consulting arrangements. These charges were included in operating expenses based on the functions of the related employees and consultants. During 2000, we incurred stock-based charges of approximately $5.7 million in connection with certain severance agreements for terminated employees. Approximately $3.4 million of this charge was included in employee severance expense in connection with our plan to reduce worldwide headcount and the remaining $2.3 million was included in stock-based expenses. During 1999, we incurred a stock-based charge of approximately $2.0 million in connection with a severance agreement for a terminated employee. This charge was included in cost of net revenues based on the employee’s function.

Warrants. During 1999 and 2000, we issued warrants to purchase shares of our preferred and common stock pursuant to certain strategic agreements. See also Note 8 of Notes to Consolidated Financial Statements — Intangible Assets and Note 16 — Impairment of Long-Lived Assets. We believe that these warrants could have a significant current and potential future impact on our results of operations.

In January 1999, we entered into an agreement with ICQ, Inc., a subsidiary of AOL Time Warner, pursuant to which we agreed to provide email hosting services that are integrated with ICQ’s instant messaging service provided to ICQ’s customers. As part of the agreement, ICQ agreed to provide sub-branded advertising for Critical Path in exchange for a warrant to purchase 2,442,766 shares of Series B Preferred Stock, issuable upon attainment of each of five milestones. As of April 9, 2000, all five milestones had been attained and the final revised aggregate fair value of all vested warrants was $93.8 million, which is being amortized to advertising expense using the straight-line method over four years. During the fourth quarter of 2000, we recorded an impairment charge of $16.8 million bringing the adjusted fair value to approximately $30.1 million, which will be amortized over the remaining benefit period.

In October 1999, we entered into an agreement with Qwest Communications Corporation, a telecommunications company, pursuant to which we agreed to provide email hosting services to Qwest’s customers. As part of the agreement, Qwest agreed to provide sub-branded advertising for us in exchange for warrants to purchase up to a maximum of 3,534,540 shares of common stock upon attainment of each of six milestones. In October 1999, the first of the six milestones had been attained and the final revised aggregate fair value of the vested warrants associated with the first milestone approximated $22.2 million, which is being amortized to advertising expense using the straight-line method over three years. None of the remaining milestones are considered probable and as a result, the fair value of the warrants relating to the shares underlying the second through sixth milestones has not been recognized. During the fourth quarter of 2000, we recorded an impairment charge of $4.8 million bringing the adjusted fair value to approximately $8.6 million, which will be amortized over the remaining benefit period.

In December 1999, we entered into an agreement with Worldsport Network Ltd., the sole and exclusive provider of Internet solutions for the General Association of International Sports Federations or GAISF and a majority of the international federations it recognizes. Under the terms of the agreement, Worldsport offered Critical Path’s web-based email and calendaring services to the GAISF network and its members. As part of the agreement, Worldsport agreed to provide sub-branded advertising for Critical Path in exchange for warrants to purchase up to a 1.25% equity interest in Critical Path on a fully diluted basis upon attainment of each of five milestones based on the number of email boxes for which Worldsport registers and provides sub-branding. The warrants are exercisable for five years after becoming vested. Any warrants not vested within five years of the date of the agreement will be cancelled. Worldsport ceased operations and filed for bankruptcy during 2000 and none of the milestones are considered probable. Accordingly, no deferred compensation associated with these warrants has been recognized.

In December 1999, we entered into an agreement with one of our lessors, in connection with an office lease, pursuant to which the lessor was issued warrants to purchase up to a maximum of 25,000 shares of our common stock. The warrants may be exercised beginning January 1, 2000 through December 20, 2006 at a price of $90.00 per share. The warrants vest at the beginning of each month on a straight-line basis in the amount of 521 shares per month. The fair value of approximately $2.0 million is being amortized to general and administrative expenses using the straight-line method over 10 years.

In January 2000, The docSpace Company entered into an agreement with a major telecommunications company (“Telco”) pursuant to which docSpace would provide secure messaging services to the Telco’s customers. As part of the agreement, Telco agreed to provide marketing, publicity, and promotional services to docSpace. As a result of the completion of our acquisition of docSpace, Critical Path assumed warrants that allowed Telco to purchase up to a maximum of 349,123 shares of Critical Path common stock upon attainment of each of three milestones. Subsequent to the acquisition, we entered into discussions with Telco to modify our relationship. Accordingly, we believe the vesting provisions of the proposed agreement will be modified to reflect the requirements of the new relationship. As of December 31, 2001, none of the vesting milestones of the original agreement had been attained and none of the milestones are considered probable. Accordingly, no deferred compensation associated with the warrants has been recognized.

Strategic Restructuring and Employee Severance

In July 2000, we announced a plan to reduce our worldwide employee headcount by approximately 113 employees or 11%. This employee reduction plan was executed with the intent to realize various synergies gained through the nine acquisitions we completed in 1999 and the first half of 2000. During 2000, we recognized a charge for severance-related costs totaling $6.7 million, composed of $3.3 million in cash charges and $3.4 million in stock-based compensation expense, which resulted from the acceleration of certain employee stock options in connection with the headcount reduction plan. During 2000, the Company paid all amounts related to employee severance.

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 communication solutions. The three elements of the plan included: (i) focusing on core communication solutions; (ii) workforce reduction; and (iii) facilities

and operations consolidation. Additionally, we have implemented an aggressive expense management plan designed to further reduce operating costs while maintaining strong customer service for our core solutions. We completed the restructuring plan in 2001, including the divestiture of all of our non-core products and services, a 44% reduction in headcount, a 65% reduction in facilities and the implementation of other cost cutting measures, resulting in a significant reduction in overall operating expenses. As a result of these strategic initiatives, we anticipate that we will realize significant future annual cost savings. The non-core products and services comprised approximately 26% and 21% of total revenues in the years ended December 31, 2000 and 2001. These products and services will be an insignificant part of Critical Path’s revenue stream going forward.

Refocusing on Core Communications Solutions. We consider our core communication solutions to be our messaging, collaboration and identity management solutions, including mail, calendar, address book, file storage, secure delivery, directory and meta-directory, and access services supporting wireline and wireless users. Restructuring charges associated with this refocusing of our products and services consisted primarily of contract termination fees, gains and losses related to asset sales and dispositions, and lease termination fees. During 2001, Critical Path sold or discontinued all of its non-core products and services. As a result of these transactions, a net gain of $1.0 million was recorded for the year ended December 31, 2001.

Reduction of Workforce, Facility and Other Expenses. Critical Path reduced its headcount from 1,011 at March 31, 2001 to 562 employees at December 31, 2001, and consolidated its facilities from 77 at December 31, 2000 to 27 at December 31, 2001. Charges related to the headcount reduction consisted primarily of the payment of severance and fringe benefits, and aggregated approximately $10.3 million during 2001. Included in this charge was approximately $1.5 million related to the forgiveness of a note receivable to one of the Company’s former executives. Facilities and other expenses consisted primarily of costs associated with lease terminations, future lease payments and related fees, and aggregated approximately $9.0 million during 2001.

Summary of Year-To-Date Restructuring Costs


							Cash
		Total			Noncash		Payments/			Liabilities at
		Charge			Charges		(Receipts)			December 31, 2001


		(in millions)
Workforce reduction		$	10.3		$	1.3	$	8.9		$	0.1
Facility and operations consolidation and other charges			9.0			5.5		1.6			1.9
Non-core product and service sales and divestitures			(1.0	)		1.1		(2.3	)		0.2

	Total	$	18.3		$	7.9	$	8.2		$	2.2

Net Revenues Related to Our Core Communication Solutions



		Fiscal Year Ended December 31,

		1999		2000		2001


		(in millions)
Core Net Revenues
	Software licensing	$	—	$	47.1	$	28.1
	Hosted messaging		15.1		31.6		30.2
	Professional services		—		11.6		10.7
	Maintenance & support		—		9.9		13.0

	Total core revenues	$	15.1	$	100.2	$	82.0
Non-Core Net Revenues		$	1.1	$	35.5	$	22.2

Total Net Revenues		$	16.2	$	135.7	$	104.2

Impairment of Long-Lived Assets

We recorded a $1.3 billion impairment charge to reduce goodwill, other intangible assets and deferred costs associated with our ICQ and Qwest relationships to their estimated fair values in the fourth quarter of 2000. In connection with the impairment analysis, the estimates of fair values were based upon the discounted estimated cash flows of Critical Path for the succeeding three years using a discount rate of 25% and an estimated terminal value. The assumptions supporting the estimated cash flows, including the discount rate and an estimated terminal value, reflect management’s best estimates. The discount rate was primarily based upon the weighted average cost of capital for comparable companies. During 2001 and in connection with our strategic restructuring effort an additional assessment was performed on certain of our remaining long-lived assets. The restructuring plan identified and formulated a plan to exit certain products and services that were determined to be non-core to the Company’s business strategy. The Company reviewed the intangible assets related to these non-core products and services and, as a result of its assessment, recorded a $14.2 million impairment charge in the second quarter of 2001 to eliminate these assets. During the fourth quarter of 2001, the Company recorded a further impairment charge of $12.4 million related to long-lived assets within its core business.

Interest and Other Income (Expense)

Interest and other income consists primarily of interest earnings on cash and cash equivalents as well as net gains (losses) on foreign exchange transactions. We completed private placements of equity securities in April 1998, September 1998, and January 1999, and we completed public offerings of common stock in April 1999 and June 1999. In addition, on March 30, 2000, we issued $300.0 million of five-year, 5 3/4% Convertible Subordinated Notes due April 1, 2005. As a result, interest income increased significantly during the latter half of 1999 and into 2000, in comparison with early 1999, due to higher cash balances available for investing. During 2001 we used $53.1 million to retire a substantial portion of our convertible subordinated notes and as well as a significant amount of cash to fund our operating activities. As a result of this reduction in cash, interest income significantly decreased in 2001 from 2000. During 2000, we recognized a net loss from foreign currency transactions associated with our international operations in the amount of $280,000 and a net gain of $947,000 in 2001. Foreign currency transaction gains or losses were insignificant during 1999.

Interest Expense

Interest expense consists primarily of interest and the amortization of issuance costs related to our 5 3/4% Convertible Subordinated Notes we issued in March 2000, and interest on certain capital leases. We incurred approximately $13.0 million and $12.1 million in interest expense on the Convertible Subordinated Notes, and approximately $1.6 million and $1.5 million related to amortization of debt issuance costs in 2000 and 2001, respectively. Interest on capital leases and other long-term obligations amounted to approximately $1.3 million during 2001, $1.3 million during 2000 and $688,000 during 1999.

Depreciation Expense

Depreciation expense primarily relates to the expensing, over the estimated useful lives, of capital equipment used in network infrastructure and for our hosted messaging services, leasehold improvements and equipment used in our general operations. Depreciation expense totaled $8.1 million, $34.4 million and $43.0 million during 1999, 2000 and 2001, respectively. Included in these amounts was depreciation expense related to cost of net hosted messaging revenues, which totaled $5.2 million, $23.9 million and $26.3 million during 1999, 2000 and 2001, respectively. The remaining depreciation expense related to capital expenditures incurred for general operations of our business and has been allocated to cost of net revenue and operating expense, as appropriate.

Loss on Investments

During 2000 and 2001, we determined that certain of our investments were permanently impaired and recorded write downs of $23.6 million and $702,000, respectively. During 2001, these adjustments reduced the carrying value by $2.6 million in investments in marketable securities and $21.0 million in investments in non-

marketable securities. During 2001, investments in non-marketable securities were written-down by $702,000. See also Note 6 to the Notes to Consolidated Financial Statements — Investments.

Equity in Net Loss of Critical Path Pacific

In June 2000, we established a joint venture, Critical Path Pacific, Inc. with Mitsui and Co., Ltd., NTT Communications Corporation and NEC Corporation to deliver advanced Internet messaging solutions to businesses in Asia. We invested $7.5 million and hold a 40% ownership interest in the joint venture. This investment is being accounted for using the equity method. During 2000 and 2001, we recorded equity in net loss of joint venture of approximately $1.0 million and $1.9 million, respectively. Management does not expect to provide any additional cash funding for into this joint venture and, as of December 31, 2001, Critical Path Pacific’s liabilities were insignificant.

Minority Interest in Net Income of Consolidated Subsidiary

As of December 31, 2000, we owned a 72.87% interest in CP Italia, a consolidated subsidiary, which was acquired in connection with the acquisition of ISOCOR. The minority interest in net income of CP Italia amounted to $649,000 in 2000 and was insignificant in 2001. In March 2001, in connection with our agreement to purchase the remaining minority interest, we acquired the outstanding 27.13% interest in CP Italia for approximately $4.2 million.

Provision for Income Taxes

No current provision or benefit for U.S. federal or state income taxes has been recorded as we have incurred net operating losses for income tax purposes since our inception. No deferred provision or benefit for federal or state income taxes has been recorded as we are in a net deferred tax asset position for which a full valuation allowance has been provided due to uncertainty of realization. We recognized a provision for foreign income taxes during 2000 and 2001 as certain of our European operations generated income taxable in certain European jurisdictions.

Convertible Subordinated Notes

We issued $300.0 million of five-year, 5 3/4% Convertible Subordinated Notes due April 2005, to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933 in March 2000. We incurred approximately $10.8 million in debt issuance costs, consisting primarily of underwriting discount and legal and other professional fees. These costs have been capitalized and will be recognized as a component of interest expense on a straight-line basis, which approximates the effective interest method, over the five-year term of the Notes. Interest is payable on April 1 and October 1 of each year. As of December 31, 2000 and 2001, there was approximately $4.3 million and $600,000 in interest payable, respectively. These Notes are subordinated in right of payment to all senior debt of Critical Path and effectively subordinated to all existing and future debt and other liabilities of Critical Path’s subsidiaries.

During 2001, we retired $261.4 million of face value of these notes, which resulted in an extraordinary gain on retirement of $179.3 million, inclusive of $6.8 million in write downs of related debt issuance costs. We used cash of $48.7 million as well as a portion was retired through the issuance of the preferred stock in the financing transaction completed in December 2001. See also Note 14 to the Notes to Consolidated Financial Statements — Financing Transaction. As of December 31, 2000 and 2001, the total balance outstanding was $300.0 million and $38.4 million, respectively. These Notes are carried at cost and had an approximate fair value at December 31, 2001 of $21.5 million.

Accretion on redeemable convertible preferred shares

In connection with the financing transaction Critical Path completed during December 2001, we received gross cash proceeds of approximately $30 million and retired approximately $65 million in face value of our outstanding convertible subordinated notes in exchange for shares of our Series D Convertible Preferred Stock. See also Note 14 of Notes to the Financial Statements — Financing Transaction. The fair value

ascribed to the shares of Series D Preferred Stock was based on actual cash paid by independent investors and the approximate fair value of the Notes retired in connection with the offering. The principal terms of the Series D Preferred Stock include an automatic redemption on November 8, 2006, cumulative dividends at a rate of 8% per year, compounded on a semi-annual basis and payable in cash or additional shares of Series D Preferred Stock, conversion into shares of common stock calculated based on the Accreted Value, as defined, divided by $1.05, and preference in the return of equity in any liquidation or change of control. At issuance, the total amount of these costs was recorded as a reduction of the carrying amount of the Series D Preferred Stock and will accrete over the term of the Series D Preferred Stock. Additionally, at issuance, the Series D Preferred Stock was deemed to have an embedded beneficial conversion feature which was limited to the net proceeds allocable to preferred stock of approximately $42 million. The value of the beneficial conversion feature, at issuance, was initially recorded as a reduction of the carrying amount of the Series D Preferred Stock and will accrete over the term of the Series D Preferred Stock.

Related Party Transactions

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 alternatives the Company was exploring and to 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, potential transaction-based fees associated with certain strategic asset sales and investments in Critical Path and immediately exercisable 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 life of the warrants, and expected volatility of 215%, the 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. During the term of the agreements, we paid Vectis Group an aggregate of approximately $1.1 million in retainer fees and expenses and approximately $3.1 million in transactional fees, including approximately $2.75 million in connection with our recent preferred stock financing transaction. Vectis Group was also one of three investors (and their affiliates) that participated in this transaction led by General Atlantic Partners. See also Note 14 to the Notes to Consolidated Financial Statements — Financing Transaction. William McGlashan, Jr., a principal in Vectis Group, and a member of the Board of Directors of the Company, was appointed interim President and Chief Operating Officer in April, 2001 and was later appointed Vice Chairman and Chief Executive Officer. Effective September 30, 2001, the Company terminated its agreements with Vectis Group for consulting and other transactional services. In connection with the termination of the agreements, certain other employees of Vectis Group have become employees of Critical Path. Although the agreements terminated, certain obligations under the agreements survived, including payment of the transaction fee in connection with the Company’s recent financing transaction and related indemnification obligations. The total potential remaining fees aggregate between zero and $135,000.

Loans to Officers and Employees. During 1998, Critical Path issued notes receivable to shareholder and former Chief Executive Officer, Douglas Hickey, equal to $1.06 million in full recourse and $500,000 in non-recourse notes. Hickey’s notes accrue interest at the rate of 4.51% per annum. In February 2001, Mr. Hickey terminated his employment with the Company. In connection with the termination, the repayment of the $1.06 million note and accrued interest was extended to May 9, 2002 and the repayment of the $500,000 note and accrued interest was extended to March 9, 2002. As of December 31, 2000 and 2001, accrued interest totaled $160,000 and $231,000, respectively. Mr. Hickey repaid both notes in full with interest in March 2002.

During 2000, Critical Path issued a full recourse note to its then Chief Financial Officer, Lawrence Reinhold, equal to $1.7 million. Reinhold’s full recourse note accrued interest at the rate of 6.0% per annum and both principal and interest were scheduled to be forgiven over a specified period. During Reinhold’s employment with Critical Path approximately $270,000 of principal and interest was forgiven, consistent with the terms of the note. The repayment of the outstanding loan was subject to certain change of control and employment termination criteria. In August 2001, Mr. Reinhold’s employment with Critical Path terminated. In connection with his termination all outstanding principal and interest, totalling of $1.5 million, was forgiven.

During 2001 and in connection with each of their respective employment agreements, the Company made loans and held notes receivable from David C. Hayden, Executive Chairman, and Pierre Van Beneden, President, totaling $1.5 million and $350,000, respectively. Hayden’s full recourse note accrues interest at the rate of 6.75% per annum and shall be repaid by the achievement of performance-based milestones described in Mr. Hayden’s employment agreement and performance loan agreement. As of December 31, 2001, accrued interest totaled $40,000 pursuant to the note to Mr. Hayden. Mr. Van Beneden’s loan shall be interest free for the first year and shall be forgiven in monthly installments over the first year of Van Beneden’s employment, resulting in a compensation charge to operating expense ratably over the first twelve months of his employment. In the event of Mr. Van Beneden’s departure prior to one year from employment, the note shall be repayable and interest due in accordance with the terms of his employment agreement. Mr. Van Beneden’s employment agreement and loan were not effective until October 8, 2001.

In December 2001, the Board approved a full recourse loan to William E. McGlashan, Jr. of up to $4.0 million in connection with the purchase of a principal residence in the San Francisco Bay Area. The loan is to be collateralized by the residence, and to the extent necessary should an appraisal of the property equal less than 120% of the loan’s value, be secured by Mr. McGlashan’s personal shareholdings pledged to the Company, such that the amount outstanding shall be at all times fully collateralized or secured by at least 120% of the principal outstanding. Interest on the loan is accrued at the Applicable Prime Rate, deferred until principal is due, over a 10 year term. The loan shall be forgiven upon a defined Change of Control event. In the event Mr. McGlashan terminates employment either by voluntary resignation or for Cause, the loan shall be due and payable, with interest, no later than 12 months following such termination. In the event Mr. McGlashan is terminated for any reason other than Cause, the loan shall remain outstanding for the remainder of its terms. The Company has not yet funded the loan and as such no accrued interest was outstanding as of December 31, 2001.

Acquisitions

The following is a summary of the ten acquisitions Critical Path completed during 1999 and 2000. There were no acquisitions completed during 2001. All acquisitions were accounted for using the purchase method of accounting. Results of operations of the acquired businesses are included in the Company’s financial results from the date of the acquisition. Net assets of the companies acquired are recorded at their fair value at the acquisition date and the excess of the purchase price over the fair value of separately identified net assets acquired is included in intangible assets in the accompanying consolidated balance sheet. The fair value of separately identified intangible assets was determined based upon independent valuations using various valuation methodologies. See also Note 2 to the Notes to Consolidated Financial Statements — Acquisitions.

1999 Acquisitions. On May 26, 1999, we acquired substantially all the operating assets of the Connect Service business of Fabrik Communications, including the ongoing business operations as well as nearly 500 customer relationships for a total purchase price of approximately $20.1 million. On July 21, 1999, we acquired dotOne Corporation, a corporate email messaging service provider for a total purchase price of approximately $57.0 million. On August 31, 1999, we acquired Amplitude Software Corporation, a provider of business-to-business Internet calendaring and resource scheduling solutions for a total purchase price of approximately $214.4 million. On November 24, 1999, we acquired Xeti, Inc., a developer of standards-based public key infrastructure solutions for a total purchase price of approximately $23.8 million. On December 6, 1999, we acquired FaxNet Corporation, a outsource supplier of carrier-class enhanced fax and integrated messaging solutions for a total purchase price of approximately $187.6 million.

2000 Acquisitions On January 19, 2000, we acquired ISOCOR Corporation, a supplier of Internet messaging, directory and meta-directory software solutions for a total purchase price of approximately $277.4 million. On March 8, 2000, we acquired The docSpace Company, a provider of web-based services for secure file delivery, storage and collaboration for a total purchase price of approximately $258.0 million. On March 30, 2000, we acquired RemarQ Communities, Inc., a provider of Internet collaboration services for corporations, web portals and Internet service providers for a total purchase price of approximately $267.6 million. On June 26, 2000, we acquired Netmosphere, Inc., a provider of e-Business solutions for project collaboration and communications for a total purchase price of approximately $41.3 million. On

September 26, 2000, we acquired PeerLogic, Inc., a provider of directory and enterprise application integration software for a total purchase price of approximately $445.1 million.

Liquidity and Capital Resources

Working capital declined to $58.0 million at December 31, 2001 from $186.8 million at December 31, 2000 due primarily to the use of cash to fund the Company’s net loss for 2001, adjusted for non-cash charges, and cash utilized to retire a significant portion of the Company’s convertible debt obligations.

Cash, cash equivalents and short-term investments were $69.2 million at December 31, 2001 and $216.5 million at December 31, 2000. The Company primarily invests its excess cash in money market funds and other highly liquid securities with maturities of less than 90 days with the intent to make such funds readily available for operating purposes. During 2001, we also began investing a portion of our cash in high-grade, low risk investments with an average maturity of three- to twelve-months. As of December 31, 2001, these short-term investments totaled approximately $9.7 million.

Cash and cash equivalents decreased by $156.5 million during 2001 after having increased by $140.6 million in the prior year. The Company used cash to fund operating activities of $91.2 million during 2001 and $80.5 million in 2000, primarily due to our net loss, adjusted for non-cash charges, as operating costs, primarily employee and employee related costs, significantly exceeded the related sales of our software products and services. A more detailed discussion of our 2000 and 2001 operating results can be found in the Results of Operations section of this document. Also contributing to the use of cash in operating activities in 2001 were net cash outlays totaling $8.2 million related to employee and facilities reduction costs and the divestiture of non-core products and services, associated with the Company’s 2001 strategic restructuring activities. In 2000, the payment of $11.6 million in acquisition-related retention bonuses contributed to the net use of cash in operating activities.

During 2001, we used cash in investing activities of $34.9 million to purchase property and equipment, primarily for the acquisition of additional network infrastructure equipment for our data centers, for certain strategic investments and short-term investments in high-grade, low risk instruments. In 2001, we acquired the outstanding 27.13% interest in our Italian subsidiary, CP Italia, for approximately $4.2 million, and paid an investment banking fee associated with our ISOCOR acquisition.

During 2000, we used cash in investing activities totaling $90.4 million primarily to purchase property, equipment and other capital assets and to fund certain strategic acquisitions and investments. The significant outlay in capital expenditures during 2000 was primarily related to installation of additional network infrastructure equipment in our data centers, licenses of new software platforms, and purchases of furniture and equipment for new employees. During 2000, we completed our acquisitions of ISOCOR, docSpace, RemarQ, Netmosphere, and PeerLogic, and as a result, expended a significant amount of capital. In addition, we made several strategic investments in private entities and an initial capital contribution to fund our interest in Critical Path Pacific, Inc. These uses of cash were offset by the repayment of a previous advance made to a private company pursuant to a promissory note and certain of the employee notes.

During 2001, the Company used cash in financing activities of $30.3 million as funds were used to retire a significant portion of the Company’s convertible debt and to payoff capital lease obligations. These cash outlays were partially offset by proceeds raised in a financing transaction closed in the fourth quarter of 2001 (detailed below) and from the exercise of stock options.

During 2001, the Company retired $261.4 million of face value of convertible debt, which resulted in an extraordinary gain on retirement of $179.3 million, inclusive of $6.8 million in write downs of related debt issuance costs. The Company used cash of $53.1 million, as well as a significant portion of the proceeds raised from the issuance of preferred stock, in order to retire this debt. See also Note 14 to the Notes to the Consolidated Financial Statements — Financing Transaction. As of December 31, 2000 and 2001 the total balance outstanding was $300.0 million and $38.4 million, respectively.

During the fourth quarter of 2001, we closed a financing transaction with a group of investors led by General Atlantic Partners, LLC and its affiliates. The financing transaction consisted of approximately

$30 million in gross cash proceeds and the retirement of $65 million in face value of our 5 3/4% Convertible Subordinated Notes in the form of shares of mandatorily redeemable convertible preferred stock, and the issuance to General Atlantic and its affiliates of warrants to purchase 2.5 million shares of common stock. The related proceeds will be used for working capital and general corporate purposes. The cash proceeds to the Company, net of transaction costs, totaled $26.8 million. The related proceeds will be used for working capital and general corporate purposes.

We received net cash proceeds from financing activities during 2000 of $311.5 million due to the sale of $300.0 million in 5 3/4% Convertible Subordinated Notes, as well as from the exercise of employee stock options and the purchase of stock under our employee stock purchase plan. These cash proceeds were partially offset by a payment to retire a note payable assumed in the PeerLogic acquisition and payments to retire principal on capital lease obligations.

Our primary sources of capital have come from both debt and equity financings, that have been completed by Critical Path over the past three years. Revenues generated from the sale of our products and services may not increase to a level that exceeds our operating expenses or could fluctuate significantly as a result of changes in customer demand or acceptance of future products. We also expect to experience increased operating expenses, including moderate increases in strategic areas, such as sales and marketing, and we anticipate that operating expenses and capital expenditures will constitute a material use of our cash. Accordingly, our cash flow from operations may continue to be negatively impacted. We believe that our cash, cash equivalents and anticipated cash from operations will be sufficient to maintain current and planned operations for at least the next twelve months.

Additionally, we have no present understandings, commitments or agreements for any material acquisitions of, or investments in, other complementary businesses, products or technologies. We continually evaluate potential acquisitions of, or investments in, other businesses, products and technologies, and may in the future utilize our cash resources or may require additional equity or debt financing to accomplish any acquisitions or investments. Currently, we are considering several alternatives to expand our presence in the Asian markets and potentially other international markets. These alternatives could increase liquidity through the infusion of investment capital by third-party investors or decrease our liquidity as a result of Critical Path seeking to fund expansion into these markets. Such expansions might also cause an increase in capital expenditures and operating expenses.

The Contractual Obligations and Commitments Table below sets forth our significant obligations and commitments as of December 31, 2001.



			Fiscal Year

								2006
			Total	2002	2003	2004	2005	and beyond


			(in thousands)
Contractual Cash Obligations:
	Convertible subordinated notes, including interest(1)		$45,898	$2,206	$2,206	$2,206	$39,280	$	—
	Operating lease obligations		42,192	5,819	5,290	5,028	4,514		21,541
	Capital lease obligations		2,081	1,232	536	313	—		—
	Other purchase obligations(2)		4,905	4,635	270	—	—		—

		Total Contractual Cash Obligations	$95,076	$13,892	$8,302	$7,547	$43,794	$	21,541

(1) Represent the Critical Path 5 3/4% Convertible Subordinated Notes due April 2005.

(2) Represent certain contractual obligations related to licensed software, maintenance contracts and network infrastructure storage costs.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

Due to our limited operating history, evolving business strategy and the 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 integration of acquisitions we completed in 1999 and 2000, our recent strategic and operational 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 30% in 2001. Our revenues have in some quarters and could continue to fall short of expectations if we experience delays or cancellations of even a small number of orders. We often offer volume-based pricing, which may affect operating margins. A number of factors are likely to cause fluctuations in operating results, including, but not limited to:

• the demand for outsourced messaging services generally and the use of messaging and directory infrastructure products and services in particular;

• the demand for licensed solutions for 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 industry expertise, particularly sales personnel;

• the ability to upgrade, develop and maintain our systems and infrastructure and to effectively respond to the rapid technology change of the messaging and directory infrastructure market;

• 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 quickly handle and alleviate technical difficulties or system outages;

• the announcement or introduction of new or enhanced services by competitors; and

• general economic and market conditions and their affect on our operations and that of our customers.

In addition to the factors set forth above, operating results have been and will continue to 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 customers, investors and other parties with which we have business relationships. These grants of options and warrants also may be dilutive to existing shareholders.

Although we have largely exited non-core product lines, our operating results have been and could continue to be impacted by decisions to eliminate 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. Decisions to eliminate or limit any other offerings of a product or service would involve other factors affecting operational results including the expenditure of capital, the realization of losses, further reductions 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, we do not believe that period-to-period comparisons of operating results are 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 prove volatile and/or decline.

We depend on strategic relationships as well as other sales channels and the loss of any key 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 aggressively marketing our services through new and existing strategic relationships. We depend on a broad acceptance of our software and outsourced messaging services on the part of potential resellers and partners and our acceptance as a supplier of outsourced messaging solutions. We also depend on joint marketing and product development through strategic relationships to achieve further 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. In addition to strategic relationships, we also depend on the ability of our customers to aggressively sell and market our services to their end-users. If we lose any strategic relationships, fail to renew these agreements or relationships, fail to fully exploit our relationships, or fail to develop new strategic relationships, our business and financial results will suffer. The loss of any key strategic relationships would have an adverse impact on our current and future revenues.

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.

In the first quarter of 2001, in response to the restatement of our financial results, we announced a series of changes in our management that included the departure of many senior executives. In the second quarter of 2001, we announced a series of additional changes in our management and board of directors that also included the departures of senior executives and board members. A majority of the current senior executives of the Company joined us in the second and third quarters of 2001. Because of these recent changes and their recent recruitment, 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 and successfully meet operational challenges could be severely impaired. We do not have long-term employment agreements with any of our executive officers. It is possible this high turnover at our senior management levels may also continue for a variety of reasons. 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.

We have a history of losses, expect continuing losses and may never achieve profitability.

As of December 31, 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 do expect that our operating expenses will continue to decrease as a result of our strategic and operational restructuring and other cost-cutting efforts. However, we will continue to spend resources on maintaining and strengthening our business, and this may, in the near term, have a negative effect on our operating results and our financial condition.

In past quarters, 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 infrastructure solutions, and to 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 related 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 also, in turn, cause the price of our common stock to demonstrate volatility and/or to decline.

If we fail to improve our sales and marketing results, we may be unable to grow our business affecting our operating results.

Our ability to increase revenues will depend on our ability to successfully recruit, train and retain experienced and effective 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, and ultimately, grow revenues. This would also adversely impact the timing and extent of our revenues. Because we have experienced 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 and grow our sales and marketing activities, our business could suffer and the price of our common stock could decline.

A limited number of customers account for a high percentage of our revenues and if we lose a major customer or are unable to attract new customers, revenues could decline.

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 often with automatic one year renewals and can be terminated without cause upon 30 - 120 days notice. In addition, a number of our technology industry customers have also suffered from falling revenue, job losses, restructuring and decreased technology spending in the recent economic downturn. If our customers terminate their agreements for any reason 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 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 who offer hosted exchange services. Our primary 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;

• scalability, reliability and performance, and 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; and

• total cost of ownership and operation.

We believe competition will continue to be fierce and further 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 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 and market 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.

Our sales cycle is lengthy and our results could be harmed by delays or cancellations in orders.

Because we sell complex and sophisticated technology, our sales cycle can long and unpredictable often between two to twelve months. Because of the nature of our product and service offerings it can take many months of customer education and product evaluation before a purchase decision is made. In addition, many factors can influence the decision to purchase our product and service offerings including budgetary restraints and decreases in capital expenditures, quarterly fluctuations in operating results of customers and potential customers, the emerging and evolving nature of the internet-based services and wireless services markets. Furthermore, general global economic conditions, and a slowdown in technology spending in particular, have further lengthened and affected our sales cycle, leading to delays and postponements in purchasing decisions. Any delay or cancellation in sales of our products or services could cause our operating results to differ from those projected and cause our stock price to decline.

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, 2002. 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 but not limited to the resources to maintain worldwide operations, our 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 or other derivative instruments, our existing shareholders may experience significant dilution.

Pending litigation could harm relationships with existing or potential strategic partners and customers, and divert management’s attention either of which could harm our business.

We have had filed in recent years, a number of lawsuits against us, including securities class action and shareholder derivative litigation filed in February and August 2001 and February 2002, and certain of our current and former officers and directors and some of our subsidiaries, as well as other lawsuits related to acquisitions, employee terminations and copyright infringement. While these lawsuits vary greatly in the materiality of potential liability associated with them, the uncertainty associated with substantial unresolved lawsuits could seriously harm our business, financial condition and reputation, whether material individually or in the aggregate. In particular, this uncertainty could harm our relationships with existing customers, our ability to obtain new customers and our ability to operate certain aspects of our business.

The continued defense of the lawsuits also could result in continued 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 payments, individually or in the aggregate, could seriously harm our financial condition. Many of the complaints associated with these lawsuits 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. While we maintain customary business insurance coverage, we have not set aside any financial reserves relating to potential damages associated with any of these lawsuits.

Failure to complete the settlement of pending securities class action and shareholder derivative action could materially harm our business.

Although the Company has reached settlement agreements in connection with the securities class action pending in the U.S. District Court for the Northern District of California, we cannot provide assurance that a final settlement shall be approved in accordance with the settlement agreement, or at all. The approval of the definitive settlement agreements between the parties is subject to other factors, such as court review and approval, before the subject actions are dismissed. In addition, the definitive settlement agreements entered into between the parties are also subject to notice to the putative class and of the shareholders of the Company, as well as review and approval by the court. There can be no assurance that the court will approve the settlement. If the settlement were not given final approval, it could have a number of materially detrimental effects on the Company’s financial condition and business.

Should the Court fail to approve the settlement, and the litigation continue, there can be no assurance that fees and expenses, and any ultimate resolution associated with such litigation, shall be within the coverage limits of our insurance and/or our ability to pay such amounts. Although the terms of the settlement agreement are within the coverage limits of the Company’s directors and officers insurance, should the current agreement in principle fail to be approved by the court, there can be no assurance that the Company will be able to conclude such litigation on terms that coincide with the coverage limits of our insurance and/or ability to pay upon any final determination. A failure to complete the settlement could also cast doubt as to the prospects of the Company in the eyes of our customers, potential customers and investors, and cause the Company’s stock price to decline.

Although concluded without penalty to the Company, lingering effects of the recent 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 current and former officers associated with us. The investigation relates to non-specified accounting matters, financial reports, other public disclosures and trading activity in our stock. In February 2002, the SEC announced the conclusion of the investigation as to the Company. Although the SEC did not impose any penalties against the Company, we consented without admitting or denying liability, to an administrative order that the Company violated certain non-fraud provisions of the federal securities laws

and to a cease and desist order. In addition, the SEC and the Department of Justice charged two former employees of the Company with various violations of the securities laws. Despite the conclusion of the investigation of the Company, lingering concerns about the actions leading up to the restatement of financials for the third and fourth quarters of 2000 has nevertheless cast doubt on the future of the Company in the eyes of customers and investors and could continue to harm our business and cause the price of our common stock to continue to fluctuate and/or decline significantly.

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 (i) having net tangible assets of at least $4 million and (ii) maintaining a minimum bid price per share of $1. As of December 31, 2001 we were in compliance with all Nasdaq National Market listing requirements. However, there were periods in the second and third quarters of 2001 when the closing bid price per share for our common stock was well below $1. Although our bid price has been above $1 per share since November 1, 2001, if the bid price of our common stock price again slips below $1 per share for more than 60 days, our common stock may not remain listed on The Nasdaq National Market. Also effective November 1, 2002, we will also need to comply with the Nasdaq National Market’s revised quantitative maintenance criteria including a new minimum requirement of $10.0 million in stockholders’ equity. The Nasdaq National Market’s Audit Committee Rules require that our audit committee be comprised of at least three independent members. We believe that we currently comply with this requirement. However, there can be no assurance that we will be able to comply with the quantitative maintenance criteria or any of the Nasdaq National Market’s rules in the future. If we fail to maintain continued listing on the Nasdaq National Market and must move to a market with less liquidity, our financial condition could be harmed and our stock price would likely decline. 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.

Our stock price has demonstrated volatility during recent quarters and continued volatility in the stock market may cause further fluctuations and/or decline in our stock price.

The trading price of our common stock has been and may continue to experience volatility and wide fluctuations. For example, during the fourth quarter of 2001, the closing sale prices of our common stock on the Nasdaq National Market ranged from $0.51 on October 1, 2001 to $2.83 on November 21, 2001, and the closing sale price of our common stock on December 31, 2001 was $2.74. Our stock price may further fluctuate or decline in response to any number of factors and events, such as announcements related to litigation, technological innovations, strategic and sales relationships, new product and service offerings by us or our competitors, changes in senior management, changes in financial estimates and recommendations of securities analysts, the operating and stock price performance of other companies that investors may deem comparable, news reports relating to trends in our markets and overall market conditions. In addition, the stock market in general, particularly with respect to technology stocks, has experienced extreme volatility and a significant cumulative decline in recent quarters. This volatility and decline has affected many companies, including our company, irrespective of 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 or other factors.

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. Our director and officer liability insurance, that was in place

through March 2002, and our current insurance that was renewed through March 2003, contain similar provisions.

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. The Company has made payments in connection with the indemnification of officers and directors in connection with currently pending lawsuits and has reserved for estimated future amounts to be paid in connection with legal expenses and others costs of defense of pending lawsuits.

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 carefully manage expenses and growth could cause our operating results to suffer.

In the past, our management of operational expenses and the growth of our business have contributed to our history of losses. In addition, the expansion of our operations 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 and expenses effectively, our business and operating results could suffer.

If we are not successful in finalizing our strategic plan, including the exit of certain non-core products and services, 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 and third quarters of 2001, implementation of the plan occurred and, accordingly, products and services determined to be non-core to our strategy were strategically exited. Our strategic plan also included initiatives aimed at reducing operating costs through headcount reduction and consolidation of approximately two-thirds of our office space and related contracts and leases, all in keeping with our increased focus on core messaging products and services. During the fourth quarter of 2001 we incurred some addition charges in connection previously announced reductions in force and were able to finalize the consolidation of additional facilities and related contracts and expenses associated with those facilities. The non-core products and services comprised approximately 37% of total revenues in the first quarter of 2001, approximately 24% of total revenues in the second quarter of 2001, approximately 18% of total revenues in the third quarter of 2001, and 3% of total revenues in the fourth quarter of 2001. We expect that any further charges associated with the strategic restructuring will be minimal in future quarters.

We may face continued technical, operational and strategic challenges preventing us from successfully continuing the integration or divestiture of acquired businesses.

Acquisitions involve risks related to the integration and management of acquired technology, operations and personnel. In addition, in connection with our strategic restructuring, the Company elected to divest or discontinue many of the acquired businesses. Both the integration and divestiture of acquired businesses have been and will continue to be complex, time consuming and expensive processes, which may disrupt and distract our management from its core business. With respect to integration, 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. With divestitures, the timing and transition of those businesses and their customers to other entities has required and will continue to require resources from our legal, finance and corporate development teams as well as expenses associated with the conclusion of those transactions.

Consequently, we may not be successful or efficient in integrating or divesting acquired businesses or technologies and may not achieve anticipated revenues and benefit and/or cost reductions. 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 be realized. In addition, if we are not successful in divesting non-core acquired businesses, we will incur costs associated with the cessation of operations or wind up of acquired businesses. In either event, we will likely further 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 eliminated 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. Such decisions to eliminate or limit our offering of an acquired product or service involved and could continue to include the expenditure of capital, the realization of losses, further 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 currently license many third-party technologies and may need to license further technologies and we face risks in doing so that could cause our operating results to suffer.

We intend to continue to license certain technologies from third parties and incorporate such technologies into our products and services, including web server technology, virus and anti-spam solutions 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. To the extent we cannot license needed technologies or solutions, we may have to devote Company resources to the development of such technologies which could materially harm our business and operations.

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, potential patent and copyright infringement issues, 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. In addition, an inability to obtain needed licenses could delay product and service development until equivalent technology can be identified, licensed and integrated. Any delays in services or integration problems could cause our business and operating results to suffer.

If our system security is breached, our business and reputation could suffer.

A fundamental requirement for online communications is the secure transmission of confidential information over public networks. Third parties may attempt to breach our security or that of our customers. If

these attempts are successful, customers’ confidential information, including customers’ profiles, passwords, financial account information, credit card numbers or other personal information could be breached. We may be liable to our customers for any breach in security and a breach could harm our reputation. We rely on encryption technology licensed from third parties. Although we have implemented network security measures, our servers remain 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.

Changes in the regulatory environment for the operation of our business or those of our customers could pose risks.

Few laws currently apply directly to activity on the Internet and the messaging business, however new laws are proposed and other laws made applicable to Internet communications every year. In particular, the Company faces risks associated with privacy, confidentiality of user data and communications, consumer protection, taxation, content, copyright, trade secrets, trademarks, antitrust, defamation and other legal issues. In particular, legal concerns with respect to communication of confidential data have affected our financial services and health care customers due to newly enacted federal legislation. The growth of the industry and the proliferation of Internet-based messaging devices and services may prompt further legislative attention to our industry and thus invite more regulatory control of our business. The imposition of more stringent protections and/or new regulations and application of laws to our business could burden our company and those with which we do business. Further, the adoption of additional laws and regulations could limit the growth of our business and that of our business partners and customers. Any decreased generalized demand for our service or the loss of or decrease in business by a key partner due to regulation or the expense of compliance with any regulation, could either increase the costs associated with our business or affect revenue, either of which could harm our financial condition or operating results. Certain of our service offerings include operations subject to the Digital Millenium Copyright Act of 1998. The Company has expended resources and implemented processes and controls in order to remain in compliance with DMCA but there can be no assurance that our efforts will be sufficient and/or new legislation and case law will not affect the operation of certain services.

In addition, the applicability of laws and regulations directly applicable to the businesses of our customers, particularly customers in the fields of banking and health care, will continue to affect us. The security of information about our customers’ end-users continues to be an area where a variety of laws and regulations with respect to privacy and confidentiality are enacted. As our customers implement the protections and prohibitions with respect to the transmission of end user data, our customers will look to us to assist them in remaining in compliance with this evolving area of regulation. In particular the Gramm-Leach-Blilely Act contains restrictions with respect to the use and protection of banking records for end-users whose information may pass through our system.

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.

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. In some instances, we may be subject to criminal liability in connection with Internet content transmission.

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 might need to be used to settle claims. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage could harm our reputation and business and operating results, or could result in the imposition of criminal penalties.

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, trade secret laws, contractual restrictions and patents to protect our proprietary rights, and if these rights are not sufficiently protected, our ability to compete and generate revenue could be harmed.

We rely on a combination of trademark, copyright and trade secret laws, contractual restrictions, such as confidentiality agreements and licenses, and patents to establish and protect our proprietary rights, which we view as critical to our success. 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 that impose certain restrictions on the licensee’s ability to utilize the software. 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, which could harm our competitive position and market share. 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. In addition, we have several patents pending in the United States and may seek additional patents in the future. However, 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 do not know if our patent applications or any of our future patent applications will be issued with the scope of the claims sought, if at all, or whether any patents we have received or will receive will be challenged or invalidated.

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;

• 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; and

• end user license provisions in our contracts that protect us against unauthorized use, copying, transfer and disclosure of the licensed program may be unenforceable.

In addition, the laws of some foreign countries may 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 no claims of alleged patent infringement are currently pending, we cannot be certain that our products do not infringe issued patents that may relate to our products. In addition, because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to our software products.

We may 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 do not properly identify the feature preferences of prospective customers, or if we fail to deliver email features that 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 entails significant technical and business risks and requires 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.

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 affect 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, some 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 our losses. If losses due to delays or inability to pay are greater than our reserves, it could harm our business, operating results and financial condition.

If we do not successfully address the risks inherent in the expansion of our international operations, our business could suffer.

We derived 40% of our revenues from international sales in the fiscal year ended December 31, 2001 and 38% of our revenues 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 or operate 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;

• 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.

We rely on a continuous power supply to conduct our operations, and any significance disruption in California’s energy supply could harm our operations and increase our expenses.

During 2000 and 2001 California experienced a serious energy crisis that could have and may in the future 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 of 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 their operations, could harm their business, and ultimately could also harm our business if they were to terminate or fail to renew contracts. We do not carry sufficient business interruption insurance to compensate us for losses that may occur as a result of blackouts, 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.

SUPPLEMENTAL ALTERNATIVE MEASUREMENT FINANCIAL DATA

(in thousands)

The following supplemental alternative measurement financial information presents Critical Path’s condensed consolidated results of operations during 1999, 2000 and 2001, excluding the impact of certain special charges consisting of (i) amortization of intangible assets associated with purchase business combinations, (ii) accruals for employee retention bonuses associated with purchase business combinations, (iii) stock-based compensation associated with outstanding options and warrants, (iv) one-time charges related to our restructuring initiative, (v) impairment of long-lived assets, (vi) write-down of investments, (vii) gain on the retirement of convertible subordinated debt, and (viii) accretion on redeemable convertible preferred shares. This supplemental presentation is for informational purposes only, and attempts to depict the financial results of Critical Path excluding certain non-cash and extraordinary one-time charges and gains. It is not intended to replace the consolidated operating results prepared and presented in accordance with generally accepted accounting principles.



			Year Ended December 31,

			1999			2000			2001

Consolidated Statement of Operations Data:
Net revenues
	Software license		$	—		$	51,607		$	30,960
	Hosted messaging			16,157			58,553			43,821
	Professional services			—			14,527			12,573
	Maintenance and support			—			10,966			16,819

		Total net revenues		16,157			135,653			104,173

Cost of net revenues
	Software license			—			2,731			1,533
	Hosted messaging			16,505			59,104			59,124
	Professional services			—			5,945			10,315
	Maintenance and support			—			8,060			10,081

		Total cost of net revenues		16,505			75,840			81,053

Gross profit (loss)				(348	)		59,813			23,120

Operating expenses
	Sales and marketing			13,811			66,125			53,356
	Research and development			7,682			31,022			30,744
	General and administrative			14,051			30,444			42,260

		Total operating expenses		35,544			127,591			126,360

Loss from operations				(35,892	)		(67,778	)		(103,240	)
Interest and other income (expense), net				7,061			12,970			5,840
Interest expense				(752	)		(15,948	)		(14,714	)
Equity in net loss of joint venture				—			(1,019	)		(1,866	)
Minority interest in net income of consolidated subsidiary				—			(649	)		—

Loss before income taxes				(29,583	)		(72,424	)		(113,980	)
Provision for income taxes				—			(6,513	)		(5,606	)

Net loss			$	(29,583	)	$	(78,937	)	$	(119,586	)

Net loss per share — basic and diluted			$	(0.99	)	$	(1.31	)	$	(1.62	)

Weighted average shares — basic and diluted				29,770			60,399			73,981
EBITDA(1)			$	(27,829	)	$	(31,798	)	$	(58,343	)


(1)	Earnings before interest, taxes, depreciation and amortization (excluding equity in net loss, minority interest in net income, one-time charges identified in the table below).

The following table reconciles the alternative measurement financial data presented above to the consolidated operating results prepared and presented in accordance with generally accepted accounting principles (“GAAP”).



			Year Ended December 31,

			1999			2000			2001

Supplemental pro forma net loss			$	(29,583	)	$	(78,937	)	$	(119,586	)
Add back cost of revenue, operating and non-operating expense amounts excluded from the calculation of pro forma net loss:
	Amortization of purchased technology			—			(18,140	)		(21,284	)
	Amortization of intangible assets			(32,259	)		(355,868	)		(13,216	)
	Acquisition-related retention bonuses in cost of net revenues			(520	)		(1,040	)		—
	Acquisition-related retention bonuses in operating expenses			(3,587	)		(8,294	)		(1,381	)
	Stock-based expense in cost of revenue			(4,532	)		(1,586	)		(4,050	)
	Stock-based expense in operating expenses			(46,460	)		(50,598	)		(53,615	)
	Impairment of long-lived assets in cost of net revenues			—			(25,315	)		(16,654	)
	Impairment of long-lived assets in operating expenses			—			(1,282,150	)		(9,991	)
	Acquired in-process research and development			—			(3,700	)		—
	Restructuring and other expense			—			(3,248	)		(18,267	)
	Loss on investments reported as a non-operating expense			—			(23,589	)		(702	)

		Subtotal of amounts excluded from pro forma net loss	$	(87,358	)	$	(1,773,528	)	$	(139,160	)

GAAP loss before extraordinary item				(116,941	)		(1,852,465	)		(258,746	)
Gain on retirement of convertible subordinated notes, net				—			—			179,282

GAAP net loss			$	(116,941	)	$	(1,852,465	)	$	(79,464	)
Accretion on redeemable convertible preferred shares				—			—			(356	)

GAAP net loss attributable to common shares			$	(116,941	)	$	(1,852,465	)	$	(79,820	)

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

As of December 31, 2001, the Company’s short-term investments consisted of available-for-sale securities, excluding those classified as cash equivalents, of $9.7 million. These investments are primarily comprised of low risk government securities and corporate bonds. See also Note 6 to the Notes to Consolidated Financial Statements — Investments).

These securities are subject to equity price risk. The Company has not attempted to reduce or eliminate its market exposure on these equity securities. At December 31, 2001 the Company carried long-term investments totaling $7.2 million, comprised of $1.0 million in investments in marketable securities and $6.2 million in investments in non-marketable securities. These securities represent strategic equity investments in corporate partners, certain of which are publicly traded and marketable and certain of which are privately held. For each 10% decline in market value of its available-for-sale equity securities from December 31, 2001, the Company’s marketable securities would be insignificantly impacted.

We do not attempt to reduce or eliminate our market exposure on these securities.

The Company’s long-term obligations consist of the Company’s $38.4 million five-year, 5 3/4% Convertible Subordinated Notes due April 2005, and certain fixed rate capital leases. Accordingly, an immediate 10% change in interest rates would not affect the Company’s long-term obligations or the Company’s results of operations.

A significant portion of our international 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 rate fluctuations cannot be predicted with any certainty, however our exposure to foreign currency rate risk is

primarily associated with fluctuations in the Euro, Italian Lire and Irish Punt. We realized a net loss on foreign exchange equal to $280,000 during 2000 and a net gain of $947,000 in 2001. To date, we have not sought to hedge the risks associated with fluctuations in exchange rates.

Information relating to quantitative and qualitative disclosure about market risk is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 8. Financial Statements and Supplemental Data

Financial Statements

Reference is made to the Index of Consolidated Financial Statements that appears on page F-1 of this report. The Report of Independent Accountants, Consolidated Financial Statements, Notes to Consolidated Financial Statements and Financial Statement Schedule which are listed in the Index of Consolidated Financial Statements and which appear beginning on page F-2 of this report are incorporated into this Item 8.

Supplemental Data

The following table sets forth certain unaudited quarterly statements of operations data for each of Critical Path’s quarters during the 2000 and 2001 fiscal years. This information has been derived from Critical Path’s consolidated unaudited financial statements, which, in management’s opinion, have been prepared on the same basis as the audited consolidated financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the quarters presented. This information should be read in conjunction with the audited consolidated financial statements of Critical Path and the notes thereto included elsewhere in this document. The operating results for any quarter are not necessarily indicative of the operating results for any future period.



			2000									2001

			First		Second		Third		Fourth			First			Second			Third		Fourth


			(in thousands)
Consolidated Statement of Operations Data:
Net revenues
	Software license		$	11,070	$	13,897	$	12,365	$	14,275		$	5,550		$	8,913		$	7,724	$	8,773
	Hosted messaging			9,095		14,220		16,759		18,479			14,439			11,141			10,000		8,241
	Professional services			2,493		3,030		3,609		5,395			3,417			2,900			4,206		2,050
	Maintenance and support			1,895		2,348		2,609		4,114			3,737			4,131			4,857		4,094

		Total net revenues		24,553		33,495		35,342		42,263			27,143			27,085			26,787		23,158

Cost of net revenues
	Software license			1,007		737		634		353			291			126			517		599
	Hosted messaging			11,880		13,538		15,552		18,134			17,938			17,440			13,982		9,764
	Professional services			1,056		1,388		1,317		2,184			2,966			2,594			2,565		2,190
	Maintenance and support			1,404		1,812		2,207		2,637			2,586			2,414			2,837		2,244
	Amortization of purchased technology			2,114		4,421		4,434		7,171			5,672			5,672			4,970		4,970
	Acquisition-related retention bonuses			390		390		260		—			—			—			—		—
	Stock-based expenses			493		383		381		329			1,303			1,469			631		647
	Impairment of long-lived assets			—		—		—		25,315			—			4,207			—		12,447

		Total cost of net revenues		18,344		22,669		24,785		56,123			30,756			33,922			25,502		32,861

Gross profit (loss)				6,209		10,826		10,557		(13,860	)		(3,613	)		(6,837	)		1,285		(9,703	)



			2000												2001

			First			Second			Third			Fourth			First			Second			Third			Fourth


			(in thousands)
Operating expenses
	Sales and marketing			13,605			17,342			16,128			19,050			18,712			15,694			11,018			7,932
	Research and development			6,323			9,213			7,853			7,633			9,934			8,333			7,322			5,155
	General and administrative			6,766			7,332			6,568			9,778			13,293			11,745			9,447			7,775
	Amortization of intangible assets			47,499			88,986			94,160			125,223			4,133			4,112			2,485			2,486
	Acquisition-related retention bonuses			2,679			3,693			1,028			894			170			793			92			326
	Stock-based expenses			6,703			11,942			13,835			18,118			16,430			14,244			11,286			11,655
	Restructuring and other expenses			—			—			3,248			—			—			8,481			3,779			6,007
	Acquired in-process research and development			200			—			3,500			—			—			—			—			—
	Impairment of long-lived assets			—			—			—			1,282,150			—			9,991			—			—

		Total operating expenses		83,775			138,508			146,320			1,462,846			62,672			73,393			45,429			41,336

Loss from operations				(77,566	)		(127,682	)		(135,763	)		(1,476,706	)		(66,285	)		(80,230	)		(44,144	)		(51,039	)
Interest and other income (expense), net				1,258			4,697			4,905			2,110			2,425			2,895			178			342
Interest expense				(274	)		(5,260	)		(5,214	)		(5,200	)		(5,067	)		(5,315	)		(3,829	)		(503	)
Equity in net loss of joint venture				—			—			(640	)		(379	)		(776	)		(397	)		(346	)		(347	)
Minority interest in net income of consolidated subsidiary				—			(325	)		(201	)		(123	)		—			—			—			—
Loss on investments				—			—			—			(23,589	)		—			(702	)		—			—

Loss before extraordinary item and income taxes				(76,582	)		(128,570	)		(136,913	)		(1,503,887	)		(69,703	)		(83,749	)		(48,141	)		(51,547	)
Provision for income taxes				(360	)		(1,439	)		(2,534	)		(2,180	)		(343	)		(1,150	)		(2,180	)		(1,933	)

Loss before extraordinary item			$	(76,942	)	$	(130,009	)	$	(139,447	)	$	(1,506,067	)	$	(70,046	)	$	(84,899	)	$	(50,321	)	$	(53,480	)
Gain on retirement of convertible subordinated notes, net				—			—			—			—			—			3,818			137,222			38,242

Net profit (loss)			$	(76,942	)	$	(130,009	)	$	(139,447	)	$	(1,506,067	)	$	(70,046	)	$	(81,081	)	$	86,901		$	(15,238	)
Accretion on redeemable convertible preferred shares				—			—			—			—			—			—			—			(356	)

Net loss attributable to common shares			$	(76,942	)	$	(130,009	)	$	(139,447	)	$	(1,506,067	)	$	(70,046	)	$	(81,081	)	$	86,901		$	(15,594	)


Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure*

None.

PART III


Item 10.	*Directors and Executive Officers of the Registrant*

Directors and Executive Officers

The executive officers, directors and key employees of Critical Path and their ages as of March 15, 2002 are as follows:


Name	Age		Position

David C. Hayden		46	Executive Chairman of the Board
William E. McGlashan, Jr.		38	Vice Chairman of the Board and Chief Executive Officer
Pierre Van Beneden		54	President
Laureen DeBuono		44	Executive Vice President and Chief Financial Officer
Bernard Harguindeguy		44	Executive Vice President and Chief Marketing Officer
Laurie Priddy		39	Executive Vice President, Operations and General Manager of Hosted Operations
Michael J. Zukerman		42	Senior Vice President, General Counsel and Secretary
Menelaos (Michael) Serbinis		28	Vice President, Engineering and Chief Technology Officer
Raul Fernandez(1)(2)		35	Director
William E. Ford(1)(2)		40	Director
Jeffrey Webber(2)		49	Director


(1)	Member of the Compensation Committee of the Board of Directors.

(2)	Member of the Audit Committee of the Board of Directors.

David C. Hayden founded Critical Path and served as Director, Chairman, President, Chief Executive Officer and Secretary from its inception in February 1997 to October 1998. Mr. Hayden has served as Chairman of the Board of Directors of Critical Path since October 1998 and was appointed Executive Chairman of the Board in February 2001. From February 1993 to August 1996, Mr. Hayden served as chairman, chief executive officer, and co-founder of The McKinley Group, Inc., creators of Magellan, an Internet search engine. Mr. Hayden is also a member of the Board of Directors of E*Trade, Inc.

William McGlashan has served as our Vice Chairman and Chief Executive Officer since December of 2001. Mr. McGlashan joined the Company in April 2001 as our Interim President and Chief Operating Officer. He was appointed Interim Chief Executive Officer in August 2001. Prior to joining the Company, Mr. McGlashan served as the chief executive officer and founder of the Vectis Group LLC, an investment company, from 2000 to 2001. Prior to his tenure at Vectis, he was a venture partner at Whitney and Co., a venture capital firm, and was also the co-founder and president of Pharmanex, a phyto-pharmaceutical company from 1995 to 2000. He co-founded and served as chief executive officer of Generation Ventures, a firm funded by Whitney & Co., from 1993 to 1995 and also co-founded and served as president for TRADE, Inc. from 1991 to 1993. Prior to that, Mr. McGlashan was a senior associate at Bain Capital from 1990 to 1991.

Pierre Van Beneden has served as our President since October 2001. Mr. Van Beneden joined Critical Path as President in October 2001. Prior to joining Critical Path, Mr. Van Beneden was executive vice-president, worldwide field operations at the Lotus unit of IBM Corp. from 2000 to 2001 and from 1995 to 2000, Mr. Van Beneden served in various senior positions at Lotus and IBM Corp., including vice president of software sales for the IBM Software Brands, IBM EMEA and general manager and senior vice president, Lotus EMEA.

Laureen DeBuono has served as of Executive Vice President and Chief Financial Officer since January 2002. Ms. DeBuono joined Critical Path in September 2001 as Senior Vice President and Interim Chief Financial Officer. Prior to joining the Company, Ms. DeBuono served as chief financial officer and chief operating officer for More.com, Inc. from 1999 to 2000. Prior to that, Ms. DeBuono was executive vice President, chief operating officer and chief financial officer at ReSound Corporation from 1998 to 1999. Prior to that, Ms. DeBuono held several executive management positions with Nellcor Puritan Bennett Inc. from 1992 to 1998.

Bernard Harguindeguy has served as of Executive Vice President and Chief Marketing Officer since December 2001. Before joining Critical Path, Mr. Harguindeguy was a consultant serving various technology companies. Prior to that, he served as chief executive officer of Worldtalk Communications Corporation, from 1996 to 1999.

Laurie Priddy has served as of Executive Vice President, Operations and General Manager, Hosted Operations since February 2002. Ms. Priddy joined Critical Path from Exodus Communications, where she last served as executive vice president of operations from 2001 to 2002. Ms. Priddy came to Exodus as part of the acquisition of GlobalCenter, Inc. where she was co-chief operating officer from 2000 to 2001. Prior to that, Ms. Priddy served as president and chief executive officer of NDTC, AT&T Broadband and Internet Services, from 1999 to 2000.

Michael J. Zukerman has served as our Senior Vice President, General Counsel and Secretary since June 2001. From 1999 to 2001, Mr. Zukerman served as vice president of business development for Driveway Corporation. Prior to that, Mr. Zukerman was general counsel and vice president of business development at SegaSoft Networks, a subsidiary of Sega Networks, from 1996 to 1999. Prior to that, from 1989 to 1996, Mr. Zukerman worked at Netopia, Inc. (formerly Farallon Communications), where he last served as vice president and general counsel.

Menelaos (Michael) Serbinis has served as our Vice President and Chief Technology Officer since February 2001. Mr. Serbinis joined Critical Path as its Chief Security Officer in March 2000 and served in this capacity until February 2001. From November 1997 to March 2000, Mr. Serbinis was the chief technology officer of The docSpace Company, which he co-founded in November 1997. From September 1996 to October 1997, Mr. Serbinis was a software engineer for Total Control, a subsidiary of General Electric. From April 1996 to August 1996, Mr. Serbinis was responsible for search engine engineering at Zip2 Corporation.

Raul J. Fernandez has served as a director of the Company since December 2001. Mr. Fernandez is the Chief Executive Officer of Dimension Data North America and was appointed to the board of directors of Dimension Data Holdings in 2001 following the Group’s acquisition of Proxicom Corporation. Mr Fernandez was the founder and chief executive officer of Proxicom. Mr. Fernandez is also a member of the Board of Directors of Liz Claiborne, Inc.

William E. Ford has served as a director of the Company since December 2001. Mr. Ford is a general partner at General Atlantic Partners LLC, a worldwide private equity firm, where he has worked since 1991. From 1987 to 1991, Mr. Ford worked at Morgan Stanley & Co. as an investment banker, where he was a member of the merger and acquisition and corporate finance departments.

Jeffrey Webber has served as a director of the Company since July of 2001. He is the founder and partner in the R.B.Webber & Company, a technology management consulting firm where he was worked since 1991.

Additional information required by this item is incorporated by reference to the information set forth in the section entitled “Information About the Board of Directors and Committees of the Board” in the Proxy Statement in connection with the solicitation of proxies for our 2002 Annual Meeting of Shareholders (“Proxy Statement”) to be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year ended December 31, 2001. This information is contained in the Section entitled “Information about the Board of Directors and Committees of the Board — Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement and is incorporated by reference.

Item 11. Executive Compensation

The information required by this item is incorporated by reference to the information set forth in the sections entitled “Compensation of Executive Officers” and “Election of Directors” contained in the Proxy Statement for our 2002 Annual Meeting of Shareholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this item is incorporated by reference to the information set forth in the section entitled “Common Stock Ownership of Certain Beneficial Owners and Management” contained in the Proxy Statement for our 2002 Annual Meeting of Shareholders.

Item 13. Certain Relationships and Related Party Transactions

The information required by this item is incorporated by reference to the information set forth in the section entitled “Transactions with Related Parties” contained in the Proxy Statement for our 2002 Annual Meeting of Shareholders.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1) Index to Consolidated Financial Statements

Please see the accompanying Index to Consolidated Financial Statements that appears on page F-1 of this report. The Report of Independent Accountants, Consolidated Financial Statements and Notes to Consolidated Financial Statements which are listed in the Index to Consolidated Financial Statements and which appear beginning on page F-2 of this report are incorporated by reference into Item 8 above.

(a)(2) Financial Statement Schedule

Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 1998, 1999 and 2000 appears on page S-1 of this report and should be read in conjunction with the consolidated financial statements and related notes thereto and report of independent accountants filed herewith.

Schedules not mentioned above have been omitted because the information required to be set forth therein is not applicable or the information is otherwise included in the Financial Statements or notes thereto.

(b) Reports on Form 8-K

For the quarter ended December 31, 2001, we filed the following reports on Form 8-K:

      (1) On October 15, 2001, we filed a current report on Form 8-K dated October 9, 2001, reporting under Item 5 and Item 7 our balance sheet restructuring by repurchasing approximately $192 million of face value of our outstanding 5 3/4% Convertible Subordinated Notes due April 1, 2005. As part of this report, we filed our Pro Forma Balance Sheet as of June 30, 2001.

      (2) On November 7, 2001, we filed a current report on Form 8-K dated October 23, 2001, reporting under Item 5 the appointment of Pierre Van Beneden as President and William McGlashan, Jr. as Interim Chief Executive Officer.

      (3) On November 13, 2001, we filed a current report on Form 8-K dated November 8, 2001, reporting under Item 5 that we entered into binding memoranda of understanding with respect to the settlement of securities class action and shareholder derivative litigation pending against us in the U.S. District Court for the Northern District of California and that we had announced the closing of a $95 million financing transaction from a group of investors and their affiliate entities.

      (4) On December 17, 2001, we filed a current report on Form 8-K dated December 11, 2001, reporting under Item 5 the appointments of William E. Ford and Raul J. Fernandez to our board of directors and the resignations of Larry Weber and Stephen J. Richards from our board of directors.

The following exhibits are filed as part of, or are incorporated by reference into, this Annual Report on Form 10-K:


	3(i).1			Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3(i)(b) to the Registrant’s Registration on Form S-1 (File No. 333-71499)).
	3(i).2			Amendment to the Articles of Incorporation, dated January 5, 2001 (Incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
	3(i).3			Certificate of the Powers, Designations, Preferences and Rights of the Series D Cumulative Redeemable Convertible Participating Preferred Stock dated November 6, 2001.
	3(ii)			Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3(ii)(b) to the Registrant’s Registration Statement on Form S-1 (File No. 333-71499)).
	4.1			Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-71499)).


	4.2			Preferred Stock Rights Agreement dated as of March 19, 2001 between Registrant and ComputerShare Trust Company, Inc., including the Certificate of Determination, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B and C respectively (Incorporated by reference to Exhibit 4.5 of Registrant’s Form 8-A filed on May 7, 2001).
	4.3			Indenture, dated March 31, 2000, by and between Registrant and State Street Bank and Trust Company of California, N.A., Trustee, relating to the $300 million five-year, 5.75% Convertible Subordinated Notes due April 1, 2005 (Incorporated by reference to Exhibit 4.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000).
	4.4			Warrant to Purchase Common Stock dated March 29, 2001 issued by the Registrant to Vectis Group LLC (Incorporated by reference to Exhibit 4.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
	4.5			Warrant to Purchase Common Stock dated January 29, 1999 issued by the Registrant to America Online, Inc. (Incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-1 (File No. 333-71499)).
	4.6			Warrant to Purchase up to 25,000 Shares of Common Stock dated as of December 29, 1999 by and between Ecker Folsom Properties, LLC.
	4.7			Warrant to Purchase up to 834,000 shares of Common Stock dated as of June 2000 by and between Worldsport Networks Europe Ltd.
	4.8			Stock and Warrant Purchase and Exchange Agreement dated as of November 8, 2001 by and among Registrant and General Atlantic Partners 74, LP, GAP Coinvestment Partners II, LP, Gapstar, LLC, Vectis CP Holdings, LLC, Cenwell Limited, Campina Enterprises Limited.
	4.9			Stockholders Agreement dated as of November 8, 2001 by and among Registrant and General Atlantic Partners 74, L.P., GAP Coninvestment Partners II, LP, Gapstar, LLC, Vectis CP Holdings, LLC, Cenwell Limited, Campina Enterprises Limited.
	4.10			Registration Rights Agreement dated as of November 8, 2001 by and among Registrant and General Atlantic Partners 74, L.P., GAP Coninvestment Partners II, LP, Gapstar, LLC, Vectis CP Holdings, LLC, Cenwell Limited, Campina Enterprises Limited.
	4.11			Escrow Agreement dated as of November 8, 2001 by and among Registrant and General Atlantic Partners 74, L.P., GAP Coninvestment Partners II, LP, Gapstar, LLC, Vectis CP Holdings, LLC, Cenwell Limited, Campina Enterprises Limited.
	4.12			Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-8 filed on June 15, 2001 (File No. 333-63080)).
	4.13			Amended and Restated 1998 Stock Plan. (Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8 filed on June 15, 2001 (File No. 333-63080)).
	4.14			1999 Stock Option Plan and forms of agreements thereunder (Incorporated by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-8 filed on September 22, 1999 (File No. 333-87553)).
	10.1			Master Services Agreement dated December 10, 1998 by and between the Registrant and US West Communications Services, Inc. (Incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1 (File No. 333-71499)).
	10.2			Amendment to Email Services Agreement September 30, 1998 by and between the Registrant and E*TRADE Group, Inc. (Incorporated by reference to Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1 (File No. 333-71499)).
	10.3			Email Services Agreement dated January 29, 1999 by and between the Registrant and ICQ, Inc. (Incorporated by reference to Exhibit 10.22 to the Registrant’s Registration Statement on Form S-1 (File No. 333-71499)).
	10.4			Hills Plaza I Office Lease dated as of November 16, 2001 by and between Registrant and SPI Hills Plaza Venture, LLC.


	10.5			Standard Industrial/ Multitenant Lease-Gross dated June 20, 1997 by and between the Registrant and 501 Folsom Street Building. (Incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1 (File No. 333-71499)).
	10.6			Office lease dated December 1999 by and between Ecker-Folsom Properties, LLC and the Registrant. (Incorporated by reference to Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999).
	10.7			Office lease dated December 1999 by and between Ecker-Folsom Properties, LLC and the Registrant. (Incorporated by reference to Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999).
	10.8			Agreement dated as August 13, 2001 by and between Registrant and David Hayden (Incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter and nine months ended September 30, 2001).
	10.9			Nonstatutory Stock Option Agreement dated as of November 8, 2001 by and between Registrant and David Hayden.
	10.10			Agreement dated as of August 1, 2001 by and between Registrant and William E. McGlashan, Jr. (Incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report for the quarter and nine months ended September 30, 2001).
	10.11			Nonstatutory Stock Option Agreement dated as of August 1, 2001 by and between Registrant and William E. McGlashan, Jr.
	10.12			Nonstatutory Stock Option Agreement dated as of November 8, 2001 by and between Registrant and William E. McGlashan, Jr.
	10.13			First Amended and Restated Employment Agreement dated as of January 7, 2002 by and between Registrant and William E. McGlashan, Jr.
	10.14			Nonstatutory Stock Option Agreement dated as of December 21, 2001 by and between Registrant and William E. McGlashan, Jr.
	10.15			Agreement dated as of October 8, 2001 by and between Registrant and Pierre Van Beneden (Incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report for the quarter and nine months ended September 30, 2001).
	10.16			Nonstatutory Stock Option Agreement dated as of October 8, 2001 by and between Registrant and Pierre Van Beneden.
	10.17			Nonstatutory Stock Option Agreement dated as of November 8, 2001 by and between Registrant and Pierre Van Beneden.
	10.18			Consulting Agreement dated as of August 16, 2001 by and between Registrant and Laureen DeBuono.
	10.19			Nonstatutory Stock Option Agreement dated as of September 5, 2001 by and between Registrant and Laureen DeBuono.
	10.20			Addendum to Consulting Agreement dated as of October 31, 2001 by and between Registrant and Laureen DeBuono.
	10.21			Nonstatutory Stock Option Agreement dated as of October 31, 2001 by and between Registrant and Laureen DeBuono.
	10.22			Nonstatutory Stock Option Agreement dated as of November 8, 2001 by and between Registrant and Laureen DeBuono.
	10.23			Employment Agreement dated as of January 14, 2002 by and between Registrant and Bernard Harguindeguy.
	10.24			Agreement, dated as of May 15, 2001, by and between the Registrant and Lawrence P. Reinhold (Incorporated by reference to Exhibit 10.2 to the Registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2001).


	10.25	Agreement and Release, dated February 9, 2001, by and between the Registrant and Douglas Hickey (Incorporated by reference to Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000.
	10.26	Promissory Note and Security Agreement dated November 2, 1998 by and between the Registrant and Douglas Hickey. (Incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1 (File No. 333-71499)).
	10.27	Form of Indemnification Agreement by and between the Registrant and each of its directors and officers. (Incorporated by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000).
	21.1	List of Subsidiaries (Incorporated by reference to Exhibit 21.1 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000).
	23.1	Consent of PricewaterhouseCoopers LLP, Independent Accountants.
	24.1	Power of Attorney (see the signature page of this report).
(d) Financial Statements and Schedules
		Please see Item 14(a)(2).

CRITICAL PATH, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page

Report of Independent Accountants		F-2
Consolidated Balance Sheet		F-3
Consolidated Statement of Operations		F-4
Consolidated Statement of Shareholders’ Equity		F-5
Consolidated Statement of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-7
Schedule II — Valuation and Qualifying Accounts		S-1

F-1

Report of Independent Accountants

To the Board of Directors and Shareholders

of Critical Path, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Critical Path, Inc. and its subsidiaries at December 31, 2000 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, CA

February 5, 2002

F-2

CRITICAL PATH, INC.

CONSOLIDATED BALANCE SHEET

(In thousands, except per share amounts)


				2000			2001
December 31
ASSETS
Current assets
	Cash and cash equivalents			$	216,542		$	59,463
	Short-term investments				—			9,702
	Accounts receivable, net				38,938			26,692
	Other current assets				10,252			5,367

			Total current assets		265,732			101,224
Investments					10,610			7,215
Property and equipment, net					85,304			36,285
Intangible assets, net					124,094			48,641
Restricted cash					215			2,674
Other assets					11,655			3,913

			Total assets	$	497,610		$	199,952

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
	Accounts payable			$	43,710		$	25,955
	Accrued expenses				10,377			6,232
	Deferred revenue				15,720			10,297
	Capital lease and other obligations, current				9,363			3,431

			Total current liabilities		79,170			45,915
Convertible subordinated notes payable					300,000			38,360
Capital lease and other obligations, long-term					4,687			1,149

			Total liabilities		383,857			85,424

Commitments and contingencies (Note 12)
Minority interest in consolidated subsidiary					649			—
Mandatorily redeemable preferred stock (Note 14)					—			5,373
Shareholders’ equity
	Preferred Stock and paid-in-capital, $0.001 par value
		Shares authorized: 5,000
		Shares issued and outstanding: none			—			—
	Common Stock and paid-in-capital, $0.001 par value
		Shares authorized: 150,000
		Shares issued and outstanding: 74,135 and 76,581			2,130,329			2,176,370
	Common stock warrants				—			5,250
	Notes receivable from shareholders				(1,205	)		(1,222	)
	Unearned compensation				(34,005	)		(7,050	)
	Accumulated deficit, including other comprehensive income				(1,982,015	)		(2,064,193	)

			Total shareholders’ equity		113,104			109,155

			Total liabilities and shareholders’ equity	$	497,610		$	199,952

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

F-3

CRITICAL PATH, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share amounts)


			1999			2000			2001
Year Ended December 31
Net revenues
	Software license		$	—		$	51,607		$	30,960
	Hosted messaging			16,157			58,553			43,821
	Professional services			—			14,527			12,573
	Maintenance and support			—			10,966			16,819

		Total net revenues		16,157			135,653			104,173

Cost of net revenues
	Software license			—			2,731			1,533
	Hosted messaging			16,505			59,104			59,124
	Professional services			—			5,945			10,315
	Maintenance and support			—			8,060			10,081
	Amortization of purchased technology			—			18,140			21,284
	Acquisition-related retention bonuses			520			1,040			—
	Stock-based expense — Hosted messaging			4,532			1,586			1,520
	Stock-based expense — Professional services			—			—			1,347
	Stock-based expense — Maintenance and support			—			—			1,183
	Impairment of long-lived assets			—			25,315			16,654

		Total cost of net revenues		21,557			121,921			123,041

Gross profit (loss)				(5,400	)		13,732			(18,868	)

Operating expenses
	Sales and marketing			13,811			66,125			53,356
	Research and development			7,682			31,022			30,744
	General and administrative			14,051			30,444			42,260
	Amortization of intangible assets			32,259			355,868			13,216
	Acquisition-related retention bonuses			3,587			8,294			1,381
	Stock-based expense — Sales and marketing			37,521			30,948			24,704
	Stock-based expense — Research and development			2,161			3,449			3,691
	Stock-based expense — General and administrative			6,778			12,754			25,220
	Stock-based expense — Restructuring			—			3,447			—
	Acquired in-process research and development			—			3,700			—
	Restructuring and other expenses			—			3,248			18,267
	Impairment of long-lived assets			—			1,282,150			9,991

		Total operating expenses		117,850			1,831,449			222,830

Loss from operations				(123,250	)		(1,817,717	)		(241,698	)
Interest and other income (expense), net				7,061			12,970			5,840
Interest expense				(752	)		(15,948	)		(14,714	)
Equity in net loss of joint venture				—			(1,019	)		(1,866	)
Minority interest in net income of consolidated subsidiary				—			(649	)		—
Loss on investments				—			(23,589	)		(702	)

Loss before extraordinary item and income taxes				(116,941	)		(1,845,952	)		(253,140	)
Provision for income taxes				—			(6,513	)		(5,606	)

Loss before extraordinary item			$	(116,941	)	$	(1,852,465	)	$	(258,746	)
Gain on retirement of convertible subordinated notes, net				—			—			179,282

Net loss			$	(116,941	)	$	(1,852,465	)	$	(79,464	)
Accretion on redeemable convertible preferred shares				—			—			(356	)

Net loss attributable to common shares			$	(116,941	)	$	(1,852,465	)	$	(79,820	)

Net loss per common share — basic and diluted:
Net loss per common share			$	(3.93	)	$	(30.67	)	$	(1.08	)
Weighted average shares — basic and diluted				29,770			60,399			73,981

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

F-4

CRITICAL PATH, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands)


					1999			2000			2001
Year Ended December 31
Convertible Preferred Stock and paid-in-capital
	Balance, beginning of year				$	24,565		$	—		$	—
	Issuance of Series A Preferred Stock, net					—			—			—
	Issuance of Series B Preferred Stock, net					10,749			—			—
	Exercise of stock purchase rights and warrants					1,747			—			—
	Conversion of Preferred Stock, net					(37,061	)		—			—

		Balance, end of year				—			—			—

Common Stock and paid-in-capital
	Balance, beginning of year					21,850			864,699			2,130,329
	Issuance of Common Stock					645,828			1,204,022			431
	Series D Preferred Stock conversion feature					—			—			41,428
	Exercise of stock options and warrants					1,648			32,246			2,138
	Issuance of warrants to purchase common stock					—			—			5,250
	Unearned compensation related to stock options					158,541			29,608			3,632
	Conversion of Preferred Stock, net					37,061			—			—
	Purchase of Common Stock					(229	)		(246	)		(67	)
	Purchase of remaining minority interest					—			—			(1,521	)

		Balance, end of year				864,699			2,130,329			2,181,620

Notes receivable from shareholders
	Balance, beginning of year					(1,151	)		(1,154	)		(1,205	)
	Issuance of Common Stock					—			—			—
	Exercise of stock options					(30	)		—			—
	Interest on shareholder notes					(58	)		(51	)		(50	)
	Repayment of shareholder notes					85			—			33

		Balance, end of year				(1,154	)		(1,205	)		(1,222	)

Unearned compensation
	Balance, beginning of year					(17,371	)		(19,658	)		(34,005	)
	Unearned compensation related to stock options					(24,393	)		(39,630	)		(11,210	)
	Amortization of unearned compensation					22,106			25,283			38,165

		Balance, end of year				(19,658	)		(34,005	)		(7,050	)

Accumulated deficit, including other comprehensive income
	Balance, beginning of year					(12,535	)		(121,647	)		(1,982,015	)

	Net loss					(116,941	)		(1,852,465	)		(79,464	)
	Other comprehensive income:
		Unrealized investment gains (losses)				7,926			(7,926	)		(790	)
		Foreign currency translation adjustments				(97	)		23			(1,924	)

			Comprehensive loss			(109,112	)		(1,860,368	)		(82,178	)

		Balance, end of year				(121,647	)		(1,982,015	)		(2,064,193	)

				Total shareholders’ equity	$	722,240		$	113,104		$	109,155

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

F-5

CRITICAL PATH, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)


			1999			2000			2001
Year Ended December 31
Operating
	Net loss		$	(116,941	)	$	(1,852,465	)	$	(79,464	)
	Provision for doubtful accounts			573			3,190			5,142
	Depreciation and amortization			8,063			35,980			44,897
	Amortization of intangible assets			32,259			374,008			34,499
	Stock-based costs and expenses			51,162			52,184			57,665
	Acquired in-process research and development			—			3,700			—
	Impairment of long-lived assets			—			1,307,465			26,645
	Minority interest in net income of consolidated subsidiary			—			649			33
	Equity in net loss of joint venture			—			1,019			1,866
	Loss on investments			—			23,589			702
	Gain on retirement of convertible debt			—			—			(179,282	)
	Provision for restructured operations			—			—			7,905
	Accounts receivable			(4,708	)		(14,422	)		6,329
	Other assets			(25,612	)		(4,603	)		3,522
	Accounts payable			25,916			(8,699	)		(12,557	)
	Accrued expenses			5,633			(1,380	)		(3,793	)
	Deferred revenue			(163	)		(711	)		(5,340	)

		Net cash used in operating activities		(23,818	)		(80,496	)		(91,231	)

Investing
	Notes receivable from officers			(169	)		(1,966	)		(1,699	)
	Property and equipment purchases			(41,819	)		(54,461	)		(11,189	)
	Purchase of short-term investments, net			—			—			(9,702	)
	Investments in unconsolidated entities, net			(10,500	)		(28,492	)		(4,212	)
	Payments for acquisitions, net of cash acquired			(116,359	)		(15,618	)		(5,686	)
	Promissory note receivable			(15,000	)		10,000			—
	Restricted cash			—			110			(2,459	)

		Net cash used in investing activities		(183,847	)		(90,427	)		(34,947	)

Financing
	Proceeds from issuance of Preferred Stock, net			12,496			—			26,786
	Proceeds from issuance of Common Stock, net			259,803			35,368			2,569
	Proceeds from convertible debt offering, net			—			289,181			—
	Retirement of convertible debt			—			—			(48,734	)
	Repayment of note payable			—			(6,000	)		—
	Proceeds from payments of shareholder notes receivable			26			—			21
	Principal payments on lease obligations			(3,193	)		(6,816	)		(10,899	)
	Purchase of common stock			(229	)		(246	)		(67	)

		Net cash provided by financing activities		268,903			311,487			(30,324	)

Net change in cash and cash equivalents				61,238			140,564			(156,502	)
Effect of exchange rates on cash and cash equivalents				(97	)		46			(577	)
Cash and cash equivalents at beginning of year				14,791			75,932			216,542

Cash and cash equivalents at end of year			$	75,932		$	216,542		$	59,463

Supplemental cash flow disclosure:
	Cash paid for interest		$	688		$	11,598		$	17,633
	Cash paid for foreign income taxes		$	—		$	335		$	6,914
Non-cash investing and financing activities:
	Property and equipment leases		$	5,863		$	—		$	1,413
	Property and equipment purchases payable		$	9,796		$	1,470		$	—
	Common Stock issued for notes receivable		$	29		$	—		$	—
	Retirement of notes payable through issuance of Preferred Stock		$	—		$	—		$	64,630
	Unrealized gain (loss) on investments		$	7,926		$	(7,926	)	$	(790	)
	Common Stock and options issued for acquisitions		$	387,651		$	1,229,728		$	—

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

F-6

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — The Company and Summary of Significant Accounting Policies

The Company

Critical Path, Inc. was incorporated in California on February 19, 1997. Management intends to solicit shareholder approval at its 2002 Annual Meeting to reincorporate in Delaware. Assuming receipt of shareholder approval, management intends to complete the re-incorporation process during 2002. Critical Path, along with its subsidiaries (collectively referred to herein as the “Company”), provides messaging and collaboration solutions, from wireless, secure and unified messaging to basic email and personal information management, as well as identity management solutions that simplify user profile management and strengthen information security. The Company’s customers are corporate enterprises, carriers and service providers, postal authorities and government agencies.

Basis of Presentation

The consolidated financial statements include the accounts of the Company, and its wholly-owned and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The equity method is used to account for investments in unconsolidated entities if the Company has the ability to exercise significant influence over financial and operating matters, but does not have the ability to control such entities. The cost method is used to account for equity investments in unconsolidated entities where the Company does not have the ability to exercise significant influence over financial and operating matters.

Use of Estimates

Acquisitions

The Company has accounted for all business combinations using the purchase method of accounting. Results of operations of the acquired businesses are included in the Company’s financial results from the date of the acquisition. Net assets of the companies acquired are recorded at their fair value at the acquisition date. The excess of the purchase price over the fair value of separately identified net assets acquired is included in intangible assets in the accompanying consolidated balance sheet. The fair value of separately identified intangible assets was determined based upon independent valuations using various valuation methodologies.

Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of deposits in money market funds. Restricted cash is composed of amounts held on deposit that are required as collateral related to certain lease and other obligations of the Company.

Investments

Short-term and long-term investments are accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) 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 approxi-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

mately $9.7 million in low risk government securities, agency and corporate bonds and classifies these investments as available-for-sale. Available-for-sale securities are carried at fair market 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.

Marketable securities are classified as available-for-sale as of each balance sheet date and are reported at fair value, with unrealized gains and losses, net of tax, recorded in shareholders’ equity. Realized gains or losses and charges for other than temporary declines in value, if any, on available-for-sale securities are reported in other income or expense as incurred. The Company periodically evaluates these investments for other-than-temporary impairment. See also Note 6 — Investments.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, restricted cash, investments and accounts receivable. Cash and cash equivalents, restricted cash and investments are deposited with financial institutions that management believes are creditworthy. While the Company’s accounts receivable are derived from product and service transactions with geographically dispersed companies that operate in a number of horizontal markets, certain customers may be negatively impacted as a result of an economic downturn or other industry or market related conditions. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. During 1999 one of the Company’s customers individually comprised 15% of net revenue. This customer has comprised an insignificant portion of the Company’s net revenues during 2000 and 2001.

Fair Value of Financial Instruments

The Company’s financial instruments, including cash and cash equivalents, restricted cash, investments, accounts and notes receivable and accounts payable, are carried at cost, which approximates fair value due to the short maturity of these instruments.

Derivative Instruments

The Company accounts for derivative instruments in accordance with the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations and complies with SFAS No. 138, “Accounting for Certain Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS 133 and SFAS 138 establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The Company records derivatives on the balance sheet at their fair value in compliance with the standards set forth in SFAS 133. Currently the Company has a non-hedged derivative and accordingly, changes in its fair value are adjusted through the statement of operations. The Company issued derivative financial instruments during the fourth quarter of 2001 in connection with its issuance of Series D Convertible Preferred Shares. See also Note 14 — Financing Transaction.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the shorter of the estimated useful lives of the assets, generally three to five years, or the lease term, if applicable. Gains and losses on disposals are included in results of operations at amounts equal to the difference between the net book value of the disposed assets and the proceeds received upon disposal. Expenditures for replacements and improvements are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred.

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CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Software Costs for Internal Use

The Company capitalizes costs related to software for internal use. These costs primarily include purchased software and qualifying external consulting fees and the amortization of these costs is included in general and administrative expenses. During 2000 and 2001, approximately $2.1 million and $1.5 million of cost, respectively, related to internal use software was capitalized, and amortization of $283,000 and $1.0 million, respectively, was charged to expense. There were no amounts capitalized or charged to amortization expense during 1999.

Software Costs for Products

Development costs related to software products are expensed as incurred, as research and development costs, until technological feasibility of the product has been established. The Company has defined the establishment of technological feasibility as the completion of a working model. There is typically a relatively short time period between technological feasibility and product release, and the amount of costs incurred during such period is insignificant; as a result, capitalization of software development costs has been infrequent and insignificant. During 2000, approximately $800,000 was capitalized related to software development costs. These costs are being amortized over three years, with amortization of $267,000 recorded in 2001. There were no amounts capitalized during 1999 and 2001 and there was no amortization expense during 1999 and 2000.

Intangible Assets

Identifiable intangible assets result from the application of the purchase method of accounting for the Company’s acquisitions and are composed of the amounts allocated as of the acquisition date based on the fair value of assembled workforce, customer base and acquired technology. The excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired is recorded as goodwill. The Company also capitalizes, as intangible assets, the value of deferred advertising costs incurred in connection with warrants to purchase stock issued to strategic partners. Intangible assets are stated net of accumulated amortization and were amortized on a straight-line basis over their expected useful lives ranging from two to eight years. The Company periodically evaluates the reasonableness of the remaining useful lives of intangible assets based upon an analysis of current operating contributions and business plans.

Valuation of Long-Lived Assets

The Company periodically evaluates the carrying value of long-lived assets and certain identifiable intangibles for impairment, when events and circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized whenever the evaluation demonstrates that the carrying amount of a long-lived asset is not recoverable. The Company measures an impairment loss based upon a projected discounted cash flow method using a discount rate primarily based upon its weighted average cost of capital and that of comparable companies. See also Note 7 — Property and Equipment, Note 8 — Intangible Assets and Note 16 — Impairment of Long-Lived Assets.

Revenue Recognition

The Company recognizes revenue related to the sale of the Company’s licensed software products, hosted messaging and communication services, professional services and post-contract customer maintenance and support services. Revenue is recognized once the related products on services have been delivered and collection of all fees is considered probable.

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CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

License Revenues

Software license. The Company derives software license revenues from perpetual and term licenses for our messaging, collaboration and identity management solutions. License revenues are recognized when persuasive evidence of an arrangement exists, delivery of the licensed software to the customer has occurred and the collection of a fixed or determinable license fee is considered probable.

The Company’s revenue recognition policies require that revenue recognized from software arrangements be allocated to each element of the arrangement based on the fair values of the elements, such as software products, upgrades and enhancements, post contract customer support, installation, training or other services. License software sales that involve multiple elements, including software license and undelivered maintenance and support and professional services, are recognized such that we allocate revenue to each component of the arrangement using the residual value method based on evidence of the fair value of the undelivered elements. The vendor specific objective evidence of fair values for the ongoing maintenance obligations are based upon the prices paid for the separate renewal of these services by the customer or upon substantive renewal rates stated in the contractual arrangements. Vendor specific objective evidence of the fair value of other services, primarily professional services, is based upon substantive rates stated in the contractual arrangements or upon separate sales of these services at substantive rates.

If a multiple element arrangement includes services that are deemed essential to the functionality of a delivered element, we recognize the entire arrangement fee using the percentage of completion method. Under this method, individual contract revenues are recorded based on the percentage relationship of the contract costs incurred as compared to management’s estimate of the total cost to complete the contract. If fair value cannot be determined for more than one individual element of a multiple element arrangement, revenue is recognized ratably over the term of the agreement.

License fees are also received from resellers under arrangements that do not provide product return or exchange rights. Revenues from reseller agreements may include a nonrefundable, advance royalty which is payable upon the signing of the contract and license fees based on the contracted value of our products purchased by the reseller. Guaranteed license fees from resellers, where no right of return exists, are recognized when persuasive evidence of an arrangement exists, delivery of the licensed software has occurred and the collection of a fixed or determinable license fee is considered probable. Non-guaranteed per-copy license fees from resellers are initially deferred and are recognized when they are reported as sold to end-users by the reseller.

Service Revenues

Hosted messaging services. The Company derives hosted messaging revenues from fees for hosting services it offers related to its messaging and collaboration solutions. These are primarily based upon monthly contractual per unit rates for the services involved, which are recognized on a monthly basis over the term of the contract beginning with the month in which service delivery starts. Amounts billed or received in advance of service delivery, including but not limited to branding and set-up fees, are initially deferred and subsequently recognized on a ratable basis over the expected term of the relationship beginning with the month in which service delivery starts.

Professional services. The Company derives professional service revenues from fees primarily related to training, installation and configuration services. The associated revenues are recognized in the period in which the services are performed.

Maintenance and support. The Company derives maintenance and support service revenues for fees from post-contract customer support agreements associated with product licenses. Such services typically include rights to future update and upgrade product releases and dial-up phone services. Fees are deferred and recognized ratably over the term of the support contract, generally one year.

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CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Advertising Expense

Advertising and promotion costs are generally expensed as incurred. Costs associated with the development of print or other media campaigns are deferred until the period that includes the first commercial use of the media campaign. Costs associated with industry trade shows and customer conferences are deferred until the period that includes the applicable trade show or conference. Advertising costs totaled $414,000, $1,300,000 and $648,000 during 1999, 2000 and 2001, respectively.

Research and Development

Research and development costs include expenses incurred by the Company to develop and enhance its portfolio of messaging, collaboration and identity management solutions. Research and development costs, including acquired in-process research and development costs, are recognized as expense, as incurred.

Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and its related interpretations and complies with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Under APB No. 25, compensation expense for fixed options is based on the difference, if any, on the date of the grant, between the fair value of the Company’s stock and the exercise price of the option. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF 096-18. The shares underlying warrants for which vesting is considered probable are remeasured at each reporting date until a measurement date occurs, at which time the fair value of the warrant is fixed. The related charge is amortized over the estimated term of the relationship. In the event such remeasurement results in increases or decreases from the initial fair value, which could be substantial, these increases or decreases will be recognized immediately, if the fair value of the shares underlying the milestone has been previously recognized, or over the remaining term, if not. Currently, all related amortization has been recognized as advertising expense over the term of the estimated benefit period. See also Note 8 — Intangible Assets.

Income Taxes

Income taxes are computed using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. The measurement of current and deferred tax assets and liabilities are based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. Deferred tax assets are reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are more likely than not to be realized.

Net Loss per Share

Basic net loss per share is computed by dividing the net loss available to common shareholders for the period by the weighted average number of common shares outstanding during the period. Shares subject to repurchase by the Company and shares held in escrow in connection with certain acquisition agreements are excluded from the basic calculation. Diluted net loss per share is computed by dividing the net loss available to common shareholders for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of each class of potential common shares is dilutive. Potential common shares include restricted Common Stock, shares held in escrow, and incremental Common and Preferred shares issuable upon the exercise of stock options and warrants and upon conversion of Series A,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Series B and Series D Preferred Shares, Mandatorily Redeemable Preferred Shares and the 5 3/4% Convertible Subordinated Notes.

Comprehensive Income

The Company accounts for and reports comprehensive income or loss and its components in its financial statements. Comprehensive income or loss, as defined, includes the Company’s net income or loss and all other changes in equity (net assets) during the period from non-owner sources.

Foreign Currency

The Company considers the local currencies of each of its foreign operations to be the functional currency in those operations. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the period. Translation adjustments are charged or credited to other comprehensive income, a component of shareholders’ equity. Gains and losses on foreign currency transactions are included in non-operating income and expense.

Segment and Geographic Information

The Company does not currently manage its business in a manner that requires it to report financial results on a segment basis. The Company currently operates in one segment: Internet messaging and communication products and services and management uses one measure of profitability. See also Note 19 — Product and Geographic Information.

Reclassifications

Certain amounts previously reported have been reclassified to conform to the current period presentation.

Liquidity

Since inception, the Company has incurred aggregate consolidated net losses of approximately $2.1 billion, which includes $1.3 billion related to the impairment of long-lived assets, $444.5 million related to non-cash charges associated with the Company’s ten acquisitions and $163.5 million related to non-cash stock-based compensation expenses. During 2001, the Company completed a three-part restructuring plan that included (i) the termination of non-core products and services; (ii) a reduction in headcount; and (iii) a consolidation of facilities. In addition, the Company completed a financing transaction that resulted in net cash proceeds of approximately $27 million and the retirement of approximately $65 million of face value of our 5 3/4 Convertible Subordinated Notes. Also, during 2001 the Company retired an additional $197 million of face value of our 5 3/4 Convertible Subordinated Notes.

The Company’s revenues generated from the sale of our products and services may not increase to a level that exceeds our operating expenses or could fluctuate significantly as a result of changes in customer demand or acceptance of future products. Accordingly, our cash flow from operations may continue to be negatively impacted. We believe that our cash, cash equivalents and anticipated cash from operations will be sufficient to maintain current and planned operations for at least the next twelve months. Failure to generate sufficient revenues, raise additional capital or reduce discretionary spending could have a material adverse effect on the Company’s ability to achieve its intended business objectives.

Recent accounting pronouncements

In October 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

This Statement supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement applies to all long-lived assets (including discontinued operations) and consequently amends APB Opinion No. 30, Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. This Statement develops one accounting model for long-lived assets that are to be disposed of by sale. This Statement requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, this Statement expands the scope of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in a disposal transaction. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of this Statement to have a significant impact on its financial statements.

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. Upon adoption, approximately $5.5 million related to acquired workforce and goodwill will no longer be amortized, however we will annually test them for impairment, if not on a more frequent basis.

In June 2001, the FASB issued 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 May 2000, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 00-14, Accounting for Certain Sales Incentives. EITF Issue No. 00-14 addresses the recognition, measurement, and income statement classification for sales incentives that a vendor voluntarily offers to customers, without charge, which the customer can use in, or exercise as a result of, a single exchange transaction. The EITF changed the transition date for Issue 00-14, concluding that a company should apply this consensus no later than the company’s annual or interim financial statements for the periods beginning after December 15, 2001. In June 2001, the EITF issued EITF Issue No. 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products, effective for periods beginning after December 15, 2001. EITF Issue No. 00-25 addresses whether consideration from a vendor to a reseller is an adjustment to the selling prices of the vendor’s products and, therefore, should be deducted from revenue when recognized in the vendor’s results of operations, or, a cost incurred by the vendor for assets or services received from the reseller and, therefore, should be included as a cost of expense when recognized in the vendor’s results of operations. In September of 2001, the EITF issued EITF Issue No. 01-09, Accounting for Consideration Given by a

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Vendor to a Customer or a Reseller of the Vendor’s Products, which is a codification of EITF Issues No. 00-14, No. 00-25 and No. 00-22, Accounting for Points and Certain Other Time-or Volume-Based Sales Incentive Offers and Offers for Free Products or Services to be Delivered in the Future. The Company does not expect the adoption of these issues to have a significant impact on its financial statements.

Note 2 — Acquisitions

During 1999 and 2000, the Company completed ten acquisitions. There were no acquisitions completed during 2001. These acquisitions have been accounted for using the purchase method of accounting and were as follows:

• Operating assets of the Connect Service business of Fabrik Communications, including the ongoing business operations and customer relationships;

• dotOne Corporation, a corporate email messaging service provider;

• Amplitude Software Corporation, a provider of business-to-business Internet calendaring and resource scheduling solutions;

• Xeti, Inc., a developer of standards-based public key infrastructure solutions;

• FaxNet Corporation, a outsource supplier of carrier-class enhanced fax and integrated messaging solutions;

• ISOCOR Corporation, a supplier of Internet messaging, directory and meta-directory software solutions;

• The docSpace Company, a provider of web-based services for secure file delivery, storage and collaboration;

• RemarQ Communities, Inc., a provider of Internet collaboration services for corporations, web portals and Internet service providers;

• Netmosphere, Inc., a provider of e-Business solutions for project collaboration and communications;

• PeerLogic, Inc., a provider of directory and enterprise application integration software.



		Acquired Company

		Fabrik		dotOne			Amplitude		Xeti		FaxNet			ISOCOR		docSpace			RemarQ		Netmosphere			PeerLogic


		(in thousands)
Acquisition date			5/26/99		7/12/99			8/31/99		11/24/99		12/6/99			1/19/00		3/8/00			3/30/00		6/26/00			9/26/00
Shares issued			109		641			4,107		274		2,845			5,030		3,806			3,868		1,008			6,120
Purchase price:
Value of shares issued		$	8,000	$	35,000		$	141,300	$	18,500	$	152,400		$	226,700	$	218,000		$	259,300	$	33,000		$	374,700
Value of options assumed			—		3,200			22,000		3,100		7,300			37,200		—			7,700		6,700			63,400
Cash			12,000		17,500			45,000		2,000		20,000			—		30,000			—		—			3,000
Transaction costs			100		1,300			6,100		200		7,900			13,500		10,000			600		1,600			4,000

	Total purchase price	$	20,100	$	57,000		$	214,400	$	23,800	$	187,600		$	277,400	$	258,000		$	267,600	$	41,300		$	445,100

Purchase price allocation:
Property and equipment		$	500	$	—		$	—	$	—	$	—		$	—	$	—		$	—	$	—		$	—
Customer base			2,100		4,600			600		—		5,500			9,800		—			5,900		9,000			5,500
Assembled workforce			400		1,500			3,800		360		900			3,400		500			3,300		1,400			7,400
In-process technology			—		—			—		—		—			200		—			—		—			3,500
Existing technology			—		600			4,100		540		6,100			18,300		21,500			4,500		3,600			30,300
Unvested/assumed options			—		—			—		—		—			—		—			—		—			28,300
Assets/(Liabilities)			—		(1,700	)		4,400		200		(10,100	)		18,700		(7,100	)		7,800		(1,000	)		(18,650	)
Goodwill			17,100		52,000			201,500		22,700		185,200			227,000		243,100			246,100		28,300			388,750

	Total purchase price	$	20,100	$	57,000		$	214,400	$	23,800	$	187,600		$	277,400	$	258,000		$	267,600	$	41,300		$	445,100

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CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Acquired In-Process Research and Development

In connection with the acquisitions of ISOCOR and PeerLogic during 2000, the Company recognized $3.7 million representing the value attributable to acquired in-process research and development that had not yet reached technological feasibility and had no alternative future use. These values were determined by estimating the future net cash flows of the acquired in-process research and development over their respective estimated useful lives and discounting the net cash flows back to their present value. At December 31, 2001, actual results were consistent, in all material respects, with our assumptions at the time of the acquisitions. All acquired in-process research and development was expensed at the date of acquisition. No amounts were recognized resulting from acquired in-process research and development during 1999 or 2001.

Pro Forma Results (Unaudited)

The following unaudited pro forma summary presents the Company’s consolidated results of operations for 1999 and 2000 as if the acquisitions had been consummated at January 1, 1999. The pro forma consolidated results of operations include certain pro forma adjustments, including the amortization of intangible assets and the accretion of the acquisition-related retention bonuses.


		1999			2000

Year Ended December 31
(in thousands, except per share amounts)
Net revenues		$	97,466		$	154,382
Net loss		$	(705,114	)	$	(1,532,958	)
Net loss per share:
	Basic and diluted	$	(14.79	)	$	(20.91	)

The pro forma results are not necessarily indicative of those that would have actually occurred had the acquisitions taken place at the beginning of the periods presented.

Note 3 — Retention Related Bonuses

In connection with the acquisitions of dotOne, Amplitude, Xeti, FaxNet, ISOCOR, and docSpace, the Company established a retention bonus program in the aggregate amount of $20.7 million to provide incentives for certain former employees of these companies to continue their employment with the Company. Payments of bonuses to designated employees occurs on the six-month, twelve-month or eighteen-month anniversary date of the acquisition, depending on the program, unless the designated employee voluntarily terminates employment with the Company prior to the respective acquisition’s applicable anniversary. A ratable share of the adjusted eligible bonus amount has been accrued and charged to compensation expense over the respective six, twelve or eighteen month period commencing on the date the bonuses were granted. There were no acquisition-related retention bonuses granted during 2001.

As of December 31, 1999, the aggregate, adjusted eligible bonus amount was $11.6 million and the ratable charge to compensation expense for the year then ended was $4.1 million. Based on the functions of the employees scheduled to receive acquisition bonuses in 1999, $520,000 of the compensation charge was allocated to cost of net revenues and the remaining $3.6 million was allocated to operating expenses. No bonuses were paid in 1999.

As of December 31, 2000, the aggregate, adjusted eligible bonus amount was $4.9 million and the ratable charge to compensation expense for the year then ended was $9.3 million. Based on the functions of the employees scheduled to receive acquisition bonuses in 2000, $1.0 million of the compensation charge was allocated to cost of net revenues and the remaining $8.3 million was allocated to operating expenses. Additionally, during 2000, approximately $790,000 was recognized as employee severance expense, resulting

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CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

from acceleration of the required one year vesting period in the third quarter of 2000. See also Note 4 — Strategic Restructuring and Employee Severance. During 2000, $11.6 million was paid in acquisition-related retention bonuses and $2.5 million was accrued as of the year then ended.

As of December 31, 2001, the aggregate, adjusted eligible bonus amount was $1.9 million and the ratable charge to compensation expense for the year then ended was $1.4 million. Based on the functions of the employees scheduled to receive acquisition bonuses in 2001, this amount was charged to operating expenses. In March 2001, the Company announced an employee retention bonus program designed to provide incentives for current employees of Critical Path to continue their employment with the Company. The Company did not incur or pay any cost related to this program, as none of the financial metrics were achieved.

Note 4 — Strategic Restructuring and Employee Severance

In July 2000, the Company announced a plan to reduce its worldwide employee headcount by approximately 113 employees or 11%. This employee reduction plan was executed with the intent to realize various synergies gained through the nine acquisitions the Company completed in 1999 and the first half of 2000. During 2000, the Company recognized a charge for severance-related costs totaling $6.7 million, composed of $3.3 million in cash charges and $3.4 million in stock-based compensation expense, which resulted from the acceleration of certain employee stock options in connection with the Company’s employee reduction plan. During 2000, the Company paid all amounts related to employee severance.

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) workforce 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. The Company completed its restructuring plan in 2001, including the divestiture of all of its non-core products and services, a 44% reduction in headcount, a 65% reduction in facilities and the implementation of other cost cutting measures, resulting in a significant reduction in overall operating expenses. The non-core products and services comprised approximately 26% and 21% of total revenues in the years ended December 31, 2000 and 2001. These products and services will be an insignificant part of the Company’s revenue stream going forward.

Refocusing on Core Communications Solutions

The Company considers its core communication solutions to be its messaging, collaboration and identity management solutions, including mail, calendar, address book, file storage, secure delivery, directory and meta-directory, and access services supporting wireline and wireless users. Restructuring charges associated with this refocusing of our products and services consisted primarily of contract termination fees, gains and losses related to asset sales and dispositions, and lease termination fees. During 2001, the Company sold or discontinued all of its non-core products and services. As a result of these transactions a net gain of $1.0 million was recorded for the year ended December 31, 2001.

Reduction of Workforce, Facility and Other Expenses

The Company reduced its headcount from 1,011 employees at March 31, 2001 to 562 employees at December 31, 2001, and consolidated our facilities from 77 at December 31, 2001 to 27 at December 31, 2001. Charges related to the headcount reduction consisted primarily of the payment of severance and fringe benefits, and aggregated approximately $10.3 million during 2001. Included in this charge was approximately $1.5 million related to the forgiveness of a note receivable from one of the Company’s former executives. Lease terminations and facility consolidation related charges consisted primarily of lease termination costs, future lease payments and related fees, and aggregated approximately $9.0 million during 2001.

F-16

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Summary of Fiscal Year 2001 Restructuring Costs


							Cash			Liabilities at
		Total			Noncash		Payments			December 31,
		Charge			Charges		(Receipts)			2001(1)


		(in millions)
Workforce reduction		$	10.3		$	1.3	$	8.9		$	0.1
Facility and operations consolidation and other charges			9.0			5.5		1.6			1.9
Non-core product and service sales and divestitures			(1.0	)		1.1		(2.3	)		0.2

	Total	$	18.3		$	7.9	$	8.2		$	2.2


(1)	These restructuring obligations are expected to be paid during the first quarter of 2002

Note 5 — Accounts Receivable


December 31		2000			2001


		(in thousands)
Accounts receivable		$	42,463		$	27,874
Allowance for doubtful accounts			(3,525	)		(1,182	)

	Accounts receivable, net	$	38,938		$	26,692

The provision for doubtful accounts was $446,000, $3.2 million and $5.1 million in 1999, 2000 and 2001, respectively.

Note 6 — Investments


				Net		(1)Net
		Cost		Unrealized		Realized			Estimated
December 31, 2000		Basis		Gain (Loss)		Gain(Loss)			Fair Value

(in thousands)
Long-term investments
	Marketable securities	$	3,510	$	—	$	(2,601	)	$	909
	Non-marketable securities		24,200		—		(20,988	)		3,212
	Investment in Critical Path Pacific, equity method		7,508		—		(1,019	)		6,489

		$	35,218	$	—	$	(24,608	)	$	10,610


December 31, 2001

(in thousands)
Short-term investments
	Marketable securities	$	9,702	$	96		$	—		$	9,798

Long-term investments
	Marketable securities	$	1,883	$	(790	)	$	—		$	1,093
	Non-marketable securities		2,202		—			(702	)		1,500
	Investment in Critical Path Pacific, equity method		7,508		—			(2,886	)		4,622

		$	11,593	$	(790	)	$	(3,588	)	$	7,215


(1)	Includes write-downs related to other-than-temporary impairment of $23.6 million and $702,000 during 2000 and 2001, respectively.

The Company’s investments consist of both short-term and long-term investments. Short-term investments are primarily comprised of low risk government securities and corporate bonds. Long-term investments are primarily comprised of strategic equity investments in corporate partners, certain of which are publicly traded and marketable and certain of which are privately held and non-marketable. The Company’s investments in marketable securities are stated at fair value, which is based on quoted market prices.

F-17

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Investments in non-marketable securities are stated at fair value, based on initial cost of the investment and periodic review for impairment. Adjustments to the fair value of these investments are recorded as a component of other comprehensive income. All investments are periodically evaluated for other-than-temporary impairment.

In June 2000, the Company established a joint venture, Critical Path Pacific, Inc. (“CP Pacific”), with Mitsui and Co., Ltd., NTT Communications Corporation and NEC Corporation to deliver advanced Internet messaging solutions to businesses in Asia. The Company invested $7.5 million and holds a 40% ownership interest in the joint venture. This investment is being accounted for using the equity method. During 2000 and 2001, the Company recorded equity in net loss of joint venture of approximately $1.0 million and $1.9 million, respectively.

During 2000, the Company determined that the impairment of certain of these investments was deemed to be other-than-temporary and recorded a write down of $23.6 million, consisting of $2.6 million in investments in marketable securities and $21.0 million in investments in non-marketable securities. Additionally, during 2001 the Company recorded write-downs of $702,000 related to additional other-than-temporary impairments of certain non-marketable securities.

Note 7 — Property and Equipment


December 31	2000			2001


	(in thousands)
Computer equipment and software	$	124,413		$	109,543
Furniture and fixtures		6,245			9,822
Leasehold improvements		4,002			2,180

		134,660			121,545
Less: Accumulated depreciation		(49,356	)		(85,260	)

	$	85,304		$	36,285

At December 31, 2000 and 2001, property and equipment included $21.5 million and $2.9 million of assets under capital leases, respectively, and accumulated depreciation totaled $13.6 million and $1.4 million at December 31, 2000 and 2001, respectively. All assets under capital lease relate to computer equipment and software.

Depreciation expense totaled $8.1 million, $34.4 million and $43.0 million during 1999, 2000, and 2001, respectively.

Note 8 — Intangible Assets


December 31	2000		2001


	(in thousands)
Strategic Relationships — Warrants	$	46,755	$	38,660
Existing technology		45,372		39,748
Customer base		20,971		12,493
Assembled workforce		10,270		8,930
Patent license		726		726
Goodwill		—		1,983

		124,094		102,540
Less: Accumulated amortization		—		(53,899	)

	$	124,094	$	48,641

F-18

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amortization expense was $32.3 million, $374.0 million and $34.5 million in 1999, 2000 and 2001. Based on the types of identifiable intangibles acquired, during 2000 and 2001 amortization expense of $18.1 million and $21.3 million was allocated to cost of net revenues, respectively, and during 1999, 2000 and 2001 amortization expense of $32.3 million, $355.9 million and $13.2 million was allocated to operating expenses, respectively. During 2000, the Company also recognized $3.7 million of acquired in-process research and development costs in the period the transaction was consummated. Additionally, a $1.3 billion impairment charge to reduce goodwill and other intangible assets was recognized in 2000. The remaining identifiable intangible assets primarily relate to existing technology for some of the Company’s licensed products, which were acquired in 2000, and certain amounts related to assembled work forces, which were acquired in 1999 and 2000. Intangible assets amounted to approximately $124.1 million and $48.6 million as of December 31, 2000 and 2001, respectively. Intangible assets are expected to be fully amortized by the end of the fourth quarter of 2002. See also Note 16 — Impairment of Long-Lived Assets.

Warrants

ICQ

In January 1999, the Company entered into an agreement with ICQ, Inc., a subsidiary of AOL Time Warner, pursuant to which the Company provides email hosting services that are integrated with ICQ’s instant messaging service provided to ICQ’s customers. As part of the agreement, ICQ agreed to provide sub-branded advertising for the Company in exchange for warrants to purchase 2,442,766 shares of Series B Preferred Stock, issuable upon attainment of each of five milestones.

As of April 9, 2000, all five milestones had been attained and all related warrants were exercised during 2000 in two net exercises of 766,674 and 1,441,067 shares. Using the Black-Scholes option-pricing model and assuming a term of seven years and expected volatility of 90%, the final revised aggregate fair value of all vested warrants was $93.8 million, which was being amortized to advertising expense using the straight-line method over four years. Aggregate charges to stock-based expenses of $27.4 million, $19.5 million and $14.7 million were recorded during 1999, 2000 and 2001, respectively, related to these warrants. During the fourth quarter of 2000, the Company recorded an impairment charge of $16.8 million bringing the adjusted fair value to approximately $30.1 million to be amortized over the remaining benefit period. See also Note 16 — Impairment of Long-Lived Assets.

Qwest Communications Corporation

In October 1999, the Company entered into an agreement with Qwest Communications Corporation, a telecommunications company, pursuant to which the Company agreed to provide email hosting services to Qwest’s customers. As part of the agreement, Qwest agreed to provide sub-branded advertising for Critical Path in exchange for warrants to purchase up to a maximum of 3,534,540 shares of Common Stock upon attainment of each of six milestones.

The shares underlying the milestones for which achievement is considered probable are remeasured at each subsequent reporting date, beginning at December 31, 1999, until each sub-branded Qwest mailbox registration threshold is achieved and the related warrant shares vest, at which time the fair value attributable to that tranche of the warrant is fixed. In the event such remeasurement results in increases or decreases from the initial fair value, which could be substantial, these increases or decreases will be recognized immediately, if the fair value of the shares underlying the milestone has been previously recognized, or over the remaining term, if not.

In October 1999, the first of the six milestones had been attained. Using the Black-Scholes option-pricing model and assuming a term of 5 years and expected volatility of 90%, the final revised aggregate fair value of the vested warrants associated with the first milestone approximated $22.2 million, which is being amortized

F-19

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

to advertising expense using the straight-line method over three years. The Company expects that future changes in the trading price of the Company’s Common Stock at the end of each quarter, and at the time certain milestones are considered probable and achieved, may cause additional substantial changes in the ultimate amount of the related stock-based charges.

As of December 31, 2001, only the first of the six milestones had been attained. None of the remaining milestones are considered probable and as a result, the fair value of the warrants relating to the shares underlying the second through sixth milestones has not been recognized. During 1999, 2000 and 2001, $1.5 million, $7.4 million and $4.6 million, respectively, was charged to stock-based expense related to the vested warrants. During the fourth quarter of 2000, the Company recorded an impairment charge of $4.8 million. See also Note 16 — Impairment of Long-Lived Assets. The fair value at December 31, 2000 and 2001, was approximately $8.6 million and $4.6 million and will be fully amortized by the end of the fourth quarter of 2002.

Worldsport Network Ltd.

In December 1999, the Company entered into an agreement with Worldsport Network Ltd., the sole and exclusive provider of Internet solutions for the General Association of International Sports Federations (“GAISF”) and a majority of the international federations it recognizes. Under the terms of the agreement, Worldsport offers the Company’s web-based email and calendaring services to the GAISF network and its members. As part of the agreement, Worldsport agreed to provide sub-branded advertising for the Company in exchange for warrants to purchase up to a 1.25% equity interest in the Company on a fully diluted basis upon attainment of each of five milestones based on the number of email boxes for which Worldsport registers and provides sub-branding. The warrants are exercisable for five years after becoming vested. Any warrants not vested within five years of the date of the agreement will be cancelled. The Company believes that this agreement could have a significant current and potential future impact on the Company’s results of operations. However, Worldsport ceased operations and filed for bankruptcy during 2000 and the Company continues to believe the warrants will ultimately expire unvested and unexercised.

Lessor Warrants

In December 1999, the Company entered into an agreement with one of its lessors, in connection with an office lease, pursuant to which the lessor was issued warrants to purchase up to a maximum of 25,000 shares of the Company’s Common Stock. The warrants may be exercised beginning January 1, 2000 through December 20, 2006 at a price of $90.00 per share. The warrants vest at the beginning of each month on a straight-line basis in the amount of 521 shares per month.

Using the Black-Scholes option pricing model and assuming a term of six years and expected volatility of 90%, the fair value of the warrants on the effective date of the agreement approximated $2.0 million, which is being amortized to general and administrative expenses using the straight-line method over ten years beginning January 2000. During 2000 and 2001, approximately $200,000 was charged to stock-based expense related to the vested warrants, respectively.

Telco

In January 2000, docSpace entered into an agreement with a major telecommunications company (“Telco”) pursuant to which docSpace would provide secure messaging services to the Telco’s customers. As part of the agreement, Telco agreed to provide marketing, publicity, and promotional services to docSpace. As a result of the completion of the Company’s acquisition of docSpace, the Company assumed warrants that allowed Telco to purchase up to a maximum of 349,123 shares of the Company’s Common Stock upon attainment of each of three milestones.

F-20

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Subsequent to the acquisition, the Company entered into discussions with Telco to modify their relationship. Accordingly, the vesting provisions of the proposed agreement were modified to reflect the requirements of the new relationship.

As of December 31, 2001, none of the vesting milestones of the original agreement had been attained and none of the milestones are considered probable of issuance. Accordingly no deferred compensation associated with the warrants has been recognized.

The Company expects that future changes in the trading price of the Company’s Common Stock at the end of each quarter, and at the time certain milestones are achieved, will cause additional substantial changes in the ultimate amount of the related stock-based charges.

Note 9 — Related Party Transactions

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 alternatives the Company was exploring and to 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, potential transaction — based fees associated with certain strategic asset sales and investments in Critical Path and immediately exercisable 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, because the relationship is terminable at any time. During the term of the agreement, we paid Vectis Group an aggregate of approximately $1.1 million in monthly retainer fees and expenses and approximately $3.1 million in transactional fees, including approximately $2.75 million in connection with our recent preferred stock financing transaction, in which Vectis Group participated as one of several investors in this transaction led by General Atlantic Partners and its affiliates. See also Note 14 — Financing Transaction. William McGlashan, Jr., a principal in Vectis Group, and a member of the Board of Directors of the Company, was appointed interim President and Chief Operating Officer in April 2001 and was later appointed Vice Chairman and Chief Executive Officer. Effective September 30, 2001, the Company terminated its agreements with Vectis Group for consulting and other transactional services. In connection with the termination of the agreements, certain other employees of Vectis Group have become employees of Critical Path. Although the agreements were terminated, certain obligations under the agreement survived, including the transaction fee paid in connection with the Company’s recent financing transaction and related indemnification obligations. The total potential remaining fees payable aggregate between zero and $135,000.

Notes receivable from shareholders

During 1998, the Company issued a full recourse note to a shareholder and former Chief Executive Officer, Douglas Hickey, equal to $1.06 million. Mr. Hickey’s full recourse note accrues interest at the rate of 4.51% per annum and is secured by shares of the Company’s Common Stock owned by Mr. Hickey. In February 2001, Mr. Hickey terminated his employment with the Company. In connection with the termination, the repayment of the $1.06 million note receivable and accrued interest was extended to May 9, 2002. As of December 31, 2000 and 2001, accrued interest totaled $109,000 and $158,000, respectively. Mr. Hickey repaid this note in full with interest in March 2002.

F-21

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Notes receivable from officers

During 1998, the Company issued a note receivable to a shareholder and former Chief Executive Officer, Douglas Hickey, equal to $500,000. Mr. Hickey’s non-recourse note accrues interest at the rate of 4.51% per annum. In February 2001, Mr. Hickey terminated his employment with the Company. In connection with the termination, the repayment of the $500,000 note receivable and accrued interest was extended to March 9, 2002. As of December 31, 2000 and 2001, accrued interest totaled $51,000 and $73,000, respectively. Mr. Hickey repaid this note in full with interest in March 2002.

During 2000, the Company issued a note receivable to a former Chief Financial Officer, Lawrence Reinhold, equal to $1.7 million. Reinhold’s full recourse note accrued interest at the rate of 6.0% per annum and both principal and interest were scheduled to be forgiven over a specified period. During Mr. Reinhold’s employment with Critical Path approximately $270,000 of principal and interest was forgiven, consistent with the terms of the note. The repayment of the outstanding loan was subject to certain change of control and employment termination criteria. In August 2001, Mr. Reinhold terminated his employment with the Company. In connection with the termination all outstanding principal and interest of $1.5 million was forgiven by the Company.

During 2001 and in connection with each of their respective employment agreements, the Company made loans and held notes receivable from David C. Hayden, Executive Chairman, and Pierre Van Beneden, President, totaling $1.5 million and $350,000, respectively. Hayden’s full recourse note accrues interest at the rate of 6.75% per annum and shall be repaid by the achievement of performance-based milestones described in Mr. Hayden’s employment agreement and performance loan agreement. Mr. Van Beneden’s loan is interest free for the first year and will be forgiven in monthly installments over the first year of Van Beneden’s employment, resulting in a compensation charge to operating expense ratably over the first twelve months of his employment. In the event of Mr. Van Beneden’s departure prior to one year from the date of employment, the note shall be repayable and interest due in accordance with the terms of his employment agreement. Mr. Van Beneden’s employment agreement and loan was not effective until October 8, 2001. As of December 31, 2001, accrued interest totaled $40,000 related to the note to Mr. Hayden.

In December 2001, the Board approved a full recourse loan to William E. McGlashan, Jr. Board of up to $4.0 million in connection with the purchase of a principal residence in the San Francisco Bay Area. The loan is to be secured by the residence, and to the extent necessary should an appraisal of the property equal less than 120% of the loan’s value, by Mr. McGlashan’s personal shareholdings pledged to the Company, such that the amount outstanding shall be at all times secured by at least 120% of the principal outstanding. Interest on the loan is Applicable Prime Rate deferred until principal is due, over a 10 year term. The loan shall be forgiven upon a defined Change of Control event. In the event Mr. McGlashan terminates employment either by voluntary resignation or for Cause, the loan shall be due and payable, with interest, no later than 12 months following such termination. In the event Mr. McGlashan is terminated for any reason other than Cause, the loan shall remain outstanding for the remainder of its terms. The Company has not yet funded the loan and as such no accrued interest was outstanding as of December 31, 2001.

F-22

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revenues

The following is a summary of revenues and receivables associated with related parties:



	Revenues						Receivables

Year Ended December 31	1999		2000		2001		1999		2000		2001


	(In thousands)
E*TRADE	$	2,423	$	395	$	1,724	$	1,055	$	42	$	1,591
US West		460		5,806		2,647		426		460		21
ICQ		267		240		237		267		105		60

	$	3,150	$	6,441	$	4,608	$	1,748	$	607	$	1,672

Expenses

During 2000, the Company leased an aircraft, for use by certain officers of the Company, from D Squared LLC, in which Douglas Hickey and David Thatcher, the Company’s former Chief Executive Officer and former President, respectively, had a direct investment. The aggregate amount billed to the Company for the use of the aircraft or other aircraft arranged through D Squared LLC aggregated approximately $337,000. There were no amounts in 1999 and 2001.

Note 10 — Convertible Subordinated Notes

During 2000, the Company issued $300.0 million of five-year, 5 3/4% Convertible Subordinated Notes (“Notes”) due April 2005, to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933. Holders may convert the Notes into shares of Common Stock at any time before their maturity or the business day before their redemption or repurchase by the Company. The conversion rate is 9.8546 shares per $1,000 principal amount of Notes subject to adjustment in certain circumstances. This rate is equivalent to a conversion price of approximately $101.48 per share. On or after the third business day after April 1, 2003, through March 31, 2004, the Company has the option to redeem all or a portion of the Notes that have not been previously converted at the redemption price equal to 102.30% of the principal amount. During the period from April 1, 2004 through March 31, 2005, the Company has the option to redeem all or a portion of the Notes that have been previously converted at the redemption price equal to 101.15% of the principal amount. Thereafter the redemption price is equal to 100% of the principal amount. The Notes are non-callable for three years. In the event of a “Change in Control,” as defined in Notes’ Offering Circular, the Notes holders have the option of requiring the Company to repurchase any Notes held at a price of 100% of the principal amount of the Notes plus accrued interest to the date of repurchase.

The Company incurred approximately $10.8 million in debt issuance costs, consisting primarily of underwriting discount and legal and other professional fees. These costs have been capitalized and will be recognized as a component of interest expense on a straight-line basis, which approximates the effective interest method, over the five-year term of the Notes. During 2000 and 2001, the Company recorded interest expense related to these debt issuance costs of $1.6 million and $1.5 million, respectively.

Interest is payable on April 1 and October 1 of each year. As of December 31, 2000 and 2001, there was approximately $4.3 million and $600,000 in interest payable, respectively. During 2000 and 2001, the Company recorded interest expense related to the Notes of $13.0 million and $12.1 million, respectively. The Notes are subordinated in right of payment to all senior debt of the Company and effectively subordinated to all existing and future debt and other liabilities of the Company’s subsidiaries.

During 2001, the Company retired $261.4 million of face value of the Notes, which resulted in an extraordinary gain on retirement of $179.3 million, inclusive of $6.8 million in write downs of related debt issuance costs. The Company used cash of $53.1 million and equity in order to retire the Notes, inclusive of

F-23

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

approximately $4.4 million in accrued interest. See also Note 14 — Financing Transaction. As of December 31, 2000 and 2001 the total balance outstanding was $300.0 million and $38.4 million, respectively. These Notes are carried at cost and had an approximate fair value at December 31, 2001 of $21.5 million.

Note 11 — Income Taxes

The Company did not provide any deferred federal or state income tax benefit for any of the periods presented because it has experienced operating losses since inception. The Company has provided a full valuation allowance on the deferred net tax asset, consisting primarily of net operating loss carryforwards, because of uncertainty regarding its realizability.

The Company experienced extraordinary gains of $179.3 million relating to the retirement of the Company’s convertible subordinated notes. These gains are reported net of any tax consequences. The extraordinary gain recognition gave rise to alternative minimum tax of $1.6 million for federal and state purposes.

At December 31, 2001, the Company had approximately $239 million of federal and $107 million state net operating loss carryforwards available to offset future taxable income. Federal and state net operating loss carryforwards expire in varying amounts through 2021 for federal and 2008 for state purposes. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. These carryforwards will begin to expire at various times starting in 2013 and 2006 for federal and state tax purposes, respectively.

Since inception, the Company has incurred several ownership changes which has limited the Company’s ability to utilize loss carryforwards as defined in IRC Section 382. Based on the most current change, the losses are subject to a limitation of $324 billion per year. The Company believes the limitation should not have a material effect on the future utilization of the losses.

At December 31, 2001, the Company also had research and development credit carryforwards of approximately $7.2 million for federal and state purposes. The research and development credit carryforwards expire through 2021 for federal purposes, and do not expire for state purposes.

The components of the provision for income taxes are as follows (in thousands):


December 31		2000		2001

Current:
	Federal		—		—
	State		—		—
	Foreign		6,513		5,606
	Extraordinary Item Income Tax		—		1,600

			6,513		7,206

F-24

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Deferred tax assets (liabilities) consist of the following (in thousands):


December 31			2000			2001

Deferred Tax Assets
	Net Operating Loss Carryforwards			98,254			87,381
	Tax Credits			6,442			13,321
	Fixed Assets			1,085			7,043
	Accrued Liabilities			15,490			4,828

		Total Deferred Tax Assets		121,271			112,573
Deferred Tax Liability
	Intangible Assets			(26,917	)		(8,758	)

				(26,917	)		(8,758	)

Gross Deferred Tax Asset				94,354			103,815

Valuation Allowance				(94,354	)		(103,815	)

Net Deferred Tax Assets				—			—

Reconciliation of the statutory federal income tax to the Company’s effective tax:


December 31	2000			2001

Tax at federal statutory rate		(34	)%		(34	)%
State, net of federal benefit		(1	)%		(2	)%
Stock based expenses		—	%		17	%
Goodwill amortization		7	%		—	%
Intangible asset write off		24	%		—	%
Research and development credits		—	%		(2	)%
Change in valuation allowance		4	%		16	%
Foreign Taxes		—	%		5	%
Warrant Amortization		—	%		9	%

Provision for Taxes		—	%		9	%

Note 12 — Commitments and Contingencies

Leases

The Company leases office space and equipment under noncancelable operating and capital leases with various expiration dates through 2011. Rent expense during 1999, 2000 and 2001, totaled $1.3 million, $5.8 million and $5.4 million, respectively.

F-25

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Future minimum lease payments under noncancelable operating and capital leases are as follows:


		Capital			Operating
		Leases			Leases


		(In thousands)
Year Ending December 31
	2002	$	1,232		$	5,819
	2003		536			5,290
	2004		313			5,028
	2005		—			4,514
	2006 and beyond		—			21,541

	Total minimum lease payments	$	2,081		$	42,192

	Less: Amount representing interest		(224	)
	Unamortized discount		—

	Present value of capital lease obligations	$	1,857
	Less: Current portion		(1,043	)

	Long-term portion of capital lease obligations	$	814

Equipment Lease Lines

In 1998, the Company entered into three separate financing agreements that provided for the acquisition of up to $6.5 million in equipment and $1.5 million in software and tenant improvements. The first of these agreements provided for acquisitions of up to $2.0 million in equipment through April 30, 1999; the second agreement for acquisitions of up to $3.5 million in equipment and $1.5 million in software and tenant improvements through May 1, 1999; and the third agreement for acquisitions of up to $1.0 million in equipment through March 31, 2001. Amounts financed under these agreements were payable over three-year periods, in monthly installments of principal and interest, with interest accruing at rates between 6.30% and 7.00% per annum. Approximately $1.0 million was collateralized by the related equipment acquired. In connection with two of the agreements, the Company issued warrants to purchase a total of 339,522 shares of Series A Preferred Stock at a purchase price of $0.72 per share. The Company estimated fair value of these warrants at date of issuance of $186,000 was amortized to interest expense over the term of the related lease obligation. The obligation payable by the Company under these financing agreements of $2.4 million at December 31, 2001 was paid in full in January 2002.

Service Level Agreements

Net revenues are derived from contractual relationships that typically have one to three year terms. Certain agreements require minimum performance standards regarding the availability and response time of email services. If these standards are not met, such contracts are subject to termination and the Company could be subject to monetary penalties.

Litigation and Investigations

Securities Class Actions in Northern District of California. Beginning on February 2, 2001, a number of securities class action complaints were filed against the Company, and certain of our current and former officers and directors in the United States District Court for the Northern District of California. The

F-26

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

complaints were filed as purported class actions by individuals who allege that they purchased the Company’s common stock during a purported class period and sought an unspecified amount in damages; the alleged class periods vary among the complaints. The complaints were consolidated into a single action which alleged that, during the period from September 26, 2000 to February 1, 2001, the Company and certain of its former officers made false or misleading statements of material fact about the Company’s financial statements, including its revenues, revenue recognition policies, business operations and prospects for the year 2000 and beyond. In addition, on September 24, 2001, certain former shareholders of PeerLogic, Inc. filed a putative class action in the Superior Court of the State of California alleging that Critical Path breached representations and warranties made in connection with the acquisition of PeerLogic. The complaint sought an unspecified amount in damages. We subsequently removed the PeerLogic action to the United States District Court for the Northern District of California. On November 8, 2001, Critical Path announced that it had reached an agreement in principle to settle these cases. In February 2002, the Court gave preliminary approval to the settlement of the class action litigation. The Court also set the hearing date for final approval of the settlement agreement for May 23, 2002.

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 of the Company’s current and former officers and directors associated with the Company with respect to non-specified accounting matters, financial reports, other public disclosures and trading activity in the Company’s securities. The Company fully cooperated with the SEC in its investigation. The SEC’s investigation was concluded against the Company in January 2002 with no imposition of fines or penalties against the Company. The Company consented without admitting or denying liability, to an administrative order that the Company violated certain non-fraud provisions of the federal securities laws and to a cease and desist order.

F-27

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

were terminating the Software License Agreement based on our belief that Comverse materially breached the contract. On or about October 15, 2001, Comverse filed a complaint in the United States District Court for the Southern District of New York against the Company, challenging the Company’s right to terminate the agreement entered into by Comverse. Comverse asserted causes of action for specific performance, requesting that the Company be required to perform and to recognize Comverse’s alleged rights under the Agreement, and injunctive relief, prohibiting the Company from taking action to suspend, terminate or interfere with Comverse’s alleged rights, remedies or privileges. Concurrently with the filing of the Complaint, Comverse also filed a Demand for Arbitration with the American Arbitration Association, seeking a determination that Critical Path did not have the right to terminate the agreement. Comverse does not seek money damages in either the Complaint or the Demand for Arbitration. In December 2001, the District Court issued a preliminary injunction against Critical Path prohibiting us from taking various actions in connection with the termination, including demanding the return of the licensed software or publicly announcing that Comverse’s rights under the license agreement were terminated. The Company has appealed the preliminary injunction and has also succeeded in having the arbitration moved to San Francisco. While it is difficult to determine what the eventual outcome of this matter will be, the Company intends to defend its rights vigorously.

Securities Class Action in Northern District of California. Beginning on February 1, 2002, a number of securities class action complaints were filed against the Company, and certain of our former officers. The purported class action complaints allege that during a period from April 21, 2000 through September 25, 2000 and in same cases April 31 (sic), 2000 through October 19, 2000, the Company reported materially misleading financial statements and made materially misleading statements about the Company’s ability to collect on recognized revenue from our customers based on the current economic climate and uncertainty about continued viability of many Internet based businesses as well as in recognition of changes in accounting regulations. The suit further alleges that the Company knew these issues would severely impair future revenue growth and the ability to make future stock sales and extract future bonuses tied to the Company’s performance. The complaints seek an unspecified amount in damages. The Company believes that these suits are without merit and intends to vigorously defend such allegations.

The uncertainty associated with these and other unresolved or threatened lawsuits could seriously harm the Company’s business and financial condition. In particular, the lawsuits or the continued effects of 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 SEC investigation could also result in the diversion of management’s time and attention away from business operations, which could harm the Company’s business. Although some of the named lawsuits are in the final stages of settlement, there can be no assurance that the applicable courts will accept the final settlement as executed, or at all. Negative developments with respect to the settlements or the lawsuits 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 payments could seriously harm the Company’s financial condition.

Note 13 — Minority Interest in Subsidiary

As of December 31, 2000, the Company owned a 72.87% interest in CP Italia, a consolidated subsidiary, which was acquired in connection with the acquisition of ISOCOR. In March 2001, the outstanding 27.13% interest in CP Italia was acquired for approximately $4.2 million. For the year ended December 31, 2000, the minority interest in net income of CP Italia amounted to $649,000. Minority interest in net income of CP Italia was insignificant during 2001.

F-28

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 14 — Financing Transaction

In December 2001, the Company completed a financing transaction with a group of investors and their affiliated entities (“Investors”). In connection with this financing transaction the Company issued 4 million shares of its Series D Cumulative Redeemable Convertible Participating Preferred Stock (“Series D Preferred Stock”), in a private offering, resulting in gross cash proceeds to the Company of approximately $30 million, and the simultaneous retirement of approximately $65 million in face value of outstanding Notes. The Investors were led by General Atlantic Partners LLC and affiliates and included Hutchison Whampoa Limited and affiliates and Vectis Group LLC and affiliates. In addition, General Atlantic LLC was granted warrants to purchase 2.5 million of the Company’s Common Stock in connection with this offering.

The Series D Preferred Stock ranks senior to all preferred and common stock of the Company in priority of dividends, rights of redemption and payment upon liquidation. The fair value ascribed to the Series D Preferred Stock was based on actual cash paid by independent investors and the approximate fair value of the Notes retired in connection with the offering. The principle terms of the Series D Preferred Stock include an automatic redemption on November 8, 2006, cumulative dividends at a rate of 8% per year, compounded on a semi-annual basis and payable in cash or additional shares of Series D Preferred Stock, conversion into shares of common stock calculated based on the Accreted Value, as defined, divided by $1.05, and preference in the return of equity in any liquidation or change of control.

The Company received net cash proceeds associated with the issuance of the Series D Preferred Stock of approximately $27 million, which was net of a $2.75 million transaction fee paid to Vectis Group LLC and approximately $200,000 in related legal and accounting fees. At issuance, the total amount of these costs was recorded as a reduction of the carrying amount of the Series D Preferred Stock and will accrete over the term of the Series D Preferred Stock. Additionally, at issuance, the Series D Preferred Stock was deemed to have an embedded beneficial conversion feature which was limited to the net proceeds allocable to preferred stock of approximately $42 million. The value of the beneficial conversion feature, at issuance, was initially recorded as a reduction of the carrying amount of the Series D Preferred Stock and will accrete over the term of the Series D Preferred Stock.

The purchase agreement provides for a preferential return of equity to the Series D Preferred stockholders, before any return of equity to the common stockholders, and also provides for the Series D Preferred stockholders to participate on a pro rata basis with the common stockholders, in any remaining equity, once the preferential return has been satisfied. Under the terms of this provision, the preferential return of equity is equal to the purchase price of the Series D Preferred Stock plus all dividends that would have accrued during the term of the preferred stock, even if a change in control occurs prior to the redemption date. The right to receive a preferential return lapses if either: (i) the Company is sold for a price per share of Series D Preferred Stock, had each such share been converted into common stock prior to change in control equal to, or at least, four times the Accreted Value of Series D Preferred Stock, which at December 31, 2001 was $4.20, or (ii) the Company’s stock trades on NASDAQ for 60 days prior to the change-in-control at an average price of not less than four times the Accreted Value. At December 31, 2001, the estimated fair value of the liquidation preference was $5.2 million and was allocated to that feature and recorded as a separate component of the Series D Preferred Stock. In accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments, the Company is required to adjust the carrying value of the preference to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of operating income.

The warrants are exercisable at any time after November 8, 2002 and until November 8, 2006, at an exercise price of $1.05, and convert into one share of the Company’s Common Stock. Consistent with the provisions set forth in APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”, a portion of the proceeds received for the Series D Preferred Stock was allocated to the warrants and the preferred stock, based upon their relative fair market values. As a result of this allocation,

F-29

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

approximately $5.25 million of the proceeds were allocated to the warrants, which was recorded as a reduction of the carrying value of the Series D Preferred Stock. Using the Black-Scholes option pricing model, assuming a four-year term, 200% volatility, a risk-free rate of 6.0% and no dividend yield, the fair market value of the warrants was $6.2 million.

The carrying value of the Series D Preferred Stock at December 31, 2001 was determined as follows:


Series D Preferred Stock		$	55,000
Less: Issuance costs			(2,950	)

Series D Preferred Stock, net of issuance costs			52,050
Less amounts allocated to:
	Common stock warrants		(5,250	)
	Beneficial conversion feature		(41,800	)
Add amortization and accretion			373
Carrying value of Series D Preferred Stock and embedded change-in-control feature at December 31, 2001		$	5,373

Note 15 — Shareholders’ Equity

Changes in equity security shares outstanding were:


Year Ended December 31			1999			2000			2001


			(In thousands)
Common Stock
	Shares outstanding, beginning of year			8,294			46,937			74,135
	Issuance of Common Stock			17,285			19,958			514
	Exercise of stock options and warrants			1,580			7,313			1,967
	Conversion of Preferred Stock			19,912			—			—
	Purchase of Common Stock			(134	)		(73	)		(35	)

		Shares outstanding, end of year		46,937			74,135			76,581

Incorporation and Authorized Capital

The Company’s Articles of Incorporation, as amended, authorize the Company to issue 500 million shares of Common Stock at $0.001 par value, and 5 million shares of Preferred Stock, at $0.001 par value. The holders of Preferred Stock have various voting and dividend rights as well as preferences in the event of liquidation.

Preferred Stock

In January 1999, the Company completed the second round of the Series B Preferred Stock financing through the issuance of 2,772,708 shares at $4.26 per share for net proceeds of approximately $10,749,000. In connection with this financing, the Company issued warrants to purchase 51,364 shares of Series B Preferred Stock at $4.26 per share to the placement agent. Prior to the closing of the Company’s initial public offering, the Series B Preferred Stock placement agent sold back to the Company at $4.26 per share an aggregate of 53,293 shares held by the placement agent or its affiliates. As of the closing of the Company’s initial public offering, all of the Series B Preferred Stock outstanding was converted into an aggregate of 19,912,000 shares of Common Stock at a conversion ratio of 1:1.

F-30

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Common Stock

In January 1999, the Company sold 1,090,909 shares of Common Stock at a price of $2.20 per share to a customer that also agreed to provide marketing related services. In connection with the transactions, the Company recognized a charge totaling $2.2 million that was attributed to sales and marketing expense over the one-year term of the agreement.

On March 29, 1999, the Company completed its initial public offering of 5,175,000 shares of Common Stock (including the exercise of the underwriters over allotment option) and realized net proceeds of $114.1 million.

On June 2, 1999, the Company completed a follow-on public offering of 3,000,000 shares of Common Stock and realized net proceeds of $140.7 million.

Stock Purchase Rights

In February 1998, the Company entered into stock purchase agreements with three founders and sold 3,863,635 shares of the Company’s Common Stock at $0.02 per share. Under the terms of the stock purchase agreements, the Company has the right to purchase the shares of Common Stock at the original issue price in the event any one of the founders ceases to be an employee of the Company. These repurchase rights lapse by 25% on the first anniversary of the vesting start date and ratably each month thereafter for 36 months. On September 1, 1999, 80,508 shares were repurchased in connection with the early termination of one of the founders. At December 31, 2000 and 2001, there were no shares of Common Stock subject to repurchase rights. In connection with the issuance of these shares, the Company recorded unearned compensation of $1,306,000 that is being recognized over the periods in which the Company’s repurchase rights lapse. During 1999, 2000 and 2001 $428,000, $428,000 and $106,000, respectively, were recognized related compensation expense.

In October 1998, an officer exercised stock options to purchase 1,274,687 shares of the Company’s Common Stock at a price of $0.84 per share. Under the terms of the option, the Company has the right to purchase the unvested shares of Common Stock at the original issue price in the event the officer ceases to be an employee of the Company. The repurchase rights lapse ratably each month for 48 months. In connection with the option grant preceding this transaction, the Company recognized unearned compensation totaling $3.8 million that is included in the aggregate unearned compensation charges discussed below. In February 2001, this officer’s employment was terminated and the unvested portion of these stock options was accelerated, and resulted in a $732,000 charge to stock-based expenses in the first quarter of 2001. At December 31, 2001, no shares of Common Stock were subject to repurchase rights.

Employee Stock Purchase Plan

During 1999, the Board of Directors adopted and the shareholders approved the 1999 Employee Stock Purchase Plan (“ESPP”). The Company has authorized 600,000 shares for issuance. The number of shares of Common Stock reserved under the ESPP increases annually on January 1 of each year beginning in 2000 by an amount equal to 1% of the Company’s issued and outstanding Common Stock. However, such increases are limited to 1,000,000 additional shares each year. Employees generally will be eligible to participate in the ESPP if the Company customarily employs them for more than 20 hours per week and more than five months in a calendar year and are not 5% or greater shareholders. Under the ESPP, eligible employees may select a rate of payroll deduction up to 15% of their compensation subject to certain maximum purchase limitations per period and other statutory limitations. The ESPP was implemented in a series of overlapping twenty-four month offering periods beginning on the effective date of the Company’s initial public offering with subsequent offering periods beginning on the first trading day on or after May 1 and November 1 of each year. Purchases will occur on each April 30 and October 31 (the “Purchase Dates”) during each participation period. Under

F-31

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the ESPP, eligible employees have the opportunity to purchase shares of Common Stock at a purchase price equal to 85% of the fair market value per share of Common Stock on either the start date of the offering period or the Purchase Date of the related purchase period, whichever is less. Stock purchases under the ESPP in 1999, 2000 and 2001 were 42,495, 112,665 and 489,096, respectively, at a price of $20.40 in 1999, $20.40 and $40.27 per share in 2000 and $1.28 and $0.78 per share in 2001. As of December 31, 2001, 955,763 shares were available under the ESPP for future issuance.

Stock Options

During 1998 and 1999, the Company’s Board of Directors adopted the 1998 Stock Option Plan and the 1999 Nonstatutory Stock Option Plan, respectively (together, the “Option Plans” and each a “Plan”). The 1998 Plan provides for the granting of options to purchase up to 30,788,741 shares of common stock to employees, officers, directors and consultants, with an increase annually on January 1 of each year by an amount equal to 2% of the Company’s issued and outstanding common stock, and the 1999 Plan provides for the granting of up to 28,000,000 shares of common stock to non-executive officer employees or the initial employment grant for executive officers. In November 2001, the Board approved an increase of 11,250,000 to the number of option shares reserved for grant to non-executive officer employees under the 1999 Plan. The 1998 Plan is a shareholder approved plan and allows for options to be granted as either incentive stock options (“ISOs”) or nonqualified stock options (“NSOs”). Options granted under the 1999 Plan may only be nonqualified stock options (“NSOs”). ISOs may be granted only to Company employees, including officers and employee directors. NSOs may be granted to Company employees, non-employee directors and consultants. At December 31, 2001 the total number of shares of common stock available for option grants was 2,548,817 and 9,650,469 under the 1998 Plan and the 1999 Plan, respectively.

The Company has, in connection with the acquisition of various companies, assumed the stock option plans of each acquired company. At December 31, 2000 and 2001, a total of 1,598,793 and 481,229 shares, respectively, of the Company’s Common Stock were reserved for issuance upon exercise of outstanding options issued under the assumed plans, and the related options are included in the table below.

Options under the 1998 Plan may be granted at prices no less than 85% of the estimated fair market value of the shares on the date of grant as determined by the Board of Directors, provided, however, that (i) the exercise price of an ISO may not be less than 100% of the fair market value of the shares on the date of grant, and (ii) the exercise price of an ISO granted to a 10% shareholder may not be less than 110% of the fair market value of the shares on the date of grant. Option grants under the Company’s Option Plans generally vest 25% per year and are generally exercisable for a maximum period of ten years from the date of grant.

F-32

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of the status of the Company’s stock option plans as of December 31, 2000, and 2001, and changes during the periods ending on those dates is presented below:



		2000					2001

					Weighted					Weighted
					Average					Average
					Exercise					Exercise
Year Ended December 31		Shares			Price		Shares			Price

Options outstanding, beginning of year			13,787,959		$	15.12		22,107,213		$	42.03
	Granted and assumed		20,634,167		$	51.30		40,542,946		$	0.93
	Exercised		(5,001,418	)	$	6.44		(1,967,350	)	$	1.07
	Canceled		(7,313,495	)	$	41.78		(22,309,880	)	$	27.93

	Options outstanding, end of year		22,107,213		$	42.03		38,372,929		$	9.17
At December 31
	Options exercisable		3,587,894		$	28.93		6,423,461		$	22.64
	Weighted-average fair value of options granted during the period				$	56.65				$	1.49

The following table summarizes information about stock options outstanding at December 31, 2001:



	Options Outstanding
							Options Exercisable
			Weighted
			Average		Weighted				Weighted
Range of	Number		Remaining		Average		Number		Average
Exercise Prices	Outstanding		Contractual Life		Exercise Price		Exercisable		Exercise Price

$ 0.020 – $ 0.3		50 882,852		9.38		0.30		272,295		0.27
$ 0.360 – $ 0.		530 9,130,219		9.59		0.37		185,635		0.36
$ 0.550 – $ 0.		980 3,397,271		9.74		0.71		151,824		0.94
$ 1.000 – $ 1.		120 8,046,654		8.96		1.01		2,647,368		1.01
$ 1.130 – $ 1.		740 9,003,261		9.80		1.17		222,496		1.34
$ 2.030 – $ 9.		450 2,174,853		9.26		2.77		363,968		3.56
$10.060 – $49.94		0 2,310,122		8.23		40.73		1,120,044		39.65
$50.500 – $75.00		0 3,402,704		8.38		66.07		1,450,974		65.98
$77.250 – $87.00		0 24,993		7.72		82.46		8,857		80.74

		38,372,929		9.17	$	42.03		6,423,461	$	22.64

The compensation cost associated with the Company’s stock-based compensation plans, determined using the minimum value method prescribed by SFAS No. 123, resulted in a material difference from the reported net loss during the three years ended 2001. Had compensation cost been recognized based on the fair value at the date of grant for options granted during 1999, 2000 and 2001, the pro forma amounts of the Company’s net loss and net loss per share would have been as follows:


Year Ended December 31	1999			2000			2001


	(In thousands, except per share amounts)
Net loss attributable to common shares — as reported	$	(116,941	)	$	(1,852,232	)	$	(79,820	)
Net loss attributable to common shares — pro forma		(118,947	)		(2,198,973	)		(395,187	)
Basic and diluted net loss per share — as reported		(3.93	)		(30.67	)		(1.08	)
Basic and diluted net loss per share — pro forma		(4.00	)		(36.41	)		(5.34	)

F-33

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company calculated the minimum value and the fair value of each option grant on the date of grant during 1999, 2000 and 2001 using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following assumptions:


Year Ended December 31	1999			2000			2001

Risk-free interest rate		6.0	%		6.0	%		4.0	%
Expected lives (in years)		4.0			4.0			4.0
Dividend yield		0.0	%		0.0	%		0.0	%
Expected volatility		90.0	%		128.0	%		250.0	%

Preferred Stock Rights Agreement

On March 19, 2001 pursuant to a Preferred Stock Rights Agreement (the “Rights Agreement”) between the Company and Computershare Trust Company, Inc., as Rights Agent (the “Rights Agent”), the Company’s Board of Directors (i) declared a dividend of one right (a “Right”) to purchase one one-thousandth share of the Company’s Series C Participating Preferred Stock (“Series C Preferred”) for each outstanding share of Common Stock, par value $0.001 per share (“Common Shares”), of the Company, and (ii) authorized the issuance to each holder of Exchangeable Shares (as defined below) of one Right for each exchangeable Share held. An “Exchangeable Share” is a share of Class A Non-Voting Preferred Shares of Critical Path Messaging Co., an unlimited liability company existing under the laws of the Province of Nova Scotia and a wholly-owned subsidiary of the Company. Each Exchangeable Share is exchangeable for one Common Share. The Rights shall be issued on May 15, 2001 (the “Record Date”), to shareholders of record as of the close of business on that date. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series C Preferred at an exercise price of $25.00 (the “Purchase Price”), subject to adjustment.

The Rights will become exercisable following the tenth day after a person or group announces the acquisition of 15% or more of the Company’s common stock or announces commencement of a tender or exchange offer, the consummation of which would result in ownership by the person or group of 15% or more of the common stock of the Company. The Company will be entitled to redeem the Rights at $0.01 per Right at any time on or before the fifth day following acquisition by a person or group of 15% or more of the Company’s common stock. The Rights will expire on the earlier of May 15, 2011 or exchange or redemption of the Rights.

Unearned stock-based compensation

In connection with certain stock option grants and Common Stock issuances to employees, directors and advisors during 1998 and 1999, the Company recognized unearned compensation totaling $19.9 million and $22.3 million, respectively, which is being amortized over the vesting periods of the related options. In March 2001, the Company granted employee stock options with exercise prices below market value on the date of grant in connection with a program designed to provide incentives for current employees of the Company to continue their employment. The Company issued stock options representing an aggregate of 12.9 million shares, vesting monthly over a 2-year period, and recognized unearned compensation related to the program totaling $21.4 million, which were subsequently reduced as a result of employee terminations throughout 2001 by approximately $8.2 million. Amortization expense recognized during 1999, 2000 and 2001 totaled approximately $19.4 million, $19.0 million and $35.6 million, respectively. The Company periodically assesses unearned compensation and adjusts the remaining unamortized balance for employee terminations and resignations.

Additionally, during 1999, the Company incurred a stock-based charge of approximately $2.0 million in connection with a severance agreement for a terminated employee. This charge was included in cost of net

F-34

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

revenues based on the function of the related employee. During 2000, the Company incurred stock-based charges of approximately $5.7 million in connection with certain severance agreements for terminated employees. Approximately $3.4 million of this charge was included in employee severance expense in connection with the Company’s plan to reduce worldwide headcount and the remaining $2.3 million was included in stock-based expenses. See also Note 4 — Strategic Restructuring and Employee Severance. During 2001, we incurred stock-based charges of approximately $1.7 million in connection with certain severance agreements for terminated employees and consulting arrangements. These charges were included in operating expenses based on the functions of the related employees and consultants.

Other Comprehensive Income( Loss)


December 31	1999			2000			2001


	(in thousands)
Unrealized investment gains(losses)	$	7,926		$	—		$	(790	)
Foreign currency translation adjustments		(97	)		(74	)		(1,998	)

Other comprehensive income (loss)	$	7,829		$	(74	)	$	(2,788	)

There were no tax effects allocated to any components of other comprehensive income during 1999, 2000 or 2001. See also Note 11 — Income Taxes.

Note 16 — Impairment of Long-Lived Assets

During 2000, the Company recorded a $1.3 billion impairment charge to reduce goodwill, other intangible assets and deferred costs associated with its ICQ and Qwest relationships to their estimated fair values. In connection with the impairment analysis, the estimates of fair values were based upon the discounted estimated cash flows of the Company for the succeeding three years using a discount rate of 25% and an estimated terminal value. The assumptions supporting the estimated cash flows, including the discount rate and an estimated terminal value, reflects management’s best estimates. The discount rate was primarily based upon the weighted average cost of capital for comparable companies.

During 2001 and in connection the Company’s strategic restructuring effort an additional assessment was performed on certain of its remaining long-lived assets. The restructuring plan identified and formulated a plan to exit certain products and services that were determined to be non-core to the Company’s business strategy. The Company reviewed the intangible assets related to these non-core products and services and, as a result of its assessment, recorded a $14.2 million impairment charge in the second quarter to eliminate these assets. During the fourth quarter of 2001 the Company recorded a further impairment charge of $12.4 million related to long-lived assets within its core business.

Note 17 — Defined Contribution Plan

The Company maintains a defined contribution plan, the Critical Path 401(k) Plan, under which its employees are eligible to participate. Participants may make voluntary contributions based on a percentage of their compensation, within certain limitations. Under the plan, discretionary contributions may be made by the Company. Participants are fully vested in the Company’s contributions after a specified number of years of service, as defined under the plan. No contributions have been made by the Company since its inception.

F-35

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 18 — Loss Per Share

Net loss per share is calculated as follows:


		1999			2000			2001
Year Ended December 31

		(in thousands, except per share amounts)
Net loss
	Net loss before extraordinary item	$	(116,941	)	$	(1,855,232	)	$	(258,746	)
	Gain on retirement of convertible subordinated notes		—			—			179,282

	Net loss	$	(116,941	)	$	(1,855,232	)	$	(79,464	)
	Accretion on redeemable convertible preferred shares		—			—			(356	)

	Net loss attributable to common shares	$	(116,941	)	$	(1,855,232	)	$	(79,820	)
Weighted average shares outstanding
	Weighted average shares outstanding		32,860			63,379			75,148
	Weighted average shares subject to repurchase agreements		(2,830	)		(1,493	)		(188	)
	Weighted average shares held in escrow related to acquisitions		(260	)		(1,487	)		(979	)

	Shares used in computation of basic and diluted net loss per share		29,770			60,399			73,981
Basic and diluted net loss per share
	Net loss before extraordinary item	$	(3.93	)	$	(30.72	)	$	(3.49	)
	Gain on retirement of convertible subordinated notes		—			—			2.42

	Net loss	$	(3.93	)	$	(30.72	)	$	(1.07	)
	Accretion on redeemable convertible preferred shares		—			—			(0.01	)

	Net loss attributable to common shares	$	(3.93	)	$	(30.72	)	$	(1.08	)

During 1999, 2000 and 2001, there were 19,164,493, 7,907,018 and 89,206,120, respectively, potential common shares that were excluded from the determination of diluted net loss per share, as the effect of such shares on a weighted average basis is anti-dilutive.

Note 19 — Product and Geographic Information

Revenue information on a product basis is as follows:


			1999		2000		2001
Year Ended December 31

			(in thousands)
Net revenues
	License
		Messaging solutions	$	—	$	27,853	$	11,822
		Identity management solutions		—		7,060		9,822
		Other		—		16,694		9,316
	Service
		Hosted messaging		15,057		44,666		37,467
		Fax messaging(1)		1,100		13,887		6,354
		Maintenance		—		10,966		16,819
		Professional services		—		14,527		12,573

			$	16,157	$	135,653	$	104,173


(1)	Fax messaging was discontinued in connection with the 2001 restructuring. See also Note 4 — Strategic Restructuring and Employee Severance.

F-36

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Information regarding revenues and long-lived assets attributable to the Company’s primary geographic regions is as follows:


		1999		2000		2001
Year Ended December 31

		(in thousands)
Net revenues
	United States	$	16,157	$	83,864	$	62,928
	Europe		—		47,974		37,415
	Other		—		3,815		3,830

		$	16,157	$	135,653	$	104,173


		1999		2000		2001
December 31
Long-lived assets
	United States	$	522,973	$	202,897	$	79,255
	Other		3,841		6,501		5,671

		$	526,814	$	209,398	$	84,926

Note 20 — Quarterly Financial Data (Unaudited)

Quarterly Results of Operations

(in thousands)


	First			Second			Third(1)			Fourth(2)

2000							(As Restated)
Net revenues	$	24,553		$	33,495		$	35,342		$	42,263
Gross profit		6,209			10,826			10,557			11,455
Loss from operations		(77,566	)		(127,682	)		(135,763	)		(1,479,468	)
Net Loss		(76,942	)		(130,009	)		(139,447	)		(1,508,834	)
Net loss per share — basic and diluted		(2.51	)		(2.22	)		(2.26	)		(21.31	)


	First			Second(3)			Third(4)			Fourth(5)
2001
Net revenues	$	27,143		$	27,085		$	26,787		$	23,158
Gross profit (loss)		(3,613	)		(6,837	)		1,285			(9,703	)
Loss from operations		(66,285	)		(80,230	)		(44,144	)		(51,039	)
Net loss before extraordinary item		(70,046	)		(84,899	)		(50,321	)		(53,480	)
Net income (loss)		(70,046	)		(81,081	)		86,901			(15,238	)
Net income (loss) attributable to common shares		(70,046	)		(81,081	)		86,901			(15,594	)
Net loss before extraordinary item per share — basic and diluted		(0.97	)		(1.15	)		(0.68	)		(0.71	)
Net income (loss) per share — basic and diluted		(0.97	)		(1.10	)		1.17			(0.21	)


(1)	Includes a $6.7 million charge related employee severance expense. See also Note 4 — Strategic Restructuring and Employee Severance.

(2)	Includes a $1.31 billion charge related to impairment of intangible assets including the deferred costs associated with our ICQ and Qwest relationships. See also Note 16 — Impairment of Long-Lived Assets.

F-37

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(3) Includes a $14.2 million charge related to impairment of certain long-lived assets and an $8.5 million charge related to costs incurred as a result of our strategic restructuring initiative. See also Note 4 — Strategic Restructuring and Employee Severance and Note 16 — Impairment of Long-Lived Assets.

(4) Includes a $3.8 million charge related to costs incurred as a result of our strategic restructuring initiative. See also Note 4 — Strategic Restructuring and Employee Severance and Note 16 — Impairment of Long-Lived Assets.

(5) Includes a $12.4 million charge related to impairment of certain long-lived assets, primarily network infrastructure and equipment, and a $6.0 million charge related to costs incurred as a result of our strategic restructuring initiative. See also Note 4 — Strategic Restructuring and Employee Severance and Note 16 — Impairment of Long-Lived Assets.

F-38

SCHEDULE II

CRITICAL PATH, INC.

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)


			Additions
	Balance at		Charged to					Balance
	Beginning of		Costs and		Deductions-			at End of
Year Ended December 31,	Period		Expenses		Write-offs			Period

2001	$	3,525	$	5,242	$	(7,585	)	$	1,182
2000	$	623	$	5,492	$	(2,590	)	$	3,525
1999	$	50	$	817	$	(244	)	$	623

The above balances include the Company’s allowance for doubtful accounts.

S-1

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Francisco, State of California, on the 29th day of March, 2002.

Critical Path, Inc.

By: /s/ LAUREEN DEBUONO

Laureen DeBuono

Executive Vice President and

Chief Financial Officer

Each person whose signature appears below constitutes and appoints William E. McGlashan, Jr. and Laureen DeBuono and each of them, as attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendment to this Report and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this amendment to its Annual Report on Form 10-K has been signed below by the following persons in the capacities and on the dates indicated.


Name	Title	Date

/s/ DAVID C. HAYDEN David C. Hayden	Executive Chairman of the Board	March 29, 2002

/s/ WILLIAM E. MCGLASHAN, JR. William E. McGlashan, Jr.	Vice Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	March 29, 2002

/s/ LAUREEN DEBUONO Laureen DeBuono	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	March 29, 2002

/s/ RAUL J. FERNANDEZ Raul J. Fernandez	Director	March 29, 2002

/s/ WILLIAM E. FORD William E. Ford	Director	March 29, 2002

/s/ JEFFREY WEBBER Jeffrey Webber	Director	March 29, 2002

EXHIBIT INDEX


Exhibit
Number		Description

	3(i).1	Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3(i)(b) to the Registrant’s Registration on Form S-1 (File No. 333-71499)).
	3(i).2	Amendment to the Articles of Incorporation, dated January 5, 2001 (Incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000).
	3(i).3	Certificate of the Powers, Designations, Preferences and Rights of the Series D Cumulative Redeemable Convertible Participating Preferred Stock dated November 6, 2001.
	3(ii)	Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3(ii)(b) to the Registrant’s Registration Statement on Form S-1 (File No. 333-71499)).
	4.1	Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration on Form S-1 (File No. 333-71499)).
	4.2	Preferred Stock Rights Agreement dated as of March 19, 2001 between Registrant and ComputerShare Trust Company, Inc., including the Certificate of Determination, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B and C respectively (Incorporated by reference to Exhibit 4.5 of Registrant’s Form 8-A filed on May 7, 2001).
	4.3	Indenture, dated March 31, 2000, by and between Registrant and State Street Bank and Trust Company of California, N.A., Trustee, relating to the $300 million five-year, 5.75% Convertible Subordinated Notes due April 1, 2005 (Incorporated by reference to Exhibit 4.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000).
	4.4	Warrant to Purchase Common Stock dated March 29, 2001 issued by the Registrant to Vectis Group LLC (Incorporated by reference to Exhibit 4.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
	4.5	Warrant to Purchase Common Stock dated January 29, 1999 issued by the Registrant to America Online, Inc. (Incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-1 (File No. 333-71499)).
	4.6	Warrant to Purchase up to 25,000 Shares of Common Stock dated as of December 29, 1999 by and between Ecker Folsom Properties, LLC.
	4.7	Warrant to Purchase up to 834,000 shares of Common Stock dated as of June 2000 by and between Worldsport Networks Europe Ltd.
	4.8	Stock and Warrant Purchase and Exchange Agreement dated as of November 8, 2001 by and among Registrant and General Atlantic Partners 74, LP, GAP Coinvestment Partners II, LP, Gapstar, LLC, Vectis CP Holdings, LLC, Cenwell Limited, Campina Enterprises Limited.
	4.9	Stockholders Agreement dated as of November 8, 2001 by and among Registrant and General Atlantic Partners 74, L.P., GAP Coninvestment Partners II, LP, Gapstar, LLC, Vectis CP Holdings, LLC, Cenwell Limited, Campina Enterprises Limited.
	4.10	Registration Rights Agreement dated as of November 8, 2001 by and among Registrant and General Atlantic Partners 74, L.P., GAP Coninvestment Partners II, LP, Gapstar, LLC, Vectis CP Holdings, LLC, Cenwell Limited, Campina Enterprises Limited.
	4.11	Escrow Agreement dated as of November 8, 2001 by and among Registrant and General Atlantic Partners 74, L.P., GAP Coninvestment Partners II, LP, Gapstar, LLC, Vectis CP Holdings, LLC, Cenwell Limited, Campina Enterprises Limited.
	4.12	Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-8 filed on June 15, 2001 (File No. 333-63080)).
	4.13	Amended and Restated 1998 Stock Plan. (Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8 filed on June 15, 2001 (File No. 333-63080)).


Exhibit
Number		Description

	4.14	1999 Stock Option Plan and forms of agreements thereunder (Incorporated by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-8 filed on September 22, 1999 (File No. 333-87553)).
	10.1	Master Services Agreement dated December 10, 1998 by and between the Registrant and US West Communications Services, Inc. (Incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1 (File No. 333-71499)).
	10.2	Amendment to Email Services Agreement September 30, 1998 by and between the Registrant and E*TRADE Group, Inc. (Incorporated by reference to Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1 (File No. 333-71499)).
	10.3	Email Services Agreement dated January 29, 1999 by and between the Registrant and ICQ, Inc. (Incorporated by reference to Exhibit 10.22 to the Registrant’s Registration Statement on Form S-1 (File No. 333-71499)).
	10.4	Hills Plaza I Office Lease dated as of November 16, 2001 by and between Registrant and SPI Hills Plaza Venture, LLC.
	10.5	Standard Industrial/ Multitenant Lease-Gross dated June 20, 1997 by and between the Registrant and 501 Folsom Street Building. (Incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1 (File No. 333-71499)).
	10.6	Office lease dated December 1999 by and between Ecker-Folsom Properties, LLC and the Registrant. (Incorporated by reference to Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999).
	10.7	Office lease dated December 1999 by and between Ecker-Folsom Properties, LLC and the Registrant. (Incorporated by reference to Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999).
	10.8	Agreement dated as August 13, 2001 by and between Registrant and David Hayden (Incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter and nine months ended September 30, 2001).
	10.9	Nonstatutory Stock Option Agreement dated as of November 8, 2001 by and between Registrant and David Hayden.
	10.10	Agreement dated as of August 1, 2001 by and between Registrant and William E. McGlashan, Jr. (Incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report for the quarter and nine months ended September 30, 2001).
	10.11	Nonstatutory Stock Option Agreement dated as August 1, 2001 by and between Registrant and William E. McGlashan, Jr.
	10.12	Nonstatutory Stock Option Agreement dated as of November 8, 2001 by and between Registrant and William E. McGlashan, Jr.
	10.13	First Amended and Restated Employment Agreement dated as of January 7, 2002 by and between Registrant and William E. McGlashan, Jr.
	10.14	Nonstatutory Stock Option Agreement dated as of December 21, 2001 by and between Registrant and William E. McGlashan, Jr.
	10.15	Agreement dated as of October 8, 2001 by and between Registrant and Pierre Van Beneden (Incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report for the quarter and nine months ended September 30, 2001).
	10.16	Nonstatutory Stock Option Agreement dated as of October 8, 2001 by and between Registrant and Pierre Van Beneden.
	10.17	Nonstatutory Stock Option Agreement dated as of November 8, 2001 by and between Registrant and Pierre Van Beneden.
	10.18	Consulting Agreement dated as of August 16, 2001 by and between Registrant and Laureen DeBuono.


Exhibit
Number		Description

	10.19	Nonstatutory Stock Option Agreement dated as of September 5, 2001 by and between Registrant and Laureen DeBuono.
	10.20	Addendum to Consulting Agreement dated as of October 31, 2001 by and between Registrant and Laureen DeBuono.
	10.21	Nonstatutory Stock Option Agreement dated as of October 31, 2001 by and between Registrant and Laureen DeBuono.
	10.22	Nonstatutory Stock Option Agreement dated as of November 8, 2001 by and between Registrant and Laureen DeBuono.
	10.23	Employment Agreement dated as of January 14, 2002 by and between Registrant and Bernard Harguindeguy.
	10.24	Agreement, dated as of May 15, 2001, by and between the Registrant and Lawrence P. Reinhold (Incorporated by reference to Exhibit 10.2 Registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2001).
	10.25	Agreement and Release, dated February 9, 2001, by and between the Registrant and Douglas Hickey (Incorporated by reference to Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000).
	10.26	Promissory Note and Security Agreement dated November 2, 1998 by and between the Registrant and Douglas Hickey. (Incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1 (File No. 333-71499)).
	10.27	Form of Indemnification Agreement by and between the Registrant and each of its directors and officers. (Incorporated by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000).
	21.1	List of Subsidiaries (Incorporated by reference to Exhibit 21.1 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000).
	23.1	Consent of PricewaterhouseCoopers LLP, Independent Accountants.
	24.1	Power of Attorney (see the signature page of this report).

EX-3.(I)3 3 f80193ex3-i3.txt EXHIBIT 3(I).3 EXHIBIT 3.(i)3 CRITICAL PATH, INC. CERTIFICATE OF THE POWERS, DESIGNATIONS, PREFERENCES AND RIGHTS OF THE SERIES D CUMULATIVE REDEEMABLE CONVERTIBLE PARTICIPATING PREFERRED STOCK, PAR VALUE $0.001 PER SHARE Pursuant to Section 400 of the California General Corporation Law The undersigned, Michael Zuckerman, Vice President and Secretary of Critical Path, Inc., a California corporation (the "Corporation"), DOES HEREBY CERTIFY that the following resolution, creating a series of 4,000,000 shares of Preferred Stock was duly adopted by the Board of Directors, on November 6, 2001. WHEREAS, the Board of Directors is authorized, within the limitations and restrictions stated in the Articles of Incorporation of the Corporation, to provide by resolution or resolutions for the issuance of shares of Preferred Stock, par value $0.001 per share, of the Corporation, in one or more classes or series with such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions as shall be stated and expressed in the resolution or resolutions providing for the issuance thereof adopted by the Board of Directors, and as are not stated and expressed in the Articles of Incorporation, or any amendment thereto, including (but without limiting the generality of the foregoing) such provisions as may be desired concerning voting, redemption, dividends, dissolution or the distribution of assets and such other subjects or matters as may be fixed by resolution or resolutions of the Board of Directors under the General Corporation Law of the State of California; and WHEREAS, it is the desire of the Board of Directors, pursuant to its authority as aforesaid, to authorize and fix the terms of a series of Preferred Stock and the number of shares constituting such series. NOW, THEREFORE, BE IT RESOLVED: 1. Designation and Number of Shares. There shall be hereby created and established a series of Preferred Stock designated as "Series D Cumulative Redeemable Convertible Participating Preferred Stock" (the "Series D Preferred Stock"). The authorized number of shares of Series D Preferred Stock shall be 4,000,000. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in Section 10 below. 2 2. Rank. (a) The Series D Preferred Stock shall with respect to the payment of the Liquidation Payment in the event of Liquidation or Change of Control rank senior to (i) all classes of common stock of the Corporation (including, without limitation, the Common Stock, par value $0.001 per share, of the Corporation (the "Common Stock")), (ii) all classes of preferred stock of the Corporation (including, without limitation, the Series C Participating Preferred Stock, par value $0.001 per share) and (iii) each other class or series of Capital Stock of the Corporation hereafter created which does not expressly rank pari passu with or senior to the Series D Preferred Stock (clauses (i), (ii) and (iii), together, the "Junior Stock"). (b) Notwithstanding anything to the contrary contained in the Articles of Incorporation of the Corporation, the vote of the holders of a majority of the Series D Preferred Stock shall be a prerequisite to the designation or issuance of any shares of Capital Stock of the Corporation ranking pari passu with or senior to the Series D Preferred Stock in the event of a Liquidation or with respect to the payment of the Liquidation Payment. 3. Dividends. (a) Dividend Rate. The holders of shares of Series D Preferred Stock shall receive, out of funds legally available therefor, dividends at an annual rate equal to eight percent (8%) of the Accreted Value, calculated on the basis of a 360-day year, consisting of twelve 30-day months, and shall accrue on a daily basis from the date of issuance thereof, whether or not declared by the Board of Directors. Accrued and unpaid dividends shall compound to the Accreted Value on a semi-annual basis on December 31st and June 30th of each year (each such date, the "Compounding Date") whether or not declared by the Board of Directors. (b) Change of Control; Optional Redemption. In the event of the occurrence of a Change of Control or an optional redemption of the shares of Series D Preferred Stock pursuant to Section 5(a) below, the sum of (i) any dividends accrued at the rate and in the manner specified in Section 3(a) since the previous Compounding Date and prior to the date of the occurrence of a Change of Control or the Optional Redemption Date plus (ii) any and all dividends that would have accrued and compounded at the rate and in the manner specified in Section 3(a) from the closing date of such Change of Control or the Optional Redemption Date through and until the Automatic Redemption Date shall be added to the Accreted Value on the closing date of such Change of Control or the Optional Redemption Date, as the case may be. (c) Other Dividends. The Corporation shall not declare or pay any dividends on, or make any other distributions with respect to or redeem, purchase or otherwise acquire for consideration, any other shares of Capital Stock unless and until all accrued and unpaid dividends on the Series D Preferred Stock have been paid in full. 3 4. Liquidation and Change of Control. (a) Priority Payment. Upon the occurrence of a Liquidation, the holders of shares of Series D Preferred Stock shall be paid in cash for each share of Series D Preferred Stock held thereby, out of, but only to the extent of, the assets of the Corporation legally available for distribution to its stockholders, an amount equal to the sum of (i) the Accreted Value of such share of Series D Preferred Stock (the "Liquidation Payment") on the date of such Liquidation plus (ii) all dividends accrued since the previous Compounding Date. If the assets of the Corporation available for distribution to the holders of shares of Series D Preferred Stock shall be insufficient to permit payment in full to such holders of the sums which such holders are entitled to receive in such case, then all of the assets available for distribution to holders of shares of Series D Preferred Stock shall be distributed among and paid to such holders ratably in proportion to the amounts that would be payable to such holders if such assets were sufficient to permit payment in full. (b) Change of Control. In the event of a Change of Control, the holders of shares of Series D Preferred Stock shall be paid for each share of Series D Preferred Stock held thereby, an amount equal to the sum of (x) the Liquidation Payment plus (y) all dividends that accrue and compound pursuant to Section 3(b). Such amount shall be paid in the form of consideration paid in such Change of Control on the closing date of such Change of Control. (c) Participating Payment. (i) Upon the completion of the distribution required by Section 4(a) or Section 4(b) above, and any other distribution to any other class or series of Capital Stock of the Corporation ranking senior to the Common Stock, if assets remain in the Corporation, the remaining assets of the Corporation available for distribution to stockholders shall be distributed among the holders of shares of Series D Preferred Stock, the holders of shares of any series of preferred stock entitled to a participating payment and the holders of Common Stock pro rata based on the number of shares of the Common Stock held by each (assuming conversion of all such Series D Preferred Stock in accordance with Section 7(a) below). (ii) Notwithstanding anything to the contrary set forth in subsection (b) above, no Liquidation Payment shall be paid pursuant to clause (x) of subsection (b) above and no accrued dividends shall be paid pursuant to clause (y) of subsection (b) above if either (A) the price per share paid for each share of Series D Preferred Stock in such Change of Control (had each share of Series D Preferred Stock converted into Common Stock immediately prior to the consummation of such Change of Control) equals not less than the product of (i) four multiplied by (ii) the Accreted Value or (B) the average closing price per share of the Common Stock as reported on NASDAQ or other nationally recognized securities exchange on which the shares of Common Stock principally trade is, for at least sixty (60) consecutive trading days, not less than the product of (i) four multiplied by (ii) the Accreted Value. 4 (d) Notice. Written notice of a Liquidation or Change of Control stating a payment or payments and the place where such payment or payments shall be payable, shall be delivered in person, mailed by certified mail, return receipt requested, mailed by overnight mail or sent by telecopier, not less than ten (10) days prior to the earliest payment date stated therein, to the holders of record of shares of Series D Preferred Stock, such notice to be addressed to each such holder at its address as shown by the records of the Corporation. 5. Redemption. (a) Optional Redemption. (i) Optional Redemption Period. The Corporation shall not have any right to redeem any shares of the Series D Preferred Stock on or prior to the fourth anniversary of the Closing Date. If on any date after the fourth anniversary of the Closing Date but prior to the Automatic Redemption Date, the average closing price per share of the Common Stock, as reported on NASDAQ or other nationally recognized securities exchange on which the shares of Common Stock trade, for any sixty (60) consecutive trading days after such fourth anniversary date, equals or exceeds four hundred percent (400%) of the Accreted Value (the "Optional Redemption Measurement Window"), the Corporation shall have the right, at its sole option and election, to redeem (unless otherwise prevented by law) within thirty (30) days following such Optional Redemption Measurement Window (the "Optional Redemption Period"), all, but not less than all, of the outstanding shares of Series D Preferred Stock in cash, at a price per share (the "Optional Redemption Price") equal to the sum of the Accreted Value plus all dividends that accrue, compound and are payable pursuant to Section 3(b). (ii) Optional Redemption Payment. Written notice of any election by the Corporation to redeem the shares of Series D Preferred Stock pursuant to Section 5(a) and the closing date prior to the expiration of the Optional Redemption Period selected for such redemption (the "Optional Redemption Date") shall be delivered in person, mailed by certified mail, return receipt requested, mailed by overnight mail or sent by telecopier not less than ten (10), nor more than thirty (30), days prior to such Optional Redemption Date to the holders of record of the shares of Series D Preferred Stock, such notice to be addressed to each such holder at its address as shown in the records of the Corporation. The Optional Redemption Price shall be made with respect to each share of Series D Preferred Stock by wire transfer of immediately available funds as promptly as practicable and, in any event, within seven (7) days after receipt by the Corporation of the Series D Preferred Stock certificates to accounts designated in writing by the holders of such shares of Series D Preferred Stock after surrender of the Series D Preferred Stock certificates pursuant to the following sentence. Upon notice from the Corporation, each holder of shares of Series D Preferred Stock so redeemed shall promptly surrender to the Corporation, at any place where the Corporation shall maintain a transfer agent for its shares of Series D Preferred Stock, certificates representing the shares so redeemed, duly endorsed in blank or accompanied by proper instruments of transfer. Notwithstanding anything to the contrary set forth in this Certificate of Designation, any holder of Series D Preferred Stock may convert its 5 shares of Series D Preferred Stock pursuant to Section 7(a) until the Optional Redemption Price has been paid in full by the Corporation to such holder. (iii) Termination of Rights. If shares of Series D Preferred Stock are redeemed in full on the Optional Redemption Date, then after the Optional Redemption Date, all rights of any holder of shares of Series D Preferred Stock shall cease and terminate, and such shares of Series D Preferred Stock shall no longer be deemed to be outstanding; provided, however, that, if the Corporation defaults in the payment in full of the Optional Redemption Price, then, subject to Section 5(b), the Corporation may not redeem the shares of Series D Preferred Stock until the next Optional Redemption Measurement Window. (b) Automatic Redemption. (i) Automatic Redemption Date and Payment. On the fifth anniversary of the Closing Date (the "Automatic Redemption Date"), all of the shares of Series D Preferred Stock shall automatically, with no further action required to be taken by the Corporation or the holder thereof, be redeemed (unless otherwise prevented by law) in cash, at a redemption price per share (the "Redemption Price") equal to the sum of the Accreted Value plus, all dividends accrued since the previous Compounding Date. Written notice of the Automatic Redemption Date shall be delivered in person, mailed by certified mail, return receipt requested, mailed by overnight mail or sent by telecopier not less than thirty (30), nor more than sixty (60), days prior to the Automatic Redemption Date to the holders of record of the shares of Series D Preferred Stock, such notice to be addressed to each such holder at its address as shown in the records of the Corporation. The Redemption Price shall be made with respect to each share of Series D Preferred Stock by wire transfer of immediately available funds as promptly as practicable and, in any event, within seven (7) days after receipt by the Corporation of the Series D Preferred Stock certificates to accounts designated in writing by the holders of such shares of Series D Preferred Stock after surrender of the Series D Preferred Stock certificates pursuant to the following sentence. Upon notice from the Corporation, each holder of such shares of Series D Preferred Stock so redeemed shall promptly surrender to the Corporation, at any place where the Corporation shall maintain a transfer agent for its shares of Series D Preferred Stock, certificates representing the shares so redeemed, duly endorsed in blank or accompanied by proper instruments of transfer. Notwithstanding anything to the contrary set forth in this Certificate of Designation, any holder of Series D Preferred Stock may convert its shares of Series D Preferred Stock pursuant to Section 7(a) hereof until the Redemption Price has been paid in full by the Corporation to any such holder. (ii) Termination of Rights. If the shares of Series D Preferred Stock are redeemed in full on the Automatic Redemption Date, then after the Automatic Redemption Date, all rights of any holder of such shares of Series D Preferred Stock shall cease and terminate, and such shares of Series D Preferred Stock shall no longer be deemed to be outstanding, whether or not the certificates representing such shares have been received by the Corporation; provided, however, that, if the Corporation 6 defaults in the payment in full of the Redemption Price, the rights of the holders of shares of Series D Preferred Stock shall continue until the Corporation cures such default. (iii) Insufficient Funds for Redemption. If the funds of the Corporation available for redemption of the shares of Series D Preferred Stock on the Automatic Redemption Date are insufficient to redeem in full the shares of Series D Preferred Stock, the holders of shares of Series D Preferred Stock shall share ratably in any funds available by law for redemption of such shares according to the respective amounts which would be payable with respect to the number of shares owned by them if the shares to be so redeemed on such Automatic Redemption Date were redeemed in full. Any shares of Series D Preferred Stock that the Corporation does not redeem on the Automatic Redemption Date due to insufficient funds shall continue to be outstanding until redeemed and dividends on such shares shall continue to accrue and cumulate until redeemed. The Corporation shall in good faith use all commercially reasonable efforts as expeditiously as possible to eliminate, or obtain an exception, waiver or exemption from, any and all restrictions that prevented the Corporation from paying the Redemption Price and redeeming all of the shares of Series D Preferred Stock. At any time thereafter when additional funds of the Corporation are available by law for the redemption of the shares of Series D Preferred Stock, such funds shall be used as promptly as practicable to redeem the balance of such shares, or such portion thereof for which funds are available, on the basis set forth above. 6. Voting Rights; Election of Directors. (a) General. In addition to the voting rights to which the holders of Series D Preferred Stock are entitled under or granted by California law, the holders of Series D Preferred Stock shall be entitled to vote, in person or by proxy, at a special or annual meeting of stockholders on all matters entitled to be voted on by holders of shares of Common Stock voting together as a single class with the Common Stock (and with other shares entitled to vote thereon, if any). With respect to any such vote, each share of Series D Preferred Stock shall entitle the holder thereof to cast that number of votes as is equal to the number of votes that such holder would be entitled to cast had such holder converted its shares of Series D Preferred Stock into shares of Common Stock pursuant to Section 7(a) below on the record date for determining the stockholders of the Corporation eligible to vote on any such matters. (b) Directors. As long as at least 500,000 shares of Series D Preferred Stock are outstanding, if General Atlantic Partners 74, L.P., GAP Coinvestment Partners II, L.P., GapStar, LLC, GAPCO GmbH & Co. KG and/or any Affiliate thereof in the aggregate own at least a majority of the outstanding shares of Series D Preferred Stock, then the holders of shares of Series D Preferred Stock, voting as a separate class, shall be entitled to elect one (1) director of the Corporation. (c) Elections. As long as at least 500,000 shares of Series D Preferred Stock are outstanding, the Series D Preferred Stock shall vote together as a single class with the Common Stock (and all other classes and series of stock of the Corporation entitled to vote thereon, if any) with respect to the election of all of the other 7 directors of the Corporation. If the conditions set forth in Section 6(b) necessary for the holders of shares of Series D Preferred Stock to vote as a separate class for the election of one director are not satisfied, then the Series D Preferred Stock shall vote together as a single class with the Common Stock (and all other classes and series of stock of the Corporation entitled to vote thereon, if any) with respect to the election of all of the directors of the Corporation. At any meeting held for the purpose of electing directors pursuant to Section 6(b) at a time when the holders of shares of Series D Preferred Stock are entitled to vote as a separate class for the election of one director, the presence in person or by proxy of the holders of a majority of the shares of Series D Preferred Stock then outstanding shall constitute a quorum of the Series D Preferred Stock for the election of the director to be elected solely by the holders of shares of Series D Preferred Stock; the holders of shares of Series D Preferred Stock shall be entitled to cast one vote per share of Series D Preferred Stock in any such election; and the director to be elected exclusively by the holders of shares of Series D Preferred Stock shall be elected by the affirmative vote of the holders of a majority of the outstanding shares of Series D Preferred Stock. A vacancy in a directorship filled by the holders of the Series D Preferred Stock voting as a separate class pursuant to this Section 6(c) shall be filled only by vote or written consent of the holders of shares of Series D Preferred Stock. The director elected pursuant to Section 6(b) may not be removed without the consent of a majority of the holders of shares of Series D Preferred Stock. (d) Major Actions. Notwithstanding anything to the contrary set forth in the Articles of Incorporation or the By-laws of the Corporation, the affirmative vote of the holders of a majority of the outstanding shares of Series D Preferred Stock voting as a separate class shall be a prerequisite to: (i) any amendment, modification or restatement of the Articles of Incorporation or the By-laws of the Corporation; (ii) the issuance, reservation for issuance or authorization of any Capital Stock of the Corporation or any right or option to acquire shares of Capital Stock ranking senior to the shares of Series D Preferred Stock or any increase or decrease in the authorized number of shares of Series D Preferred Stock, provided that the Corporation may issue options or shares pursuant to the Stock Option Plans; (iii) the redemption of any Junior Stock other than the repurchase of unvested stock options or restricted stock from employees, officers, directors, or consultants of the Corporation upon termination of service; (iv) any declaration, distribution or payment of any dividend or other distribution to any Junior Stock; (v) the issuance, incurrence, assumption or guarantee by the Corporation or any Subsidiary of the Corporation of any funded Indebtedness in excess of $25 million (excluding capital leases incurred in the ordinary course of business); and 8 (vi) any amendment to this Section 6(d). 7. Conversion. (a) Optional Conversion. Any holder of shares of Series D Preferred Stock shall have the right, at its option, at any time and from time to time, to convert, subject to the terms and provisions of this Section 7, any or all of such holder's shares of Series D Preferred Stock into such number of fully paid and non-assessable shares of Common Stock as is equal to the product of (i) the number of shares of Series D Preferred Stock being so converted multiplied by (ii) the quotient of (x) the sum of the Accreted Value plus all dividends accrued since the previous Compounding Date divided by (y) the Conversion Price, subject to adjustment as provided in Section 7(c) below. Such conversion right shall be exercised by the surrender of certificate(s) representing the shares of Series D Preferred Stock to be converted to the Corporation at any time during usual business hours at its principal place of business maintained by it (or such other office or agency of the Corporation as the Corporation may designate by notice in writing to the holders of shares of Series D Preferred Stock), accompanied by written notice that the holder elects to convert such shares of Series D Preferred Stock and specifying the name or names (with address) in which a certificate or certificates for shares of Common Stock are to be issued and (if so required by the Corporation) by a written instrument or instruments of transfer in form reasonably satisfactory to the Corporation duly executed by the holder or its duly authorized legal representative and transfer tax stamps or funds therefor, if required pursuant to Section 7(i) below. All certificates representing shares of Series D Preferred Stock surrendered for conversion shall be delivered to the Corporation for cancellation and canceled by it. As promptly as practicable after the surrender of any shares of Series D Preferred Stock, in any event within 7 days of the receipt of such certificates, the Corporation shall (subject to compliance with the applicable provisions of federal and state securities laws) deliver to the holder of such shares so surrendered certificate(s) representing the number of fully paid and nonassessable shares of Common Stock into which such shares are entitled to be converted. At the time of the surrender of such certificate(s), the Person in whose name any certificate(s) for shares of Common Stock shall be issuable upon such conversion shall be deemed to be the holder of record of such shares of Common Stock on such date, notwithstanding that the share register of the Corporation shall then be closed or that the certificates representing such Common Stock shall not then be actually delivered to such Person. (b) Termination of Rights. On the date of such optional conversion pursuant to Section 7(a) above all rights with respect to the shares of Series D Preferred Stock so converted, including the rights, if any, to receive notices and vote, shall terminate, except only the rights of holders thereof to (i) receive certificates for the number of shares of Common Stock into which such shares of Series D Preferred Stock have been converted and (ii) exercise the rights to which they are entitled as holders of Common Stock. (c) (i) Dividend, Subdivision, Combination or Reclassification of Common Stock. In the event that the Corporation shall at any time or from time to time, prior to conversion of shares of Series D Preferred Stock (w) pay a 9 dividend or make a distribution on the outstanding shares of Common Stock payable in Capital Stock of the Corporation, (x) subdivide the outstanding shares of Common Stock into a larger number of shares, (y) combine the outstanding shares of Common Stock into a smaller number of shares or (z) issue any shares of its Capital Stock in a reclassification of the Common Stock (other than any such event for which an adjustment is made pursuant to another clause of this Section 7(c)), then, and in each such case, the Conversion Price in effect immediately prior to such event shall be adjusted (and any other appropriate actions shall be taken by the Corporation) so that the holder of any share of Series D Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock or other securities of the Corporation that such holder would have owned or would have been entitled to receive upon or by reason of any of the events described above, had such share of Series D Preferred Stock been converted immediately prior to the occurrence of such event. An adjustment made pursuant to this Section 7(c)(i) shall become effective retroactively (x) in the case of any such dividend or distribution, to a date immediately following the close of business on the record date for the determination of holders of Common Stock entitled to receive such dividend or distribution or (y) in the case of any such subdivision, combination or reclassification, to the close of business on the day upon which such corporate action becomes effective. (ii) Certain Distributions. In case the Corporation shall at any time or from time to time, prior to conversion of shares of Series D Preferred Stock, distribute to all holders of shares of the Common Stock (including any such distribution made in connection with a merger or consolidation in which the Corporation is the resulting or surviving Person and the Common Stock is not changed or exchanged) cash, evidences of indebtedness of the Corporation or another issuer, securities of the Corporation or another issuer or other assets (excluding cash dividends in which holders of shares of Series D Preferred Stock participate, in the manner provided in Section 3(c), dividends payable in shares of Common Stock for which adjustment is made under another paragraph of this Section 7(c) and any distribution in connection with an Excluded Transaction) or rights or warrants to subscribe for or purchase of any of the foregoing, then, and in each such case, the Conversion Price then in effect shall be adjusted (and any other appropriate actions shall be taken by the Corporation) by multiplying the Conversion Price in effect immediately prior to the date of such distribution by a fraction (x) the numerator of which shall be the Current Market Price of the Common Stock immediately prior to the date of distribution less the then fair market value (as determined by the Board of Directors in the exercise of their fiduciary duties) of the portion of the cash, evidences of indebtedness, securities or other assets so distributed or of such rights or warrants applicable to one share of Common Stock and (y) the denominator of which shall be the Current Market Price of the Common Stock immediately prior to the date of distribution (but such fraction shall not be greater than one); provided, however, that no adjustment shall be made with respect to any distribution of rights or warrants to subscribe for or purchase securities of the Corporation if the holder of shares of Series D Preferred Stock would otherwise be entitled to receive such rights or warrants upon conversion at any time of shares of Series D Preferred Stock into Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective retroactively to a date 10 immediately following the close of business on the record date for the determination of stockholders entitled to receive such distribution. (iii) Other Changes. In case the Corporation at any time or from time to time, prior to the conversion of shares of Series D Preferred Stock, shall take any action affecting its Common Stock similar to or having an effect similar to any of the actions described in Sections 7(c)(i) or (ii) above or Section 7(f) below (but not including any action described in any such Section) and the Board of Directors in good faith determines that it would be equitable in the circumstances to adjust the Conversion Price as a result of such action, then, and in each such case, the Conversion Price shall be adjusted in such manner and at such time as the Board of Directors in good faith determines would be equitable in the circumstances (such determination to be evidenced in a resolution, a certified copy of which shall be mailed to the holders of shares of Series D Preferred Stock). (iv) No Adjustment. Notwithstanding anything herein to the contrary, no adjustment under this Section 7(c) need be made to the Conversion Price if the Corporation receives written notice from holders of a majority of the outstanding shares of Series D Preferred Stock that no such adjustment is required. (d) Abandonment. If the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, and shall thereafter and before the distribution to stockholders thereof legally abandon its plan to pay or deliver such dividend or distribution, then no adjustment in the Conversion Price shall be required by reason of the taking of such record. (e) Certificate as to Adjustments. Upon any adjustment in the Conversion Price, the Corporation shall within a reasonable period (not to exceed ten (10) Business Days) following any of the foregoing transactions deliver to each registered holder of shares of Series D Preferred Stock a certificate, signed by (i) the Chief Executive Officer of the Corporation and (ii) the Chief Financial Officer of the Corporation, setting forth in reasonable detail the event requiring the adjustment and the method by which such adjustment was calculated and specifying the increased or decreased Conversion Price then in effect following such adjustment. (f) Reorganization, Reclassification. In case of any merger or consolidation of the Corporation (other than a Change of Control) or any capital reorganization, reclassification or other change of outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value) (each, a "Transaction"), the Corporation shall execute and deliver to each holder of shares of Series D Preferred Stock at least ten (10) Business Days prior to effecting such Transaction a certificate, signed by (i) the Chief Executive Officer of the Corporation and (ii) the Chief Financial Officer of the Corporation, stating that the holder of each share of Series D Preferred Stock shall have the right to receive in such Transaction, in exchange for each share of Series D Preferred Stock, a security identical to (and not less favorable than) the Series D Preferred Stock, and provision shall be made 11 therefor in the agreement, if any, relating to such Transaction. Any certificate delivered pursuant to this Section 7(f) shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 7. The provisions of this Section 7(f) and any equivalent thereof in any such certificate similarly shall apply to successive transactions. (g) Notices. In case at any time or from time to time: (w) the Corporation shall declare a dividend (or any other distribution) on its shares of Common Stock; (x) the Corporation shall authorize the granting to the holders of its Common Stock rights or warrants to subscribe for or purchase any shares of Capital Stock of any class or of any other rights or warrants; or (y) there shall be any Transaction; or then the Corporation shall mail to each holder of shares of Series D Preferred Stock at such holder's address as it appears on the transfer books of the Corporation, as promptly as possible but in any event at least ten (10) days prior to the applicable date hereinafter specified, a notice stating (A) the date on which a record is to be taken for the purpose of such dividend, distribution or granting of rights or warrants or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or granting of rights or warrants are to be determined, or (B) the date on which such Transaction is expected to become effective and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for shares of stock or other securities or property or cash deliverable upon such Transaction. Notwithstanding the foregoing, in the case of any event to which Section 7(f) above is applicable, the Corporation shall also deliver the certificate described in Section 7(f) above to each holder of shares of Series D Preferred Stock at least ten (10) Business Days' prior to effecting such reorganization or reclassification as aforesaid. (h) Reservation of Common Stock. The Corporation shall at all times reserve and keep available for issuance upon the conversion of shares of Series D Preferred Stock, such number of its authorized but unissued shares of Common Stock as will from time to time be sufficient to permit the conversion of all outstanding shares of Series D Preferred Stock, and shall take all action to increase the authorized number of shares of Common Stock if at any time there shall be insufficient authorized but unissued shares of Common Stock to permit such reservation or to permit the conversion of all outstanding shares of Series D Preferred Stock; provided that (x) the holders of shares of Series D Preferred Stock shall vote such shares in favor of any such action that requires a vote of stockholders and (y) such holders shall cause any directors elected by them pursuant to Section 6(b) above to vote in favor of any such action that requires a vote of the Board of Directors. 12 (i) No Conversion Tax or Charge. The issuance or delivery of certificates for Common Stock upon the conversion of shares of Series D Preferred Stock shall be made without charge to the converting holder of shares of Series D Preferred Stock for such certificates or for any tax in respect of the issuance or delivery of such certificates or the securities represented thereby, and such certificates shall be issued or delivered in the respective names of, or (subject to compliance with the applicable provisions of federal and state securities laws) in such names as may be directed by, the holders of the shares of Series D Preferred Stock converted; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the holder of the shares of Series D Preferred Stock converted, and the Corporation shall not be required to issue or deliver such certificate unless or until the Person or Persons requesting the issuance or delivery thereof shall have paid to the Corporation the amount of such tax or shall have established to the reasonable satisfaction of the Corporation that such tax has been paid. (j) Limitations on Conversions. Each holder of the Series D Preferred Stock's right to convert its shares of Series D Preferred Stock into shares of Common Stock shall not be limited by any notice delivered by the Corporation of any proposed redemption, Change of Control or any other event that notwithstanding this subsection (j) shall purport to limit such conversion right. 8. Certain Remedies. Any registered holder of shares of Series D Preferred Stock shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Certificate of Designation and to enforce specifically the terms and provisions of this Certificate of Designation in any court of the United States or any state thereof having jurisdiction, this being in addition to any other remedy to which such holder may be entitled at law or in equity. 9. Business Day. If any payment shall be required by the terms hereof to be made on a day that is not a Business Day, such payment shall be made on the immediately succeeding Business Day. 10. Definitions. As used in this Certificate of Designation, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires: "Accreted Value" shall mean as of any date, with respect to each share of Series D Preferred Stock, the Price Per Share plus the amount of dividends that have accrued and compounded to such date pursuant to Section 3(a) of this Certificate of Designation. "Affiliate" shall mean any Person who is an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. 13 "Automatic Redemption Date" shall have the meaning ascribed to it in Section 5(b) hereof. "Board of Directors" means the Board of Directors of the Corporation. "Business Day" means any day except a Saturday, a Sunday, or other day on which commercial banks in the State of New York or the State of California are authorized or required by law or executive order to close. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations, rights in, or other equivalents (however designated and whether voting or non-voting) of, such Person's capital stock (including, without limitation, common stock and preferred stock) and any and all rights, warrants or options exchangeable for or convertible into such capital stock. "Change of Control" means (i) any merger, consolidation or other business combination transaction (or series of related transactions) in which the stockholders owning a majority of the voting securities of the Corporation prior to such transaction do not own a majority of the voting securities of the surviving entity, (ii) any tender offer, exchange offer or other transaction whereby any person or "group" other than the Investors obtains a majority of the outstanding shares of Common Stock, (iii) any proxy contest in which a majority of the Board of Directors of the Corporation (or persons appointed by such Board of Directors) prior to such contest do not constitute a majority of the Corporation's Board of Directors after such contest or (iv) any other transaction described in any stockholder rights agreement or "poison pill", if any, to which the Corporation is party, which may permit the holders of any rights or similar certificates to exercise the rights evidenced thereby. "Closing Date" means November 8, 2001. "Commission" means the United States Securities and Exchange Commission. "Common Stock" shall have the meaning ascribed to it in Section 2(a) hereof. "Common Stock Equivalent" shall mean any security or obligation which is by its terms convertible, exchangeable or exercisable into or for shares of Common Stock, including, without limitation, the Series D Preferred Stock, and any option, warrant or other subscription or purchase right with respect to Common Stock or any Common Stock Equivalent. "Contingent Obligation" means, as applied to any Person, any direct or indirect liability of that Person with respect to any Indebtedness, lease, dividend, guaranty, letter of credit or other obligation, contractual or otherwise the "primary obligation") of another Person (the "primary obligor"), whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligations or any property 14 constituting direct or indirect security therefor, (b) to advance or provide funds (i) for the payment or discharge or any such primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss or failure or inability to perform in respect thereof. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof. "Conversion Price" shall mean $1.05, as adjusted pursuant to Section 7(c). "Corporation" shall have the meaning ascribed to it in the first paragraph of this Certificate of Designation. "Current Market Price" per share of Capital Stock of any Person shall mean, as of the date of determination, (a) the average of the daily Market Price under clause (a), (b) or (c) of the definition thereof of such Capital Stock during the immediately preceding thirty (30) trading days ending on such date, and (b) if such Capital Stock is not then listed or admitted to trading on any national securities exchange or quoted in the over-the-counter market, then the Market Price under clause (d) of the definition thereof on such date. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "Excluded Transaction" means (a) any issuance of shares of stock or options to purchase shares of Common Stock pursuant to the Stock Option Plans and (b) any issuance of Common Stock (i) upon the conversion of shares of Series D Preferred Stock, (ii) as a dividend on shares of Series D Preferred Stock or (iii) upon conversion or exercise of any Common Stock Equivalents, or (c) any issuance of Common Stock in connection with any Liquidation Payment, (d) Capital Stock issued in consideration of an acquisition, approved by the Board of Directors, by the Company of another Person and (e) shares of Common Stock and Common Stock Equivalents issued in strategic transactions (which may not be private equity or venture capital financing transactions) approved by the Board of Directors to Persons that are not principally engaged in financial investing. "GAAP" means United States generally accepted accounting principles in effect from time to time. "Governmental Authority" means the government of any nation, state, city, locality or other political subdivision thereof. 15 "Indebtedness" means, as to any Person, (a) all obligations of such Person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured), (b) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable and accrued commercial or trade liabilities arising in the ordinary course of business, (c) all interest rate and currency swaps, caps, collars and similar agreements or hedging devices under which payments are obligated to be made by such Person, whether periodically or upon the happening of a contingency, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all obligations of such Person under leases which have been or should be, in accordance with GAAP, recorded as capital leases, (f) all indebtedness secured by any Lien (other than Liens in favor of lessors under leases other than leases included in clause (e)) on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non-recourse to the credit of that Person, and (g) any Contingent Obligation of such Person. "Junior Stock" shall have the meaning ascribed to it in Section 2(a) hereof. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, encumbrance, lien (statutory or other) or preference, priority, right or other security interest or preferential arrangement of any kind or nature whatsoever (excluding preferred stock and equity related preferences). "Liquidation" shall mean the voluntary or involuntary liquidation under applicable bankruptcy or reorganization legislation, or the dissolution or winding up of the Corporation. "Liquidation Payment" shall have the meaning ascribed to it in Section 4(a) hereof. "Market Price" shall mean, with respect to the Capital Stock of any Person, as of the date of determination, (a) if such Capital Stock is listed on a national securities exchange, the closing price per share of such Capital Stock on such date published in The Wall Street Journal (National Edition) or, if no such closing price on such date is published in The Wall Street Journal (National Edition), the average of the closing bid and asked prices on such date, as officially reported on the principal national securities exchange on which such Capital Stock is then listed or admitted to trading; or (b) if such Capital Stock is not then listed or admitted to trading on any national securities exchange but is designated as a national market system security by the National Association of Securities Dealers, Inc., the last trading price of such Capital Stock on such date; or (c) if there shall have been no trading on such date or if such Capital Stock is not designated as a national market system security by the National Association of Securities Dealers, Inc., the average of the reported closing bid and asked prices of such Capital Stock on such date as shown by the National Market System of the National 16 Association of Securities Dealers, Inc. Automated Quotations System and reported by any member firm of the New York Stock Exchange selected by the Corporation; or (d) if none of (a), (b) or (c) is applicable, a market price per share determined mutually by the Board of Directors and the holders of a majority of the shares of Series D Preferred Stock or, if the Board of Directors and the holders of a majority of the shares of Series D Preferred Stock shall fail to agree, at the Corporation's expense by an appraiser chosen by the Board of Directors and reasonably acceptable to the holders of a majority of the shares of Series D Preferred Stock. Any determination of the Market Price by an appraiser shall be based on a valuation of the Corporation as an entirety without regard to any discount for minority interests or disparate voting rights among classes of Capital Stock. "Nasdaq" shall mean The Nasdaq Stock Market, Inc. "Optional Redemption Date" shall have the meaning ascribed to it in Section 5(a)(ii) hereof. "Optional Redemption Measurement Window" shall have the meaning ascribed to it in Section 5(a)(i) hereof. "Optional Redemption Period" shall have the meaning ascribed to it in Section 5(a)(i) hereof. "Optional Redemption Price" shall have the meaning ascribed to it in Section 5(a)(i) hereof. "Person" means any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, governmental body or other entity of any kind. "Price Per Share" means $13.75. "Redemption Price" shall have the meaning ascribed to it in Section 5(b) hereof. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Series D Preferred Stock" shall have the meaning ascribed to it in Section 1 hereof. "Stock Option Plans" means the Company's stock option plans and employee purchase plans approved by the Board of Directors, pursuant to which shares of restricted stock and options to purchase shares of Common Stock are reserved and available for grant to officers, directors, employees and consultants of the Corporation. 17 "Transaction" shall have the meaning ascribed to it in Section 7(f) hereof. [Remainder of page intentionally left blank] 18 IN WITNESS WHEREOF, the undersigned has executed and subscribed this certificate this 6th day of November, 2001. /s/ Michael Zuckerman --------------------------------- Senior Vice President and Secretary EX-4.6 4 f80193ex4-6.txt EXHIBIT 4.6 EXHIBIT 4.6 THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. CRITICAL PATH, INC. WARRANT TO PURCHASE UP TO 25,000 SHARES OF COMMON STOCK Issue date: December 29, 1999 1. General. THIS CERTIFIES THAT, Ecker-Folsom Properties, LLC (the "HOLDER") is entitled to subscribe for and purchase up to twenty-five thousand (25,000) fully paid and nonassessable shares of common stock of Critical Path, Inc., a California corporation (the "COMPANY"), at a price of $90 per share (the "EXERCISE PRICE") subject to the provisions and upon the terms and conditions hereinafter set forth. This warrant (this "WARRANT") is being issued to the Holder in connection with the lease of certain office space located at 530 Folsom Street and 33 Clementina in San Francisco, California between the Company and the Holder of even date herewith. 2. Exercise Period; Vesting This Warrant may be exercised by the Holder at any time and from time to time (but no more than four (4) times) from the issue date above until December 20, 2006. The number of shares that shall be issuable upon exercise of this Warrant shall initially be zero (0), and shall increase by 521 shares each calendar month (the "VESTING RATE") on the first day of each month, beginning January 1, 2000, until this Warrant is exercisable for the entire amount hereunder or until it terminates. In the event that the lease for 530 Folsom Street terminates for any reason other than due to the default of the Company thereunder, the Vesting Rate shall be reduced by 347 shares per month; in the event that the lease for 33 Clementina terminates for any reason other than due to the default of the Company thereunder, the Vesting Rate shall be reduced by 174 shares per month. 3. Method of Exercise; Payment a. Cash Exercise. The Holder may exercise this Warrant in whole or in part, by surrendering this Warrant (with the notice of exercise form attached hereto as Exhibit A duly executed) at the principal office of the Company and by the payment to the Company, by certified, cashier's or other check acceptable to the Company, of an amount equal to the aggregate purchase price of the shares of common stock being purchased. b. Net Issue Exercise. In lieu of exercising this Warrant with cash, the Holder may elect to receive shares equal to the value of this Warrant (or the portion thereof being canceled) by surrendering this Warrant at the principal office of the Company together with notice of such election, in which event the Company shall issue to the Holder a number of shares of common stock computed using the following formula: X = Y (A-B) ------- A where: X = the number of shares of common stock to be issued to the Holder; Y = the number of shares of common stock purchasable under this Warrant or, if only a portion of this Warrant is being exercised, the portion of this Warrant being canceled (at the date of such calculation); A = the Fair Market Value (as defined below) of a share of common stock (at the date of such calculation); and B = the Exercise Price (on the date of such calculation). c. Fair Market Value. The fair market value of a share of common stock of the Company shall equal the market price as quoted on the NASDAQ National Market (the "FAIR MARKET VALUE"). d. Stock Certificates. In the event the Holder exercises any of the rights represented by this Warrant to purchase shares of common stock, the Company shall deliver to the Holder certificates representing such shares within a reasonable time and, unless the Holder has fully exercised this Warrant or the Warrant has expired, a new warrant representing the remaining shares underlying this Warrant. 4. Reservation of Shares. The Company covenants and agrees that all shares of common stock which may be issued upon the exercise of this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, free from all preemptive rights of any stockholder and free from all taxes, liens and charges created by the Company with respect to the issue thereof. During the period within which the Holder may exercise this Warrant, the Company will at all times have authorized, and reserved for the purpose of issuance upon exercise of this Warrant, a sufficient number of shares of common stock to provide for the exercise of the rights represented by this Warrant. 5. Adjustment of Exercise Price and Number of Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the occurrence of certain events as follows: a. Reclassification or Merger. In case of any reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in par value or as a result of a subdivision or combination), or in case of any merger of the Company with or into another company (other than (i) a merger effected solely for the purpose of changing the Company's jurisdiction of incorporation or (ii) a merger with another company in which the Company is the acquiring and surviving corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), or in case of any sale of all or substantially all of the assets of the Company, the Company, or such successor or purchasing company, as the case may be, shall duly execute and deliver to the Holder a new warrant, so that the Holder shall have the right to receive, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of common stock theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or merger by a holder of the number of shares of common stock under this Warrant. Such new warrant shall provide for adjustments as nearly equivalent as may be practicable to the adjustments provided for in this section. The provisions of this subparagraph (a) shall similarly apply to successive reclassifications, changes, mergers, consolidations and transfers. b. Combination or Subdivision of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall combine its outstanding shares of common stock, the number of shares purchasable shall be proportionally decreased and the Exercise Price proportionally increased effective concurrently with such combination. In the case of a subdivision, the number of shares purchasable shall be proportionally increased and the Exercise Price proportionally decreased effective concurrently with such subdivision. c. Stock Dividends. If the Company at any time while this Warrant is outstanding and unexpired shall pay a dividend with respect to shares of common stock in shares of common stock, then the Exercise Price shall be adjusted, from and after the date of determination of stockholders entitled to receive such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of shares of common stock outstanding immediately prior to such dividend or distribution and (ii) the denominator of which shall be the total number of shares of common stock outstanding immediately after such dividend or distribution. 6. Fractional Shares. No fractional shares will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Exercise Price then in effect. 7. Compliance with Securities Law. The Holder, by acceptance hereof, agrees that the Holder is acquiring this Warrant, and the shares of common stock to be issued upon exercise hereof, for investment and will not offer, sell or otherwise dispose of this Warrant, or any shares of common stock to be issued upon exercise hereof, except under circumstances which will not result in a violation of the Securities Act of 1933 (the "SECURITIES ACT"). Upon exercise of this Warrant, unless the shares being acquired are registered under the Securities Act or an exemption from such registration is available, the Holder hereof shall confirm in writing, by executing the form attached as Schedule 1 to Exhibit A hereto, that the shares of common stock so acquired are being acquired for investment and not with a view towards distribution or resale. All shares of common stock issued upon exercise of this Warrant shall be stamped or imprinted with a legend in substantially the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. 8. Transferability. This Warrant and all rights hereunder are not transferable without the prior written consent of the Company. In the event that the Company agrees to any such transfer, such transfer shall be effected, without charge to the Holder hereof (except for transfer taxes), upon surrender of this Warrant properly endorsed. 9. Rights as Stockholder. No Holder, solely as such, shall be entitled to vote or receive dividends or be deemed a stockholder of the Company. 10. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 11. Notices of Change. a. Promptly upon any adjustment in the number or class of shares subject to this Warrant and of the Exercise Price, the Company shall give written notice thereof to the Holder, setting forth in reasonable detail and certifying the calculation of such adjustment. b. The Company shall give written notice to the Holder at least ten (10) business days prior to the date on which the Company closes its books or takes a record for determining rights to receive any dividends or distributions. 12. Transfer Books. The Company will at no time close its transfer books against the transfer of this Warrant or of any shares of common stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. 13. Loss, Theft, Destruction, or Mutilation. The Company represents and warrants to the Holder that, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of this Warrant, the Company, at the Holder's expense, will make and deliver a new warrant of like tenor in lieu of the lost, stolen, destroyed or mutilated Warrant. 14. Notices. Any notice, request, communication or other document required or permitted to be given or delivered to the Holder or the Company shall be delivered via overnight courier by certified or registered mail, postage prepaid, to the Holder's address as shown on the books of the Company or to the Company at the address indicated on the signature page of this Warrant. 15. Binding Effect on Successors. Except as otherwise set forth herein, this Warrant shall be binding upon any company succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. 16. Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 17. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California. 18. Acceptance. Receipt of this Warrant by the holder hereof shall constitute acceptance of and agreement to the foregoing terms and conditions. CRITICAL PATH, INC. 320 First Street San Francisco, California 94105 By: /s/ DAVID THATCHER ------------------------------- Name: DAVID THATCHER ------------------------------- Title: EVP/CFO ------------------------------- EXHIBIT A 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. 2. Method of Exercise (Please initial the applicable blank.): ______ The undersigned elects to exercise the attached Warrant by means of a cash payment, and tenders herewith payment in full for the purchase price of the shares being purchased, together with all applicable transfer taxes, if any. ______ The undersigned elects to exercise the attached Warrant by means of the net exercise provisions of the Warrant. 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) ____________________________________ ____________________________________ ____________________________________ (Address) 4. The undersigned hereby represents and warrants that the aforesaid shares of common stock are being acquired for the account of the undersigned for investment and not with a view to or for resale in connection with the distribution thereof, and that the undersigned has no present intention of distributing or reselling such shares. The undersigned hereby delivers an Investment Representation Statement in the form attached to the Warrant as Schedule I to Exhibit A. Date: _____________________ By: ___________________________ Name: ___________________________ Title: ___________________________ (if applicable) Schedule I INVESTMENT REPRESENTATION STATEMENT Purchaser: _________________________________ Security: Shares of Common Stock Amount: _________________________________ Date: _________________________________ In connection with the purchase of the above-listed shares of common stock (the "SECURITIES"), the undersigned (the "PURCHASER") represents to Critical Path, Inc. (the "COMPANY") as follows: (a) The Purchaser is aware of the Company's business affairs and financial condition, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. The Purchaser is purchasing the Securities for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "SECURITIES ACT"). (b) The Purchaser understands that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein. In this connection, the Purchaser understands that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if the Purchaser's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (c) The Purchaser further understands that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. Moreover, the Purchaser understands that the Company is under no obligation to register the Securities. In addition, the Purchaser understands that the certificate evidencing the Securities will be imprinted with the legend referred to in the Warrant under which the Securities are being purchased. (d) The Purchaser is aware of the provisions of Rule 144, promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, including, among other things: The availability of certain public information about the Company, the resale occurring not less than one year after the party has purchased and paid for the securities to be sold; the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934, as amended) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein. (c) The Purchaser further understands that at the time it wishes to sell the Securities there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144 and that, in such event, the Purchaser may be precluded from selling the Securities under Rule 144 even if the one-year minimum holding period had been satisfied. (f) The Purchaser further understands that in the event all of the requirements of Rule 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required, and that, notwithstanding the fact that Rule 144 is not exclusive, the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. PURCHASER By: ___________________________ Name: ___________________________ Title: ___________________________ (if applicable) EX-4.7 5 f80193ex4-7.txt EXHIBIT 4.7 EXHIBIT 4.7 WARRANTS Critical Path hereby agrees to grant Worldsport within 10 business days of the execution of the Critical Path Master Service Agreement (the "Agreement"), warrants entitling Worldsport to purchase up to a 1.25% equity interest in CP on a fully diluted basis as of the date of the Agreement. The warrants will become exercisable in five equal installments of .25%, upon registration of each group of Worldsport service email boxes, provided that all such Worldsport service email boxes shall be CP sub-branded (as defined below). The initial warrant installment shall vest upon the registration by Worldsport of two million (2,000,000) sub-branded email boxes; the second warrant installment shall vest upon the registration of 4 million (4,000,000) mailboxes that are CP sub-branded; the third warrant installment shall vest upon the registration of 8 million (8,000,000) mailboxes that are CP sub-branded; the fourth warrant installment shall vest upon the registration of 12 million (12,000,000) mailboxes that are CP sub-branded; and the fifth warrant installment shall vest upon registration of 20 million (20,000,000) mailboxes that are CP sub-branded. The warrant installments which have become exercisable pursuant to the terms set forth above shall be exercisable for a period of five (5) years after each first became exercisable. Any of the warrants which shall not have become exercisable (in accordance with the formula set forth above) within five years from the date of the Agreement shall be cancelled. The Initial Exercise Price for the first warrant installment (representing .25% of the fully diluted equity of CP) shall be the average of the closing price of CP's Common Stock as quoted on the NASDAQ National Market System for the fifteen (15) trading days prior to the day in question. The pricing of the additional warrant installments shall be (i) for the second warrant installment, the Initial Exercise Price plus $5.00, (ii) for the third warrant installment shall be the Initial Exercise Price plus $10.00, (iii) for the fourth warrant installment shall be the Initial Exercise Price plus $15.00, and (iiii) for the fifth warrant installment shall be the Initial Exercise Price plus $20.00. A mailbox shall be deemed to be sub-branded, provided that one of the following occurs: Worldsport shall cause the CP emblem or logo, or a variation thereof approved by CP in its reasonable discretion, to appear (i) on the initial login screen and main screens of a web-based mailbox, (ii) on the welcome message of a POP or IMAP session or (iii) in the initial email message received at the mailbox. EX-4.8 6 f80193ex4-8.txt EXHIBIT 4.8 EXHIBIT 4.8 ================================================================================ STOCK AND WARRANT PURCHASE AND EXCHANGE AGREEMENT among CRITICAL PATH, INC. GENERAL ATLANTIC PARTNERS 74, L.P., GAP COINVESTMENT PARTNERS II, L.P., GAPSTAR, LLC and THE OTHER PARTIES NAMED HEREIN ---------------------------------- Dated: November 8, 2001 ---------------------------------- ================================================================================ Table of Contents Page ---- ARTICLE I DEFINITIONS..........................................................2 1.1 Definitions..........................................................2 ARTICLE II PURCHASE AND SALE OF SERIES D PREFERRED STOCK; EXCHANGE..............9 2.1 Purchase and Sale of Series D Preferred Stock........................9 2.2 Exchange of GAP Sub Notes............................................9 2.3 Purchase and Sale of Warrants........................................9 2.4 Certificates of Designation.........................................10 2.5 Use of Proceeds.....................................................10 2.6 Closing.............................................................10 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................11 3.1 Corporate Existence and Power.......................................11 3.2 Authorization; No Contravention.....................................11 3.3 Governmental Authorization; Third Party Consents....................12 3.4 Binding Effect......................................................12 3.5 Litigation..........................................................12 3.6 Compliance with Laws................................................12 3.7 Capitalization......................................................13 3.8 No Default or Breach; Contractual Obligations.......................14 3.9 Title to Properties.................................................14 3.10 Reports; Financial Statements.......................................14 3.11 Taxes...............................................................15 3.12 No Material Adverse Change; Ordinary Course of Business.............15 3.13 Private Offering....................................................16 3.14 Labor Relations.....................................................16 3.15 Employee Benefit Plans..............................................16 3.16 Liabilities.........................................................17 3.17 Intellectual Property...............................................18 3.18 Privacy of Customer Information.....................................19 3.19 Potential Conflicts of Interest.....................................19 3.20 Trade Relations.....................................................20 3.21 Outstanding Borrowing...............................................20 3.22 Broker's, Finder's or Similar Fees..................................20 3.23 CCC Section.........................................................20 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS..........................20 4.1 Existence and Power.................................................20 4.2 Authorization; No Contravention.....................................21 4.3 Governmental Authorization; Third Party Consents....................21

i Page ---- 4.4 Binding Effect......................................................21 4.5 Purchase for Own Account............................................21 4.6 Restricted Securities...............................................22 4.7 Accredited Investor.................................................22 4.8 Experience..........................................................22 4.9 Access to Information...............................................22 4.10 General Solicitation................................................23 4.11 Reliance............................................................23 ARTICLE V ACTIONS TO BE TAKEN BY THE COMPANY AT THE CLOSING..........................23 5.1 Secretary's Certificate.............................................23 5.2 Subject Shares......................................................23 5.3 Warrants............................................................24 5.4 Opinion of Counsel..................................................24 5.5 MOU.................................................................24 5.6 Amendment to Shareholder Rights Plan................................24 ARTICLE VI DELIVERIES BY THE PURCHASERS..............................................24 6.1 Payment for Subject Shares and Warrants.............................24 ARTICLE VII INDEMNIFICATION..........................................................24 7.1 Indemnification.....................................................24 7.2 Notification........................................................25 7.3 Contribution........................................................26 ARTICLE VIII AFFIRMATIVE COVENANTS...................................................26 8.1 Financial Statements and Other Information..........................26 8.2 FIRPTA Certificate..................................................27 8.3 Reservation of Common Stock.........................................27 8.4 Books and Records...................................................28 8.5 Inspection..........................................................28 8.6 Vectis Agreement....................................................28 8.7 NASDAQ Matters......................................................28 ARTICLE IX TERMINATION OF AGREEMENT..................................................29 9.1 Termination.........................................................29 ARTICLE X MISCELLANEOUS..............................................................29 10.1 Survival of Representations and Warranties..........................29 10.2 Notices.............................................................30 10.3 Successors and Assigns; Third Party Beneficiaries...................31 10.4 Amendment and Waiver................................................31 10.5 Counterparts........................................................32 10.6 Headings............................................................32 10.7 GOVERNING LAW.......................................................32 10.8 Severability........................................................32
ii Page ---- 10.9 Rules of Construction...............................................32 10.10 Entire Agreement....................................................32 10.11 Fees................................................................33 10.12 Publicity; Confidentiality..........................................33 10.13 Further Assurances..................................................33 10.14 Legal Representation................................................34
iii EXHIBITS A-1 Form of Escrow Agreement A Form of Warrant B Form of Articles of Incorporation C Form of By-laws D Form of Certificate of Designation E Form of Registration Rights Agreement F Form of Stockholders Agreement G Form of Pillsbury Winthrop LLP Opinion H Memorandum of Understanding SCHEDULES I Coinvestors 2.1 Purchased Shares and Purchase Price 2.2 Exchange Shares and Face Amount 2.3 Warrant Shares and Purchase Price 3.5 Litigation 3.19 Potential Conflicts of Interest 3.21 Outstanding Borrowing iv STOCK AND WARRANT PURCHASE AND EXCHANGE AGREEMENT STOCK AND WARRANT PURCHASE AND EXCHANGE AGREEMENT, dated November 8, 2001 (this "Agreement"), among Critical Path, Inc., a California corporation (the "Company"), General Atlantic Partners 74, L.P., a Delaware limited partnership ("GAP LP"), GAP Coinvestment Partners II, L.P., a Delaware limited partnership ("GAP Coinvestment"), GapStar, LLC, a Delaware limited liability company ("GapStar" and, collectively with GAP LP and GAP Coinvestment, the "GAP Purchasers"), and the Persons listed on Schedule I hereto (the "Coinvestors" and, together with the GAP Purchasers, the "Purchasers"). WHEREAS, upon the terms and conditions set forth in this Agreement, the Company proposes to issue and sell to (i) each of the Purchasers, the aggregate number of shares, par value $0.001 per share, of Series D Cumulative Redeemable Convertible Participating Preferred Stock of the Company (the "Series D Preferred Stock") set forth opposite the name of such Purchaser on Schedule 2.1 hereto, for the aggregate purchase price set forth opposite such Purchaser's name on Schedule 2.1 hereto, and (ii) each GAP Purchaser, a warrant to purchase, subject to the terms and conditions thereof, the aggregate number of shares, par value $0.001 per share, of common stock of the Company (the "Common Stock") set forth opposite such GAP Purchaser's name on Schedule 2.3 hereto (the "Warrants"), at an exercise price equal to $1.05, containing the terms and conditions set forth in the form of warrant attached hereto as Exhibit A, for the purchase price set forth opposite such GAP Purchaser's name on Schedule 2.3 hereto; and WHEREAS, upon the terms and conditions set forth in this Agreement, the Company proposes to issue to each GAP Purchaser the aggregate number of shares of Series D Preferred Stock set forth opposite the name of such GAP Purchaser on Schedule 2.2 hereto in exchange for the surrender to the Company by such GAP Purchaser of its GAP Sub Notes (as hereinafter defined) in the face amount set forth opposite such GAP Purchaser's name on Schedule 2.2 hereto; and WHEREAS, each share of Series D Preferred Stock is convertible (subject to adjustment) into one share of Common Stock; and WHEREAS, the Company and the Purchasers are simultaneously with the execution and delivery of this Agreement at the Closing (as defined below) entering into an Escrow Agreement, dated the date hereof, and attached as Exhibit A-1 hereto (the "Escrow Agreement") among the Company, the Purchasers and Pillsbury Winthrop LLP, as Escrow Agent (the "Escrow Agent"), pursuant to which the parties thereto have agreed to and deposit in escrow all of the executed Transaction Documents (as defined below), the GAP Sub Notes (as defined below), the Warrants (as defined below), the Subject Shares (as defined below), the aggregate cash purchase price payable by the Purchasers pursuant to Section 2.6 of this Agreement and certain ancillary documents in escrow with 2 the Escrow Agent, to be held and released only in accordance with the Escrow Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "Affiliate" shall mean any Person who is an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "Agreement" means this Agreement as the same may be amended, supplemented or modified in accordance with the terms hereof. "Articles of Incorporation" means the Articles of Incorporation of the Company in effect on the Closing Date and attached hereto as Exhibit B. "Board of Directors" means the Board of Directors of the Company. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in the State of New York or the State of California are authorized or required by law or executive order to close. "By-laws" means the by-laws of the Company in effect on the Closing Date and attached hereto as Exhibit C. "Certificate of Designation" means the Certificate of Designation with respect to the Series D Preferred Stock adopted by the Board of Directors and duly filed with the Secretary of State of the State of California on or before the Closing Date substantially in the form attached hereto as Exhibit D. "Claims" has the meaning set forth in Section 3.5 of this Agreement. "Closing" has the meaning set forth in Section 2.6(a) of this Agreement. "Closing Date" has the meaning set forth in Section 2.6(a) of this Agreement. "Code" means the Internal Revenue Code of 1986, as amended, or any successor statute thereto. 3 "Coinvestors" has the meaning set forth in the preamble to this Agreement. "Commission" means the United States Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act and Exchange Act. "Common Stock" has the meaning set forth in the recitals to this Agreement. "Commonly Controlled Entity" means any entity which is under common control with the Company within the meaning of Code section 414(b), (c), (m), (o) or (t). "Company" has the meaning set forth in the preamble to this Agreement. "Company Plans" has the meaning set forth in Section 3.15 of this Agreement. "Condition of the Company" means the assets, business, properties, operations or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole. "Contingent Obligation" means, as applied to any Person, any direct or indirect liability of that Person with respect to any Indebtedness, lease, dividend, guaranty, letter of credit or other obligation, contractual or otherwise (the "primary obligation") of another Person (the "primary obligor"), whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligations or any property constituting direct or indirect security therefor, (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation, or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss or failure or inability to perform in respect thereof. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof. "Contractual Obligations" means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument to which such Person is a party or by which it or any of its property is bound. "Copyrights" means any foreign or United States copyright registrations and applications for registration thereof, and any non-registered copyrights. 4 "Environmental Laws" means federal, state, local and foreign laws, principles of common laws, civil laws, regulations, and codes, as well as orders, decrees, judgments or injunctions, issued, promulgated, approved or entered thereunder relating to pollution, protection of the environment or public health and safety. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Escrow Agent" has the meaning set forth in the recitals hereto. "Escrow Agreement" has the meaning set forth in the recitals hereto. "Escrow Release Date" has the meaning set forth in the Escrow Agreement. "Exchange" has the meaning set forth in Section 2.2 of this Agreement. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder. "Exchange Shares" has the meaning set forth in Section 2.2 of this Agreement. "Financial Statements" has the meaning set forth in Section 3.10 of this Agreement. "GAAP" means United States generally accepted accounting principles in effect from time to time. "GAP Coinvestment" has the meaning set forth in the preamble to this Agreement. "GAP Coinvestment Warrant" means the Warrant to be issued to GAP Coinvestment. "GAP LLC" means General Atlantic Partners, LLC, a Delaware limited liability company and the general partner of GAP LP and the managing member of GapStar, and any successor to such entity. "GAP LP" has the meaning set forth in the preamble to this Agreement. "GAP LP Warrant" means the warrant to be issued to GAP LP. "GAP Purchasers" has the meaning set forth in the preamble to this Agreement. "GapStar" has the meaning set forth in the preamble to this Agreement. 5 "GapStar Warrant" means the warrant to be issued to GapStar. "GAP Sub Notes" means the 5 3/4% Convertible Subordinated Notes due April 1, 2005 issued by the Company pursuant to the Company's Indenture, dated March 31, 2000, purchased by the GAP Purchasers for the purchase price set forth on Schedule 2.2 hereto and held by the GAP Purchasers as of the Closing Date in the face amounts set forth on Schedule 2.2 hereto. "Governmental Authority" means the government of any nation, state, city, locality or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Indebtedness" means, as to any Person, (a) all obligations of such Person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured), (b) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable and accrued commercial or trade liabilities arising in the ordinary course of business, (c) all interest rate and currency swaps, caps, collars and similar agreements or hedging devices under which payments are obligated to be made by such Person, whether periodically or upon the happening of a contingency, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all obligations of such Person under leases which have been or should be, in accordance with GAAP, recorded as capital leases, (f) all indebtedness secured by any Lien (other than Liens in favor of lessors under leases other than leases included in clause (e)) on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non-recourse to the credit of that Person, and (g) any Contingent Obligation of such Person. "Indemnified Party" has the meaning set forth in Section 7.1 of this Agreement. "Indemnifying Party" has the meaning set forth in Section 7.1 of this Agreement. "Intellectual Property" has the meaning set forth in Section 3.17 of this Agreement. "Internet Assets" means any Internet domain names and other computer user identifiers and any rights in and to sites on the worldwide web, including rights in and to any text, graphics, audio and video files and html or other code incorporated in such sites. 6 "Knowledge" means the knowledge of the Company and David C. Hayden, Executive Chairman, William E. McGlashan, Jr., President and Chief Operating Officer, Pierre Van Beneden, President, Laureen De Buono, Chief Financial Officer, Mike Serbinis, Chief Technology Officer, Sue Barsamian, Senior Vice President Product Marketing, Kent Bridges, Senior Vice President United States Sales, Michael Zuckerman, Senior Vice President, General Counsel, Larry Weber, Director, Jeffrey T. Webber, Director, Steven Richards, Director, Kevin O'Keefe, Vice President Hosted Business, Ian Goldsmith, Sales Executive after due inquiry. "Liabilities" has the meaning set forth in Section 3.16 of this Agreement. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, encumbrance, lien (statutory or other) or preference, priority, right or other security interest or preferential arrangement of any kind or nature whatsoever (excluding preferred stock and equity related preferences). "Losses" has the meaning set forth in Section 7.1 of this Agreement. "Material Contractual Obligations" has the meaning set forth in Section 3.8 of this Agreement. "MOU" means that certain Memorandum of Understanding dated the date hereof in the form attached as Exhibit H hereto that memorializes the agreement in principle of the parties therein to settle on the terms set forth therein the litigations encaptioned In Re Critical Path Inc. Securities Litigation Case (No. C-01-0551 WHO). "Nasdaq" means The Nasdaq Stock Market, Inc. "Nasdaq Escrow Approval Condition" has the meaning set forth in the Escrow Agreement. "Orders" has the meaning set forth in Section 3.2 of this Agreement. "Patents" means any foreign or United States patents and patent applications, including any divisions, continuations, continuations-in-part, substitutions or reissues thereof, whether or not patents are issued on such applications and whether or not such applications are modified, withdrawn or resubmitted. "Person" means any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Plan" means any employee benefit plan, arrangement, policy, program, agreement or commitment (whether or not an employee plan within the meaning of section 3(3) of ERISA), including, without limitation, any employment, consulting or deferred compensation agreement, executive compensation, bonus, incentive, pension, 7 profit-sharing, savings, retirement, stock option, stock purchase or severance pay plan, any life, health, disability or accident insurance plan, whether oral or written, whether or not subject to ERISA, as to which the Company or any Commonly Controlled Entity has or in the future could have any direct or indirect, actual or contingent liability. "Proxy Statement" has the meaning set forth in Section 8.7(b). "Purchased Shares" has the meaning set forth in Section 2.1 of this Agreement. "Purchasers" has the meaning set forth in the preamble to this Agreement. "Registration Rights Agreement" means the Registration Rights Agreement substantially in the form attached hereto as Exhibit E. "Requirements of Law" means, as to any Person, any law (including Environmental Laws), statute, treaty, rule, regulation, right, privilege, qualification, license or franchise or determination of an arbitrator or a court or other Governmental Authority or stock exchange, in each case applicable or binding upon such Person or any of its property or to which such Person or any of its property is subject or pertaining to any or all of the transactions contemplated or referred to herein. "Retiree Welfare Plan" means any welfare plan (as defined in Section 3(1) of ERISA) that provides benefits to current or former employees beyond their retirement or other termination of service (other than coverage mandated by Section 4980A of the Code, commonly referred to as "COBRA," the cost of which is fully paid by the current or former employee or his or her dependents). "SEC Reports" has the meaning set forth in Section 3.10 of this Agreement. "Securities" has the meaning set forth in Section 4.8 of this Agreement. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder. "Series D Preferred Stock" has the meaning set forth in the recitals to this Agreement. "Shareholder Rights Plan" means the Preferred Rights Agreement, dated as of March 19, 2001, between the Company and Computershare Trust Company, Inc., as Rights Agent. "Software" means any computer software programs, source code, object code, data and documentation, including, without limitation, any computer software programs that incorporate and run the Company's pricing models, formulae and algorithms. 8 "Stock Equivalents" means any security or obligation which is by its terms convertible into or exchangeable or execrable for shares of common stock or other capital stock of the Company, and any option, warrant or other subscription or purchase right with respect to common stock or such other capital stock. "Stock Option Plans" means the Company's stock option plans and employee purchase plans pursuant to which shares of restricted stock and options to purchase shares of Common Stock are reserved and available for grant to officers, directors, employees and consultants of the Company. "Stockholders Agreement" means the Stockholders Agreement substantially in the form attached hereto as Exhibit F. "Subject Shares" has the meaning set forth in Section 2.2 of this Agreement. "Subsidiaries" means, as of the relevant date of determination, with respect to any Person, a corporation or other Person of which 50% or more of the voting power of the outstanding voting equity securities or 50% or more of the outstanding economic equity interest is held, directly or indirectly, by such Person. Unless otherwise qualified, or the context otherwise requires, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Company. "Taxes" means any federal, state, provincial, county, local, foreign and other taxes (including, without limitation, income, profits, windfall profits, alternative, minimum, accumulated earnings, personal holding company, capital stock, premium, estimated, excise, sales, use, occupancy, gross receipts, franchise, ad valorem, severance, capital levy, production, transfer, withholding, employment, unemployment compensation, payroll and property taxes, import duties and other governmental charges and assessments), whether or not measured in whole or in part by net income, and including deficiencies, interest, additions to tax or interest, and penalties with respect thereto, and including expenses associated with contesting any proposed adjustments related to any of the foregoing. "Trade Secrets" means any trade secrets, research records, processes, procedures, manufacturing formulae, technical know-how, technology, blue prints, designs, plans, inventions (whether patentable and whether reduced to practice), invention disclosures and improvements thereto. "Trademarks" means any foreign or United States trademarks, service marks, trade dress, trade names, brand names, designs and logos, corporate names, product or service identifiers, whether registered or unregistered, and all registrations and applications for registration thereof. 9 "Transaction Documents" means, collectively, this Agreement, the Escrow Agreement, the Stockholders Agreement, the Registration Rights Agreement and the Warrants. "Warrant Shares" has the meaning set forth in Section 2.3 of this Agreement. "Warrants" has the meaning set forth in the recitals to this Agreement. "Vectis Agreement" means the following agreements between the Company and Vectis Group, LLC: (i) Advisory Services Letter Agreement, dated as of May 30, 2001, (ii) Strategic Analysis Letter Agreement, dated March 29, 2001 and (iii) Finder and Advisory Letter Agreement, dated as of March 29, 2001. ARTICLE II PURCHASE AND SALE OF SERIES D PREFERRED STOCK; EXCHANGE 2.1 Purchase and Sale of Series D Preferred Stock. On the Closing Date, the Company agrees to deposit with the Escrow Agent, to be held in escrow in accordance with the terms of the Escrow Agreement and to be released to the Purchasers on the Escrow Release Date, and each Purchaser, severally and not jointly, agrees to purchase from the Company on the Escrow Release Date subject only to the terms and provisions of the Escrow Agreement, the aggregate number of shares of Series D Preferred Stock set forth opposite such Purchaser's name on Schedule 2.1 hereto, for the aggregate purchase price set forth opposite such Purchaser's name on Schedule 2.1 hereto which is being deposited by each such Purchaser with the Escrow Agent not later than 5:00 p.m., New York City time, on November 9, 2001, to be distributed in accordance with the terms of the Escrow Agreement (all of the shares of Series D Preferred Stock being purchased pursuant hereto being referred to herein as the "Purchased Shares"). 2.2 Exchange of GAP Sub Notes. On the Closing Date, the Company agrees to deposit with the Escrow Agent, to be held in escrow in accordance with the terms of the Escrow Agreement, and to be released to the Purchasers on the Escrow Release Date, the number of shares of Series D Preferred Stock set forth opposite such GAP Purchaser's name on Schedule 2.2 hereto, in exchange for the deposit with the Escrow Agent not later than 5:00 p.m. New York City time, on November 9, 2001, to be held in escrow in accordance with the terms of the Escrow Agreement and to be released to the Company on the Escrow Release Date, by such GAP Purchaser of its GAP Sub Notes in the face amount set forth opposite such GAP Purchaser's name on Schedule 2.2 hereto (the "Exchange") (all of the shares of Series D Preferred Stock being issued pursuant to the Exchange, the "Exchange Shares" and, together with the Purchased Shares, the "Subject Shares"). 2.3 Purchase and Sale of Warrants. On the Closing Date, the Company agrees to deposit with the Escrow Agent, to be held in escrow in accordance with the terms of the Escrow Agreement and to be released to the Purchasers on the 10 Escrow Release Date, and each GAP Purchaser, severally and not jointly, agrees to purchase from the Company on the Escrow Release Date subject only to the terms and provisions of the Escrow Agreement, the Warrant to purchase the aggregate number of shares of Common Stock set forth opposite such GAP Purchaser's name on Schedule 2.3 hereto, for the aggregate purchase price set forth opposite such GAP Purchaser's name on Schedule 2.3 hereto which is being deposited by each such Purchaser with the Escrow Agent not later than 5:00 p.m., New York City time, on November 9, 2001, to be distributed in accordance with the terms of the Escrow Agreement (all of the shares of Common Stock issuable upon the exercise of the Warrants being purchased pursuant hereto being referred to herein as the "Warrant Shares"). 2.4 Certificates of Designation. The Subject Shares shall have the preferences and rights set forth in the Certificate of Designation. 2.5 Use of Proceeds. The Company shall use the proceeds from the sale of the Purchased Shares and the Warrants to the Purchasers to fund the Company's working capital. 2.6 Closing. (a) The closing (the "Closing") of the transactions referred to in Sections 2.1, 2.2 and 2.3 shall take place at the offices of Paul, Weiss, Rifkind, Wharton & Garrison, at 10:00 a.m., local time, on the date hereof (the "Closing Date"). (b) Not later than 5:00 p.m., New York City time, on November 9, 2001, the Company shall deliver to the Escrow Agent, to be held in escrow and released only in accordance with the terms of the Escrow Agreement, an undated certificate or certificates in definitive form and registered in the name of each Purchaser, representing such Purchaser's Purchased Shares. (c) Not later than 5:00 p.m., New York City time, on November 9, 2001, each Purchaser shall deliver to the Escrow Agent, to be held in escrow and released only in accordance with the terms of the Escrow Agreement, of the aggregate purchase price for such Purchaser's Purchased Shares by wire transfer of immediately available funds. (d) Not later than 5:00 p.m., New York City time, on November 9, 2001, the Company shall deliver to the Escrow Agent to be held in escrow and released only in accordance with the terms of the Escrow Agreement an undated certificate or certificates in definitive form and registered in the name of each GAP Purchaser, representing its Exchange Shares. (e) Not later than 5:00 p.m., New York City time, on November 9, 2001, each GAP Purchaser shall deliver to the Escrow Agent to be held in escrow and released only in accordance with the terms of the Escrow Agreement its GAP Sub Notes together with duly executed and undated Note Powers for such GAP Sub Notes. 11 (f) Not later than 5:00 p.m., New York City time, on November 9, 2001, the Company shall deliver the Warrants to the Escrow Agent, to be held in escrow and released only in accordance with the terms of the Escrow Agreement. (g) Not later than 5:00 p.m., New York City time, on November 9, 2001, each GAP Purchaser shall deliver to the Escrow Agent, to be held in escrow and released only in accordance with the terms of the Escrow Agreement, the aggregate purchase price for its Warrants by wire transfer of immediately available funds. (h) In addition, at the Closing, (i) the Company shall execute and deliver to the Purchasers executed copies of each of this Agreement, the Escrow Agreement, the Stockholders Agreement and the Registration Rights Agreement, together with an executed copy of the certificate referred to in Section 5.1 of this Agreement, an executed copy of the Certificate of Designations and the executed Opinion referred to in Section 5.4 of this Agreement and (ii) each Purchaser shall execute and deliver to the Company, executed copies of each of this Agreement, the Escrow Agreement, the Stockholders Agreement and the Registration Rights Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to each of the Purchasers as follows: 3.1 Corporate Existence and Power. The Company and each of its Subsidiaries (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation; (b) has all requisite corporate power and authority to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged; (c) is duly qualified as a foreign corporation, licensed and in good standing under the laws of each jurisdiction in which its ownership, lease or operation of property or the conduct of its business requires such qualification, except where the failure to be so qualified could not reasonably be expected to have a material adverse effect on the Condition of the Company and (d) has the corporate power and authority to execute, deliver and perform its obligations under this Agreement and each of the other Transaction Documents. No jurisdiction, other than those referred to in clause (c) above, has claimed, in writing or otherwise, that the Company or any of its Subsidiaries is required to qualify as a foreign corporation or other entity therein, and the Company or any of its Subsidiaries does not file any franchise, income or other tax returns in any other jurisdiction based upon the ownership or use of property therein or the derivation of income therefrom. 3.2 Authorization; No Contravention. The execution, delivery and performance by the Company of this Agreement and each of the other Transaction Documents and the transactions contemplated hereby and thereby (a) have been duly authorized by all necessary corporate action of the Company; (b) do not contravene the terms of the Articles of Incorporation or the By-laws; (c) do not violate, conflict with or 12 result in any breach, default or contravention of (or with due notice or lapse of time or both would result in any breach, default or contravention of), or the creation of any Lien under, any Contractual Obligation of the Company or any of its Subsidiaries or any Requirement of Law applicable to the Company or any of its Subsidiaries except such violations or conflicts that would not reasonably be expected to have a material adverse effect on the Condition of the Company; and (d) do not violate any judgment, injunction, writ, award, decree or order of any nature (collectively, "Orders") of any Governmental Authority against, or binding upon, the Company or any of its Subsidiaries. 3.3 Governmental Authorization; Third Party Consents. No approval, consent, compliance, exemption, authorization or other action by, or notice to, or filing with, any Governmental Authority or any other Person, and no lapse of a waiting period under a Requirement of Law, is necessary or required in connection with the execution, delivery or performance (including, without limitation, the sale, issuance and delivery of the Subject Shares) by, or enforcement against, the Company of this Agreement and the other Transaction Documents or the transactions contemplated hereby and thereby. 3.4 Binding Effect. This Agreement has been, and as of the Closing Date each of the other Transaction Documents will have been, duly executed and delivered by the Company, and this Agreement constitutes, and as of the Closing Date each of the other Transaction Documents will constitute, the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity relating to enforceability (regardless of whether considered in a proceeding at law or in equity). 3.5 Litigation. Except as set forth on Schedule 3.5 or as disclosed in the SEC Reports, there are no actions, suits, proceedings, claims, complaints, disputes, arbitrations or investigations (collectively, "Claims") pending or, to the Knowledge of the Company, threatened, at law, in equity, in arbitration or before any Governmental Authority against the Company or any of its Subsidiaries that seeks in excess of $50,000 in damages nor is the Company aware that there is any basis for any of the foregoing. The foregoing includes, without limitation, Claims pending or, to the Knowledge of the Company, threatened or any basis therefor known by the Company involving the prior employment of any employee of the Company or any of its Subsidiaries, their use in connection with the business of the Company or any of its Subsidiaries of any information or techniques allegedly proprietary to any of their former employers or their obligations under any agreements with prior employers. No Order has been issued by any court or other Governmental Authority against the Company or any of its Subsidiaries purporting to enjoin or restrain the execution, delivery or performance of this Agreement or any of the other Transaction Documents. 3.6 Compliance with Laws. The Company and each of its Subsidiaries is in compliance in all material respects with all Requirements of Law and all Orders issued by any court or Governmental Authority against the Company in all respects. To the Company's Knowledge, there are no Requirements of Law which could reasonably 13 be expected to prohibit or restrict the Company or any of its Subsidiaries from, or otherwise materially adversely effect the Company or any of its Subsidiaries in, conducting its business in any jurisdiction in which it now conducts its business. 3.7 Capitalization. (a) As of the date hereof, the authorized capital stock of the Company consists of (x) 500,000,000 shares of Common Stock of which (i) 75,515,871 shares are issued and outstanding and (ii) 49,775,020 shares are reserved for issuance upon exercise of stock options granted to directors, officers and other employees of the Company pursuant to the Stock Option Plans; and (y) 5,000,000 shares of preferred stock, none of which is outstanding. (b) On the Closing Date, after giving effect to the transactions contemplated by this Agreement, the authorized capital stock of the Company shall consist of (i) 500,000,000 shares of Common Stock, of which 75,515,871 shares are issued and outstanding, (ii) 75,000 shares of Series C Preferred Stock, par value $.001 per share, of the Company, of which no shares are issued and outstanding, (iii) assuming the Escrow Release Date has occurred, 4,000,000 shares of Series D Preferred Stock, of which 4,000,000 shares are issued and outstanding, and (iv) 925,000 shares of undesignated "blank check" preferred stock. As of the date of this Agreement, the aggregate number of shares of restricted stock and options to purchase shares of Common Stock which may be issued under the Stock Option Plans are 49,775,020, of which 31,690,094 have been granted. The Company has reserved an aggregate of 52,380,952 shares of Common Stock for issuance upon conversion of the Subject Shares and 2,500,000 shares of Common Stock for issuance upon exercise of the Warrants. Except as set forth on Schedule 3.7(a) and except for the Warrants, there are no options, warrants, conversion privileges, subscription or purchase rights or other rights presently outstanding to purchase or otherwise acquire (i) any authorized but unissued, unauthorized or treasury shares of the Company's capital stock, (ii) any Stock Equivalents or (iii) any other securities of the Company and there are no commitments, contracts, agreements, arrangements or understandings to which the Company is a party to issue any shares of the Company's capital stock or any Stock Equivalents or other securities of the Company. (c) The Subject Shares and the Warrants are duly authorized, and when issued and delivered to the Purchasers after payment therefor and the consummation of the Exchange on the Escrow Release Date, will be validly issued, fully paid and non-assessable, and assuming the accuracy of the representations and warranties of the Purchasers set forth in Article IV of this Agreement, will be issued in compliance with the registration and qualification requirements of all applicable federal, state and foreign securities laws and will be free and clear of all other Liens. The shares of Common Stock issuable upon conversion of the Subject Shares and exercise of the Warrants have been duly reserved for issuance and, when issued in compliance with the provisions of the Certificate of Designation and the Warrants (in the case of the Warrant Shares), will be validly issued, fully paid and non-assessable and not subject to any preemptive rights or similar rights that have not been satisfied and will be free and clear 14 of all other Liens. None of the issued and outstanding shares of Common Stock were issued in violation of any preemptive rights. 3.8 No Default or Breach; Contractual Obligations. All of the Contractual Obligations to which the Company or any of its Subsidiaries is a party, whether written or oral, which are required by the Exchange Act to be disclosed in the SEC Reports (collectively, "Material Contractual Obligations") are valid, subsisting, in full force and effect and binding upon the Company or its Subsidiary, as the case may be, and the other parties thereto, and the Company or its Subsidiary, as the case may be, has paid in full or accrued all amounts due thereunder and has satisfied in full or provided for all of its liabilities and obligations thereunder, except for such amounts as are being contested by the Company in good faith. Neither the Company nor any of its Subsidiaries has received notice of a default and is not in default under, or with respect to, any Material Contractual Obligation nor, to the Knowledge of the Company, does any condition exist that with notice or lapse of time or both would constitute a default thereunder. To the Knowledge of the Company, no other party to any such Contractual Obligation is in default thereunder, nor does any condition exist that with notice or lapse of time or both would constitute a default by such other party thereunder. 3.9 Title to Properties. The Company and each of its Subsidiaries has good, record and marketable title in fee simple to, or holds interests as lessee under leases in full force and effect in, all real property used in connection with its business or otherwise owned or leased by it. The Company and each of its Subsidiaries owns and has good, valid and marketable title to all of its properties and assets used in its business or reflected as owned on the Financial Statements, in each case free and clear of all Liens, except for Liens that would required to be described in the notes to the Financial Statements. 3.10 Reports; Financial Statements. (a) As of the respective dates of their filing with the Commission, all reports, registration statements and other filings, together with any amendments thereto, filed by the Company with the Commission since June 30, 2000 (the "SEC Reports"), complied in all material respects with the applicable requirements of the Securities Act, the Exchange Act, and the rules and regulations of the Commission promulgated thereunder, except as disclosed in the SEC Reports. Except as disclosed in the SEC Reports, the SEC Reports did not at the time they were filed with the Commission, or will not at the time they are filed with the Commission, 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 the light of the circumstances under which they are made, not misleading. The Company has (i) delivered to the Purchasers true and complete copies of, or will make available at the Purchaser's request, (x) all correspondence relating to the Company between the Commission, Nasdaq and the United States Attorneys Office and the Company or its legal counsel and, to the Company's Knowledge, accountants since January 1, 2001 (other than routine Commission filing package cover letters) and (y) all correspondence between the Company or its counsel and the Company's auditors since January 1, 2001, relating to 15 any audit, financial review or preparation of financial statements of the Company (other than correspondence which the Company reasonably believes is subject to a privilege), and (ii) disclosed to the Purchasers the content of all material discussions between the Commission, Nasdaq and the United States Attorneys Office on the one hand and the Company or its legal counsel, on the other hand, and, to the Company's Knowledge, accountants concerning the adequacy or form of any SEC Report filed with the Commission since January 1, 2001. The Company is not aware of any issues raised by the Commission with respect to any of the SEC Reports, other than those disclosed in the SEC Reports. (b) Except as disclosed in the SEC Reports, the consolidated financial statements (including, in each case, any related schedules or notes thereto) contained in or incorporated by reference in the SEC Reports and any such reports, registration statements and other filings to be filed by the Company with the Commission prior to the Closing Date (the "Financial Statements") (i) have been or will be prepared in accordance with the published rules and regulations of the Commission and GAAP consistently applied during the periods involved (except as may be indicated in the notes thereto) and (ii) fairly present or will fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of the respective dates thereof and the consolidated results of operations, statements of stockholders' equity and cash flows for the periods indicated, except that any unaudited interim financial statements were or will be subject to normal and recurring year-end adjustments and may omit footnote disclosure as permitted by regulations of the Commission. 3.11 Taxes. (a) The Company and each of its Subsidiaries has paid all Taxes which have come due and are required to be paid by it through the date hereof, and all deficiencies or other additions to Tax, interest and penalties owed by it in connection with any such Taxes, other than Taxes being disputed by the Company in good faith for which adequate reserves have been made in accordance with GAAP; (b) the Company and each of its Subsidiaries has timely filed or caused to be filed all returns for Taxes that it is required to file on and through the date hereof (including all applicable extensions), and all such Tax returns are accurate and complete in all material respects; (c) with respect to all Tax returns of the Company and each of its Subsidiaries, (i) there is no unassessed Tax deficiency proposed or, to the Knowledge of the Company, threatened against the Company or any of its Subsidiaries and (ii) no audit is in progress with respect to any return for Taxes, no extension of time is in force with respect to any date on which any return for Taxes was or is to be filed and no waiver or agreement is in force for the extension of time for the assessment or payment of any Tax; (d) all provisions for Tax liabilities of the Company and each of its Subsidiaries have been disclosed in the Financial Statements and made in accordance with GAAP consistently applied, and all liabilities for Taxes of the Company and each of its Subsidiaries attributable to periods prior to or ending on the Closing Date have been adequately disclosed in the Financial Statements; and (e) there are no Liens for Taxes on the assets of the Company or any of its Subsidiaries. 3.12 No Material Adverse Change; Ordinary Course of Business. Since December 31, 2000, except as disclosed in or incorporated by reference in the SEC 16 Reports, (a) there has not been any material adverse change, in the Condition of the Company, (b) neither the Company nor any of its Subsidiaries has participated in any transaction material to the Condition of the Company, including, without limitation, declaring or paying any dividend or declaring or making any distribution to its stockholders except out of the earnings of the Company or its Subsidiary, as the case may be, (c) neither the Company nor any of its subsidiaries has entered into any Material Contractual Obligation, other than in the ordinary course of business and (d) there has not occurred a material change in the accounting principles or practice of the Company or any of its Subsidiaries except as required by reason of a change in GAAP. 3.13 Private Offering. Neither the Company nor any authorized Person acting on its behalf has, in connection with the offer, sale, exchange or issuance of the Subject Shares or the Warrants, engaged in (i) any form of general solicitation or general advertising (as those terms are used within the meaning of Rule 502(c) under the Securities Act), (ii) any action involving a public offering within the meaning of Section 4(2) of the Securities Act, or (iii) any action that would require the registration under the Securities Act of the offering, sale, exchange or issuance of the Subject Shares and the Warrants pursuant to this Agreement or that would violate applicable state securities or "blue sky" laws. The Company has not made and will not prior to the Closing Date make, directly or indirectly, any offer or sale of the Subject Shares or Warrants or of securities of the same or similar class as the Subject Shares or Warrants if, as a result, the offer and sale contemplated hereby would fail to be entitled to exemption from the registration requirements of the Securities Act. As used herein, the terms "offer" and "sale" have the meanings specified in Section 2(3) of the Securities Act. 3.14 Labor Relations. Except as could not reasonably be expected to have a material adverse effect on the Condition of the Company: (a) neither the Company nor any of its Subsidiaries is engaged in any unfair labor practice; (b) there is no strike, labor dispute, slowdown or stoppage pending or, to the Knowledge of the Company, threatened against the Company or any of its Subsidiaries ; (c) neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement or contract; and (d) no union organizing activities are taking place. To the Knowledge of the Company, no officer or key employee, or any group of key employees, intends to terminate their employment with the Company or any of its Subsidiaries. To the Knowledge of the Company, each of the officers and key employees of the Company and each of its Subsidiaries spends all, or substantially all, of his business time on the business of the Company or its Subsidiary, as the case may be. To the Knowledge of the Company, none of the employees of the Company or any of its Subsidiaries is resident in the United States in violation of any Requirement of Law. 3.15 Employee Benefit Plans. (a) The SEC Reports list or describe each Plan that the Company or any of its Subsidiaries maintains or to which the Company or any of its Subsidiaries contributes (the "Company Plans"). Neither the Company nor any of its Subsidiaries has any liability under any Plans other than the Company Plans. Except as described in or incorporated by reference in the SEC Reports, neither the Company nor any Commonly 17 Controlled Entity maintains or contributes to, or has within the preceding six years maintained or contributed to, or may have any liability with respect to any Plan subject to Title IV of ERISA or Section 412 of the Code or any "multiple employer plan" within the meaning of the Code or ERISA. Each Company Plan (and related trust, insurance contract or fund) has been established and administered in accordance with its terms, and complies in form and in operation with the applicable requirements of ERISA and the Code and other applicable Requirements of Law. All contributions (including all employer contributions and employee salary reduction contributions) which are due have been paid to each Company Plan. (b) No Claim with respect to the administration or the investment of the assets of any Company Plan (other than routine claims for benefits) is pending. (c) Except as could not reasonably be expected to have a material adverse effect on the Condition of the Company, each Company Plan that is intended to be qualified under Section 401(a) of the Code is so qualified and has been so qualified during the period since its adoption; each trust created under any such Plan is exempt from tax under Section 501(a) of the Code and has been so exempt since its creation. (d) No Company Plan is a Retiree Welfare Plan. (e) Neither the consummation of the transactions contemplated by this Agreement nor any termination of employment following such transactions will accelerate the time of the payment or vesting of, or increase the amount of, compensation due to any employee or former employee whether or not such payment would constitute an "excess parachute payment" under section 280G of the Code. (f) There are no unfunded obligations under any Company Plan which are not fully reflected in the Financial Statements. (g) Except as could not reasonably be expected to have a material adverse effect on the Condition of the Company, the Company has no liability, whether absolute or contingent, including any obligations under any Company Plan, with respect to any misclassification of any person as an independent contractor rather than as an employee. 3.16 Liabilities. Neither the Company nor any of its Subsidiaries has any direct or indirect obligation or liability (the "Liabilities") which are not fully reflected or reserved against in the Financial Statements, other than Liabilities not exceeding $1,000,000 in the aggregate incurred since September 30, 2001 in the ordinary course of business. The Company has no Knowledge of any circumstance, condition, event or arrangement that could reasonably be expected to give rise hereafter to any Liabilities of the Company or any of its Subsidiaries that, individually or in the aggregate, could have a material adverse effect on the Condition of the Company. 18 3.17 Intellectual Property. (a) (i) The Company and each of its Subsidiaries is the owner of all, or has the license or right to use, sell and license all of, the Copyrights, Patents, Trade Secrets, Trademarks, Internet Assets, Software and other proprietary rights (collectively, "Intellectual Property") that are used in connection with its business as presently conducted, free and clear of all Liens. (i) None of the Intellectual Property is subject to any outstanding Order, and no action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand is pending or, to the Knowledge of the Company, threatened, which challenges the validity, enforceability, use or ownership of the item. (ii) The Company and each of its Subsidiaries has substantially performed all obligations imposed upon it under all Intellectual Property licenses, sublicenses, distributor agreements and other agreements under which the Company or any of its Subsidiaries is either a licensor, licensee or distributor, except such licenses, sublicenses and other agreements relating to off-the-shelf software which is commercially available on a retail basis and used solely on the computers of the Company or its Subsidiaries (collectively, the "IP Agreements"). The Company and each of its Subsidiaries is not, nor to the Knowledge of the Company is any other party thereto, in breach of or default thereunder in any respect, nor is there any event which with notice or lapse of time or both would constitute a default thereunder. All of the IP Agreements are valid, enforceable and in full force and effect, and will continue to be so on identical terms immediately following the Closing except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity relating to enforceability (regardless of whether considered in a proceeding at law or in equity). (iii) None of the Intellectual Property currently sold or licensed by the Company or any of its Subsidiaries to any Person or used by or licensed to the Company or any of its Subsidiaries by any Person infringes upon or otherwise violates any Intellectual Property rights of others, except as could not reasonably be expected to have a material adverse effect on the Condition of the Company. (b) No litigation is pending and no Claim has been made against the Company or any of its Subsidiaries or, to the Knowledge of the Company, is threatened, contesting the right of the Company or any of its Subsidiaries to sell or license to any Person or use the Intellectual Property presently sold or licensed to such Person or used by the Company or any of its Subsidiaries. To the Knowledge of the Company, no Person is infringing upon or otherwise violating the Intellectual Property rights of the Company or any of its Subsidiaries. (c) No former employer of any employee of the Company or any of its Subsidiaries has made a claim against the Company or any of its Subsidiaries or, to the 19 Knowledge of the Company, against any other Person, that such employee or such consultant is utilizing Intellectual Property of such former employer. (d) To the Knowledge of the Company, none of the Trade Secrets, wherever located, the value of which is contingent upon maintenance of confidentiality thereof, has been disclosed to any Person other than employees, representatives and agents of the Company or any of its Subsidiaries, except as required pursuant to the filing of a patent application by the Company or any of its Subsidiaries. (e) It is not necessary for the business of the Company or any of its Subsidiaries to use any Intellectual Property owned by any director, officer, employee or consultant of the Company or any of its Subsidiaries (or persons the Company or any of its Subsidiaries presently intends to hire). To the Company's Knowledge, at no time during the conception or reduction to practice of any of the Intellectual Property of the Company or any of its Subsidiaries was any developer, inventor or other contributor to such Intellectual Property operating under any grants from any Governmental Authority or subject to any employment agreement, invention assignment, nondisclosure agreement or other Contractual Obligation with any Person that could materially adversely affect the rights of the Company or any of its Subsidiaries to its Intellectual Property. 3.18 Privacy of Customer Information. Neither the Company nor any of its Subsidiaries use any of the customer information it receives through its website or otherwise in an unlawful manner, or in a manner violative of the privacy policy of the Company or its Subsidiary, as the case may be, or the privacy rights of its customers. Neither the Company nor any of its Subsidiaries has collected any customer information through its website in an unlawful manner or in violation of its privacy policy. The Company and each of its Subsidiaries has adequate security measures in place to protect the customer information it receives through its website and which it stores in its computer systems from illegal use by third parties or use by third parties in a manner violative of the rights of privacy of its customers. The Company and each of its Subsidiaries represents to its customers that it assures complete security as to the customer information it receives through its website. 3.19 Potential Conflicts of Interest. Except as set forth on Schedule 3.19 and except for Vectis employees at the Company, no officer, director or stockholder beneficially owning more than 5% of the outstanding shares of Common Stock, to the Knowledge of the Company, no spouse of any such officer, director or stockholder, and, to the Knowledge of the Company, no Affiliate of any of the foregoing (a) owns, directly or indirectly, any interest in (excepting less than one percent (1%) stock holdings for investment purposes in securities of publicly held and traded companies), or is an officer, director, employee or consultant of, any Person which is, or is engaged in business as, a competitor, lessor, lessee, supplier, distributor, or customer of, or lender to or borrower from, the Company or any of its Subsidiaries; (b) owns, directly or indirectly, in whole or in part, any tangible or intangible property that the Company or any of its Subsidiaries use, in the conduct of business; or (c) has any cause of action or other claim whatsoever against, or owes or has advanced any amount to, the Company or any of its Subsidiaries, except for claims in the ordinary course of business 20 such as for accrued vacation pay, accrued benefits under employee benefit plans, and similar matters and agreements existing on the date hereof. 3.20 Trade Relations. There exists no actual or, to the Knowledge of the Company, threatened termination, cancellation or limitation of, or any material adverse modification or change in, the business relationship of the Company or any of its Subsidiaries, or the business of the Company or any of its Subsidiaries, with any customer or supplier or any group of customers or suppliers whose purchases or inventories provided to the business of the Company or any of its Subsidiaries are individually or in the aggregate material to the Condition of the Company. 3.21 Outstanding Borrowing. Schedule 3.21 sets forth the amount of all Indebtedness of the Company and each of its Subsidiaries as of the date hereof, the Liens that relate to such Indebtedness and that encumber the Assets and the name of each lender thereof. No Indebtedness is entitled to any voting rights in any matters voted upon by the holders of the Common Stock. 3.22 Broker's, Finder's or Similar Fees. Except for fees payable to Vectis, there are no brokerage commissions, finder's fees or similar fees or commissions payable by the Company or any of its Subsidiaries in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with the Company or any of its Subsidiaries or any action taken by any such Person. 3.23 CCC Section. The Board of Directors has taken all action necessary to exempt from the provisions of Section 1203 of the California Corporations Code, to the extent applicable, this Agreement, any acquisition by the Purchasers of Subject Shares and Warrants pursuant to this Agreement and the Certificate of Designation and any conversion by the Purchasers of Subject Shares into shares of Common Stock and any exercise by the GAP Purchasers of the Warrants for the Warrant Shares. 3.24 Disclosure. This Agreement and the documents and certificates furnished to the Purchasers by the Company do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which they were made, not misleading. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS Each of the Purchasers hereby represents and warrants, severally and not jointly, to the Company as follows: 4.1 Existence and Power. Such Purchaser (a) is a limited partnership, corporation, partnership or limited liability company duly organized and validly existing under the laws of the jurisdiction of its formation and (b) has the requisite partnership, 21 corporate or limited liability company, as the case may be, power and authority to execute, deliver and perform its obligations under this Agreement and each of the other Transaction Documents to which it is a party. 4.2 Authorization; No Contravention. The execution, delivery and performance by such Purchaser of this Agreement and each of the other Transaction Documents to which it is a party and the transactions contemplated hereby and thereby, (a) have been duly authorized by all necessary partnership, corporate or limited liability company, as the case may be, action, (b) do not contravene the terms of such Purchaser's organizational documents, or any amendment thereof, and (c) do not violate, conflict with or result in any breach or contravention of, or the creation of any Lien under, any Contractual Obligation of such Purchaser or any Requirement of Law applicable to such Purchaser, and (d) do not violate any Orders of any Governmental Authority against, or binding upon, such Purchaser. 4.3 Governmental Authorization; Third Party Consents. No approval, consent, compliance, exemption, authorization or other action by, or notice to, or filing with, any Governmental Authority or any other Person, and no lapse of a waiting period under any Requirement of Law, is necessary or required in connection with the execution, delivery or performance by, or enforcement against, such Purchaser of this Agreement and each of the other Transaction Documents to which it is a party or the transactions contemplated hereby and thereby. 4.4 Binding Effect. This Agreement has been, and as of the Closing Date each of the other Transaction Documents will have been, duly executed and delivered by such Purchaser and this Agreement constitutes and, as of the Closing Date each of the other Transaction Documents will constitute, the legal, valid and binding obligations of such Purchaser, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability (regardless of whether considered in a proceeding at law or in equity). 4.5 Purchase for Own Account. The Subject Shares and the Warrants to be acquired by such Purchaser pursuant to this Agreement are being or will be acquired for its own account and with no intention of distributing or reselling such Subject Shares or Warrants or any part thereof in any transaction that would be in violation of the securities laws of the United States of America, any state of the United States or any foreign jurisdiction, without prejudice, however, to the rights of such Purchaser at all times to sell or otherwise dispose of all or any part of such Subject Shares or Warrants under an effective registration statement under the Securities Act, or under an exemption from such registration available under the Securities Act, and subject, nevertheless, to the disposition of such Purchaser's property being at all times within its control. If such Purchaser should in the future decide to dispose of any of such Subject Shares, such Purchaser understands and agrees that it may do so only in compliance with the Securities Act and applicable state and foreign securities laws, as then in effect. Such Purchaser agrees to the imprinting at Closing and for so long as required by law, of a 22 legend on certificates representing all of its Subject Shares, shares of Common Stock issuable upon conversion of its Subject Shares and the Warrant Shares to the following effect: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY FOREIGN JURISDICTION. THE SECURITIES MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE AND FOREIGN SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. 4.6 Restricted Securities. Such Purchaser understands that the Subject Shares and the Warrants will not be registered at the time of their issuance under the Securities Act for the reason that the sale provided for in this Agreement is exempt pursuant to Section 4(2) of the Securities Act and that the reliance of the Company on such exemption is predicated in part on such Purchaser's representations set forth herein. 4.7 Accredited Investor. Such Purchaser is an "Accredited Investor" within the meaning of Rule 501 of Regulation D under the Securities Act, as presently in effect. 4.8 Experience. Such Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in its Subject Shares and Warrants (the "Securities"), and has so evaluated the merits and risks of such investment. Such Purchaser is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment. 4.9 Access to Information. Such Purchaser acknowledges that it has reviewed the SEC Reports and has been afforded: (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; (ii) access to publicly available information about the Company and the Subsidiaries and the Condition of the Company sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional publicly available information that the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment. Neither such inquiries nor any other investigation conducted by or on behalf of such Purchaser or its representatives or 23 counsel shall modify, amend or affect such Purchaser's right to rely on the truth, accuracy and completeness of the SEC Reports and the Company's representations and warranties contained in the Transaction Documents. 4.10 General Solicitation. Such Purchaser is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement. 4.11 Reliance. Such Purchaser understands and acknowledges that: (i) the Securities are being offered and sold to it without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act and (ii) the availability of such exemption depends in part on, and the Company will rely upon the accuracy and truthfulness of, the foregoing representations and such Purchaser hereby consents to such reliance. ARTICLE V ACTIONS TO BE TAKEN BY THE COMPANY AT THE CLOSING At the Closing, the Company shall take the actions and deliver the documents described in Sections 5.1, 5.4, 5.5 and 5.6 and not later than 5:00 p.m., New York City time, on November 9, 2001, the Company shall take the actions and deliver the documents described in Sections 5.2 and 5.3. 5.1 Secretary's Certificate. The Company shall have delivered to the Purchasers a certificate from the Company, in form and substance satisfactory to the Purchasers, dated as of the Closing Date and signed by the Secretary or an Assistant Secretary of the Company, certifying (a) that the Company is in good standing with the Secretary of State of the State of California, (b) that the attached copies of the Articles of Incorporation, the By-laws, and resolutions of the Board of Directors of the Company approving this Agreement and each of the other Transaction Documents and the transactions contemplated hereby and thereby, are all true, complete and correct and remain unamended and in full force and effect and (c) that the attached copies of the resolutions of the Board of Directors electing, subject only to the satisfaction of the Escrow Release Condition (as defined in the Escrow Agreement), the one director designated by the holders of a majority of the shares of Series D Preferred Stock are true, complete and correct and remain unamended and in full force and effect. 5.2 Subject Shares. The Company shall have delivered to the Escrow Agent certificates in definitive form representing the number of Purchased Shares set forth opposite such Purchaser's name on Schedule 2.1 hereto and, with respect to the GAP Purchasers, the number of Exchange Shares set forth opposite such GAP Purchaser's name on Schedule 2.2 hereto, registered in the name of such Purchaser. 24 5.3 Warrants. The Company shall have duly executed and delivered to the Escrow Agent, in substantially the form attached hereto as Exhibit A, and registered in the name of GAP LP, GAP Coinvestment and GapStar, respectively. 5.4 Opinion of Counsel. The Company shall have caused the opinion of Pillsbury Winthrop LLP, dated November 8, 2001, relating to the transactions contemplated by or referred to herein, substantially in the form attached hereto as Exhibit G to be delivered to the Purchasers. 5.5 MOU. The Company shall have delivered to the Purchasers the fully executed MOU. 5.6 Amendment to Shareholder Rights Plan. The Company shall have delivered to the Purchasers evidence that the Shareholder Rights Plan has been amended, in form and substance satisfactory to the Purchasers, to permit each Purchaser and its Affiliates to consummate the transactions contemplated by this Agreement and each of the other Transaction Documents. ARTICLE VI DELIVERIES BY THE PURCHASERS Not later than 5:00 p.m., New York City time, on November 9, 2001, the Purchasers shall take the following actions and deliver the following. 6.1 Payment for Subject Shares and Warrants. Each Purchaser shall have deposited with the Escrow Agent the aggregate purchase price for the Purchased Shares to be purchased by such Purchaser and each GAP Purchaser shall have deposited with the Escrow Agent (i) its GAP Sub Notes, with duly executed undated Note Powers attached and (ii) the aggregate purchase price for the Warrants to be purchased by such Purchaser. ARTICLE VII INDEMNIFICATION 7.1 Indemnification. Except as otherwise provided in this Article VII, the Company (the "Indemnifying Party") agrees to indemnify, defend and hold harmless each of the Purchasers and its Affiliates and their respective officers, directors, agents, employees, subsidiaries, partners, members and controlling persons (each, an "Indemnified Party") to the fullest extent permitted by law from and against any and all losses, Claims, or written threats thereof (including, without limitation, any Claim by a third party), damages, expenses (including reasonable fees, disbursements and other charges of counsel incurred by the Indemnified Party in any action between the Indemnifying Party and the Indemnified Party or between the Indemnified Party and any third party or otherwise) or other liabilities (collectively, "Losses") resulting from or arising out of any breach of any representation or warranty, covenant or agreement by the 25 Company in this Agreement, the Stockholders Agreement, the Escrow Agreement or the Warrants. The amount of any payment to any Indemnified Party herewith in respect of any Loss shall be of sufficient amount to make such Indemnified Party whole for any diminution in value of the Subject Shares directly caused by such breach. In connection with the obligation of the Indemnifying Party to indemnify for expenses as set forth above, the Indemnifying Party shall, upon presentation of appropriate invoices containing reasonable detail, reimburse each Indemnified Party for all such expenses (including reasonable fees, disbursements and other charges of counsel incurred by the Indemnified Party in any action between the Indemnifying Party and the Indemnified Party or between the Indemnified Party and any third party) as they are incurred by such Indemnified Party; provided, however, that if an Indemnified Party is reimbursed under this Article VII for any expenses, such reimbursement of expenses shall be refunded to the extent it is finally judicially determined that the Losses in question resulted primarily from the willful misconduct or gross negligence of such Indemnified Party. 7.2 Notification. Each Indemnified Party under this Article VII shall, promptly after the receipt of notice of the commencement of any Claim against such Indemnified Party in respect of which indemnity may be sought from the Indemnifying Party under this Article VII, notify the Indemnifying Party in writing of the commencement thereof. The omission of any Indemnified Party to so notify the Indemnifying Party of any such action shall not relieve the Indemnifying Party from any liability which it may have to such Indemnified Party (a) other than pursuant to this Article VII or (b) under this Article VII unless, and only to the extent that, such omission results in the Indemnifying Party's forfeiture of substantive rights or defenses. In case any such Claim shall be brought against any Indemnified Party, and it shall notify the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to assume the defense thereof at its own expense, with counsel satisfactory to such Indemnified Party in its reasonable judgment; provided, however, that any Indemnified Party may, at its own expense, retain separate counsel to participate in such defense at its own expense. Notwithstanding the foregoing, in any Claim in which both the Indemnifying Party, on the one hand, and an Indemnified Party, on the other hand, are, or are reasonably likely to become, a party, such Indemnified Party shall have the right to employ separate counsel and to control its own defense of such Claim if, in the reasonable opinion of counsel to such Indemnified Party, either (x) one or more defenses are available to the Indemnified Party that are not available to the Indemnifying Party or (y) a conflict or potential conflict exists between the Indemnifying Party, on the one hand, and such Indemnified Party, on the other hand, that would make such separate representation advisable; provided, however, that the Indemnifying Party (i) shall not be liable for the fees and expenses of more than one counsel to all Indemnified Parties and (ii) shall reimburse the Indemnified Parties for all of such fees and expenses of such counsel incurred in any action between the Indemnifying Party and the Indemnified Parties or between the Indemnified Parties and any third party, as such expenses are incurred; provided, however, that if an Indemnified Party is reimbursed under this Article VII for any expenses, such reimbursement of expenses shall be refunded to the extent it is finally judicially determined that the Losses in question resulted primarily from the willful misconduct or gross negligence of such Indemnified Party. The Indemnifying Party agrees that it will not, without the prior written consent of the Indemnified Party, 26 settle, compromise or consent to the entry of any judgment in any pending or threatened Claim relating to the matters contemplated hereby (if any Indemnified Party is a party thereto or has been actually threatened to be made a party thereto) unless such settlement, compromise or consent includes an unconditional release of each Indemnified Party from all liability arising or that may arise out of such Claim. The Indemnifying Party shall not be liable for any settlement of any Claim effected against an Indemnified Party without the Indemnifying Party's written consent, which consent shall not be unreasonably withheld. The rights accorded to an Indemnified Party hereunder shall be in addition to any rights that any Indemnified Party may have at common law, by separate agreement or otherwise; provided, however, that notwithstanding the foregoing or anything to the contrary contained in this Agreement, nothing in this Article VII shall restrict or limit any rights that any Indemnified Party may have to seek equitable relief. 7.3 Contribution. If the indemnification provided for in this Article VII from the Indemnifying Party is unavailable to an Indemnified Party hereunder in respect of any Losses referred to herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions which resulted in such Losses, as well as any other relevant equitable considerations. The relative faults of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the Losses referred to above shall be deemed to include, subject to the limitations set forth in Sections 7.1 and 7.2, any reasonable legal or other fees, charges or expenses reasonably incurred by such party in connection with any investigation or proceeding. ARTICLE VIII AFFIRMATIVE COVENANTS The Company hereby covenants and agrees with the Purchasers as follows: 8.1 Financial Statements and Other Information. If any time the Company is not subject to the periodic disclosure obligations of the Exchange Act, the Company shall deliver to such Purchasers, in form and substance satisfactory to such Purchaser: (a) as soon as available, but not later than ninety (90) days after the end of each fiscal year of the Company, a copy of the audited consolidated balance sheet of the Company and its Subsidiaries as of the end of such fiscal year and the related statements of operations and cash flows for such fiscal year, setting forth in each case in 27 comparative form the figures for the previous year, all in reasonable detail and accompanied by a management summary and analysis of the operations of the Company for such fiscal year and by the opinion of a nationally recognized independent certified public accounting firm which report shall state without qualification that such financial statements present fairly the financial condition as of such date and results of operations and cash flows for the periods indicated in conformity with GAAP applied on a consistent basis; (b) as soon as available, but in any event not later than forty-five (45) days after the end of each of the first three fiscal quarters of each fiscal year, the unaudited consolidated balance sheet of the Company and its Subsidiaries, and the related statements of operations and cash flows for such quarter and for the period commencing on the first day of the fiscal year and ending on the last day of such quarter, all certified by an appropriate officer of the Company as presenting fairly the consolidated financial condition as of such date and results of operations and cash flows for the periods indicated in conformity with GAAP applied on a consistent basis, subject to normal year-end adjustments and the absence of footnotes required by GAAP; (c) as soon as available, but in any event not later than ten (10) days after the end of each month of each fiscal year, the unaudited consolidated balance sheet of the Company and its Subsidiaries, and the related statements of operations and cash flows for such month and for the period commencing on the first day of the fiscal year and ending on the last day of such month, all certified by an appropriate officer of the Company as presenting fairly the consolidated financial condition as of such date and results of operations and cash flows for the periods indicated in conformity with GAAP applied on a consistent basis, subject to normal year-end adjustments and the absence of footnotes required by GAAP; and 8.2 FIRPTA Certificate. If requested by any of the Purchasers, as promptly as practicable, but not later than five (5) days after the end of each fiscal year of the Company, the Company shall deliver to each Purchaser, in form and substance satisfactory to such Purchaser, a certificate signed by the Chief Executive Officer of the Company in customary form certifying that the Company is not a "foreign person" within the meaning of Section 1445 of the Code; and 8.3 Reservation of Common Stock. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issue or delivery upon conversion of the Subject Shares and exercise of the Warrants, as provided in the Certificate of Designation and Warrants respectively, the maximum number of shares of Common Stock that may be issuable or deliverable upon such conversion or exercise. Such shares of Common Stock are duly authorized and, when issued or delivered in accordance with the Certificate of Designation and Warrants, shall be validly issued, fully paid and non-assessable. The Company shall issue such shares of Common Stock, in accordance with the terms of the Certificate of Designation and Warrants, and otherwise comply with the terms hereof and thereof. 28 8.4 Books and Records. The Company shall keep proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Company in accordance with GAAP consistently applied. 8.5 Inspection. The Company shall permit representatives of the Purchasers to visit and inspect any of its properties, to examine its corporate, financial and operating records and make copies thereof or abstracts therefrom, and to discuss its affairs, finances and accounts with their respective directors, officers and independent public accountants, all at such reasonable times during normal business hours and as often as may be reasonably requested upon reasonable advance notice to the Company. 8.6 Vectis Agreement. The Company shall as soon as practicable after the date hereof, but not later than the date the Escrow Release Condition is satisfied, terminate the Vectis Agreement. 8.7 NASDAQ Matters. (a) The Company shall take all action required and shall make all submissions that are reasonably necessary to obtain written confirmation reasonably satisfactory to the GAP Purchasers from the Nasdaq that the approval of a majority of the Company's stockholders, present in person or proxy at a properly convened meeting of the Company's stockholders ("Stockholder Approval") to the issuance of the shares of Series D Preferred Stock to the GAP Purchasers is not required under the applicable Nasdaq rules and regulations in order to satisfy the Nasdaq Escrow Approval Condition. If the Company cannot obtain such written confirmation by January 31, 2001, it shall take all action required by the Nasdaq and applicable California law (including the actions referred to in Section 8.7(b)) to obtain Stockholder Approval for the issuance to the GAP Purchasers of the portion of the shares of Series D Preferred Stock that constitute the amount of shares of Series D Preferred Stock (determined assuming conversion of all of the shares of Series D Preferred Stock) in excess of 19.9% of the outstanding shares of the Common Stock on the date hereof (the "Applicable Stockholder Approval"). The Board of Directors shall recommend that the Company's stockholders vote in favor of the Applicable Stockholder Approval. (b) If required pursuant to Section 8.7(a) of this Agreement, promptly after November 30, 2001, the Company will prepare and file with the Commission a proxy statement to be distributed to the Company's stockholders in connection with the solicitation of votes in favor of the Applicable Stockholder Approval, including any amendments or supplements thereto (the "Proxy Statement"). The Company will use all reasonable commercial efforts to have or cause the Proxy Statement to be cleared by the Commission as promptly as practicable. The Company agrees to provide the Purchasers and their respective counsel with any written comments the Company or its counsel may receive from the Commission with respect to the Proxy Statement promptly after the receipt of such comments. The Company will use all reasonable commercial efforts to cause the Proxy Statement (i) not to contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make 29 the statements therein, in light of the circumstances under which they are made, not misleading and (ii) to comply as to form in all material respects with the applicable provisions of the Exchange Act and the rules and regulations thereunder. Following clearance by the Commission of the Proxy Statement, the Company shall promptly distribute the Proxy Statement to its stockholders and call and arrange for a special meeting of stockholders and take such other actions as are required or necessary in order to obtain the Applicable Stockholder Approval as promptly as practicable. ARTICLE IX TERMINATION OF AGREEMENT 9.1 Termination. This Agreement shall be terminated and be of no further force or effect on the Escrow Termination Date (as defined in the Escrow Agreement). If this Agreement so terminates, it shall become null and void and have no further force or effect. ARTICLE X MISCELLANEOUS 10.1 Survival of Representations and Warranties. All of the representations and warranties made herein shall survive the execution and delivery of this Agreement until the date that is ninety (90) days after the receipt by the Purchasers of audited financial statements of the Company for the fiscal year ending December 31, 2002 (or, if such fiscal year changes and no such audited consolidated financial statements are available, then the successor fiscal year), except for (a) Sections 3.1, 3.2, 3.4, 3.7, 3.13 and 3.22, which representations and warranties shall survive until the third anniversary of the Closing Date, and (b) Section 3.11, which shall survive until the later to occur of (i) the lapse of the statute of limitations with respect to the assessment of any Tax to which such representation and warranty relates (including any extensions or waivers thereof) and (ii) sixty (60) days after the final administrative or judicial determination of the Taxes to which such representation and warranty relates, and no claim with respect to Section 3.11 may be asserted thereafter with the exception of claims arising out of any fact, circumstance, action or proceeding to which the party asserting such claim shall have given notice to the other parties to this Agreement prior to the termination of such period of reasonable belief that a tax liability will subsequently arise therefrom. 30 10.2 Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier service or personal delivery: if to the Company: Critical Path, Inc. 532 Folsom Street San Francisco, CA 94105 Telecopy: (415) 808-8898 Attention: Chief Financial Officer with a copy to, which shall not constitute notice to the Company: Pillsbury Winthrop LLP 50 Fremont Street San Francisco, CA 94105 Telecopy: (415) 983-1200 Attention: Gregg F. Vignos, Esq. if to GAP LP, GAP Coinvestment or GapStar: c/o General Atlantic Service Corporation 3 Pickwick Plaza Greenwich, CT 06830 Telecopy: (203) 622-8818 Attention: Matthew Nimetz with a copy to, which shall not constitute notice: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, NY 10019-6064 Telecopy: (212) 757-3990 Attention: Douglas A. Cifu, Esq. if to Vectis CP Holdings, LLC: c/o Vectis Group 117 Greenwich Street San Francisco, CA 94111 Telecopy: 415-352-5310 Attention: Matthew Hobart 31 with a copy to: Kirkland & Ellis 153 East 53rd Street New York, NY 10022-4675 Telecopy: 212-446-4900 Attention: Michael Movsovich, Esq. if to Cenwell Limited: c/o 7th Floor Cheung Kong Center 2 Queen's Road Central Hong Kong Telecopy: (852) 2845-2057 Attention: Mr. Edmond lp. if to Campina Enterprises Limited c/o 22nd Floor Hutchison House 10 Harcourt Road Hong Kong Telecopy: (852) 2128-1778 Attention: Company Secretary All such notices, demands and other communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial courier service; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. Any party may by notice given in accordance with this Section 10.2 designate another address or Person for receipt of notices hereunder. 10.3 Successors and Assigns; Third Party Beneficiaries. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto. Subject to applicable securities laws and the terms and conditions thereof, the Purchasers may assign any of their rights under this Agreement or the other Transaction Documents to any of their respective Affiliates. The Company may not assign any of its rights under this Agreement without the written consent of the GAP Purchasers. Except as provided in Article VII, no Person other than the parties hereto and their successors and permitted assigns is intended to be a beneficiary of this Agreement. 10.4 Amendment and Waiver. (a) No failure or delay on the part of the Company or the Purchasers in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor 32 shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Company or the Purchasers at law, in equity or otherwise. (b) Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by the Company or the Purchasers from the terms of any provision of this Agreement, shall be effective (i) only if it is made or given in writing and signed by the Company and the Purchasers acquiring a majority of the Subject Shares, and (ii) only in the specific instance and for the specific purpose for which made or given; provided; however, that to the extent any amendment or waiver adversely affects any of the Purchasers, such amendment or waiver shall require the prior written consent of each Purchaser so adversely affected. Except where notice is specifically required by this Agreement, no notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. 10.5 Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 10.6 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 10.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. 10.8 Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. 10.9 Rules of Construction. Unless the context otherwise requires, references to sections or subsections refer to sections or subsections of this Agreement. 10.10 Entire Agreement. This Agreement, together with the exhibits and schedules hereto, and the other Transaction Documents are intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, representations, warranties or undertakings, other than those set forth or referred to herein or therein. 33 This Agreement, together with the exhibits and schedules hereto, and the other Transaction Documents supersede all prior agreements and understandings between the parties with respect to such subject matter. 10.11 Fees. Upon the Closing, the Company shall reimburse each of the Purchasers for their fees, disbursements and other charges of counsel incurred in connection with the transactions contemplated by this Agreement, provided that the aggregate amount of all such reimbursements shall not exceed $75,000 and, provided, further, that each of the Coinvestors hereby acknowledge and agree that the fees and expenses of the GAP Purchasers shall be reimbursed first and that the cap of $75,000 applies to the fees and expenses of all of the Purchasers. If this Agreement terminates pursuant to Article IX, each of the Company and the Purchasers shall bear its own fees, disbursements and other charges of counsel incurred in connection with the transactions contemplated by this Agreement. 10.12 Publicity; Confidentiality. Except as may be required by applicable Requirements of Law, none of the parties hereto shall issue a publicity release or public announcement or otherwise make any disclosure concerning this Agreement, the transactions contemplated hereby, the Purchasers or the business, technology and financial affairs of the Company, without prior approval by the other parties hereto; provided, however, that nothing in this Agreement shall restrict any of the Purchasers from disclosing information (a) that is already publicly available, (b) that was known to such Purchaser on a non-confidential basis prior to its disclosure by the Company, (c) that may be required or appropriate in response to any summons or subpoena or in connection with any litigation, provided that such Purchaser will use reasonable efforts to notify the Company in advance of such disclosure so as to permit the Company to seek a protective order or otherwise contest such disclosure, and such Purchaser will use reasonable efforts to cooperate, at the expense of the Company, with the Company in pursuing any such protective order, (d) to the extent that such Purchaser reasonably believes it appropriate in order to comply with any Requirement of Law, (e) to such Purchaser's or the Company's officers, directors, shareholders, advisors, employees, members, partners, controlling persons, auditors or counsel or (f) to Persons from whom releases, consents or approvals are required, or to whom notice is required to be provided, pursuant to the transactions contemplated by the Transaction Documents; and provided further, that after the Closing, GAP LLC may disclose on its worldwide web page, www.gapartners.com, the name of the Company, the name of the Chief Executive Officer of the Company, a brief description of the business of the Company, the Company's logo and the aggregate amount of the Purchasers' investment in the Company. If any announcement is required by any Requirement of Law to be made by any party hereto, prior to making such announcement such party will deliver a draft of such announcement to the other parties and shall give the other parties reasonable opportunity to comment thereon. 10.13 Further Assurances. Each of the parties shall execute such documents and perform such further acts (including, without limitation, obtaining any consents, exemptions, authorizations or other actions by, or giving any notices to, or making any filings with, any Governmental Authority or any other Person) as may be 34 reasonably required or desirable to carry out or to perform the provisions of this Agreement. 10.14 Legal Representation. It is acknowledged by each of the Coinvestors that the GAP Purchasers have retained Paul, Weiss, Rifkind, Wharton & Garrison to act as their counsel in connection with the transactions contemplated by the Transaction Documents and that Paul, Weiss, Rifkind, Wharton & Garrison has not acted as counsel for any of the Coinvestors in connection with the transaction contemplated by the Transaction Documents and that none of the Coinvestors has the status of a client of Paul, Weiss, Rifkind, Wharton & Garrison for conflict of interest or any other purposes as a result thereof. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the undersigned have executed, or have caused to be executed, this Stock and Warrant Purchase and Exchange Agreement on the date first written above. CRITICAL PATH, INC. By: /s/ Laureen DeBuono --------------------------------- Name: Title: GENERAL ATLANTIC PARTNERS 74, L.P. By: GENERAL ATLANTIC PARTNERS, LLC, its General Partner By: /s/ William Ford --------------------------------- Name: Title: A Managing Member GAP COINVESTMENT PARTNERS II, L.P. By: /s/ William Ford --------------------------------- Name: Title: A General Partner GAPSTAR, LLC By: GENERAL ATLANTIC PARTNERS, LLC, its Managing Member By: /s/ William Ford --------------------------------- Name: Title: A Managing Member Signature Page to Stock and Warrant Purchase and Exchange Agreement VECTIS CP HOLDINGS, LLC a Delaware limited liability company By: VECTIS GROUP, LLC, its Managing Member By: /s/ Matthew Hobart --------------------------------- Name: Title: Signature Page to Stock and Warrant Purchase and Exchange Agreement CENWELL LIMITED By: /s/ Cenwell Limited --------------------------------- Name: Title: CAMPINA ENTERPRISES LIMITED By: /s/ Campina Enterprises --------------------------------- Name: Title: Signature Page to Stock and Warrant Purchase and Exchange Agreement Schedule I Coinvestors Vectis CP Holdings, LLC Cenwell Limited Campina Enterprises Limited Schedule 2.1 Purchased Shares and Purchase Price
Purchaser Purchased Shares Purchase Price --------- ---------------- -------------- GAP LP 581,688 $7,998,210.00 GAP Coinvestment 82,097 $1,128,833.75 GapStar 44,252 $608,465.00 Vectis CP Holdings, LLC 581,818 $7,999,997.50 Cenwell Limited 436,364 $5,999,998.13 Campina Enterprises Limited 436,363 $5,999,998.12 Total: 2,162,582 $29,735,502.50
Schedule 2.2 Exchange Shares, Purchase Price of GAP SubNotes and Face Amount
Purchase Price of Face Amount of GAP Purchaser Exchange Shares GAP Sub Notes GAP Sub Notes ------------- --------------- ------------- ------------- GAP LP 1,509,530 $ 20,756,133.52 $ 53,097,000.00 GAP Coinvestment 213,049 $ 2,929,477.46 $ 7,494,000.00 GapStar 114,839 $ 1,578,884.37 $ 4,039,000.00 Total: 1,837,418 $ 25,264,495.35 $ 64,630,000.00
Schedule 2.3 Warrant Shares and Purchase Price
GAP Purchaser Warrant Shares Purchase Price ------------- -------------- -------------- GAP LP 2,053,874 $ 821.55 GAP Coinvestment 289,876 $ 115.95 GapStar 156,250 $ 62.50 Total: 2,500,000 $1,000.00
EX-4.9 7 f80193ex4-9.txt EXHIBIT 4.9 EXHIBIT 4.9 ================================================================================ STOCKHOLDERS AGREEMENT among CRITICAL PATH, INC., GENERAL ATLANTIC PARTNERS 74, L.P., GAP COINVESTMENT PARTNERS II, L.P., GAPSTAR, LLC and THE STOCKHOLDERS NAMED HEREIN Dated: November 8, 2001 ================================================================================ TABLE OF CONTENTS
Page ---- 1. Definitions...................................................................1 2. Future Issuance of Shares; Preemptive Rights..................................5 2.1 Offering Notice........................................................5 2.2 Preemptive Rights; Exercise............................................5 2.3 Closing................................................................6 2.4 Sale to Subject Purchaser..............................................7 3. Corporate Governance..........................................................7 3.1 Board of Directors; Number and Composition.............................7 3.2 Reimbursement of Expenses; D&O Insurance...............................8 3.3 Meetings of the Board of Directors.....................................8 3.4 Annual Budget..........................................................8 4. Standstill; Nasdaq Matters....................................................8 4.1 Standstill.............................................................8 4.2 Nasdaq Matters.........................................................9 5. Miscellaneous................................................................10 5.1 Notices...............................................................10 5.2 Successors and Assigns; Third Party Beneficiary.......................11 5.3 Amendment and Waiver..................................................12 5.4 Counterparts..........................................................12 5.5 Specific Performance..................................................12 5.6 Headings..............................................................12 5.7 GOVERNING LAW.........................................................12 5.8 Severability..........................................................12 5.9 Rules of Construction.................................................13 5.10 Entire Agreement......................................................13 5.11 Term of Agreement.....................................................13 5.12 Further Assurances....................................................13
EXHIBITS A Articles of Incorporation B By-laws i STOCKHOLDERS AGREEMENT STOCKHOLDERS AGREEMENT (this "Agreement"), dated November 8, 2001, among Critical Path, Inc., a California corporation (the "Company"), General Atlantic Partners 74, L.P., a Delaware limited partnership ("GAP LP"), GAP Coinvestment Partners II, L.P., a Delaware limited partnership ("GAP Coinvestment"), GapStar, LLC, a Delaware limited liability company ("GapStar"), and the Persons listed on Schedule 1 hereto (the "Coinvestors"). WHEREAS, pursuant to the Stock and Warrant Purchase and Exchange Agreement, dated November 8, 2001 (the "Stock Purchase Agreement"), among the Company, GAP LP, GAP Coinvestment, GapStar and the Coinvestors, the Company has agreed to (i) issue and sell to GAP LP, GAP Coinvestment, GapStar and the Coinvestors an aggregate of 708,037 shares of Series D Cumulative Redeemable Convertible Participating Preferred Stock, par value $0.001 per share, of the Company (the "Series D Preferred Stock"), (ii) issue and deliver to GAP LP, GAP Coinvestment and GapStar an aggregate of 1,837,418 shares of Series D Preferred Stock in exchange for a certain amount of convertible subordinated notes of the Company and (iii) issue and sell to GAP LP, GAP Coinvestment and GapStar warrants (the "Warrants") to purchase, at an exercise price of $1.05 per share, an aggregate of 2,500,000 shares of Common Stock; and WHEREAS, pursuant to an Escrow Agreement, dated the date hereof, among the Company, GAP LP, GAP Coinvestment, GapStar, the Coinvestors and Pillsbury Winthrop LLP, as Escrow Agent (the "Escrow Agreement"), the parties have agreed to consummate the transactions contemplated by the Stock Purchase Agreement in escrow, including the execution and delivery of this Agreement; and WHEREAS, the parties hereto wish to provide for, among other things, preemptive rights, corporate governance rights and standstill obligations and certain other rights under certain conditions. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "Affiliate" shall mean any Person who is an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "Agreement" means this Agreement as the same may be amended, supplemented or modified in accordance with the terms hereof. "Board of Directors" means the Board of Directors of the Company. 2 "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in the State of New York or the State of California are authorized or required by law or executive order to close. "Cenwell Stockholders" has the meaning set forth in Section 4.1(c) of this Agreement. "Charter Documents" means the Articles of Incorporation and the By-laws of the Company as in effect on the date hereof after giving effect to the filing of the Certificate of Designation with respect to the Series D Preferred Stock with the Secretary of State of the State of California, copies of which are attached hereto as Exhibits A and B, respectively. "Coinvestors" has the meaning set forth in the preamble to this Agreement. "Coinvestor Stockholders" means the Coinvestors and any Affiliate of a Coinvestor that, after the date hereof, acquires Shares, and the term "Coinvestor Stockholder" shall mean any such person. "Commission" means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "Common Stock" means the Common Stock, par value $.001 per share, of the Company and any other capital stock of the Company into which such stock is reclassified or reconstituted and any other common stock of the Company. "Common Stock Equivalents" means any security or obligation which is by its terms convertible, exchangeable or exercisable into or for shares of Common Stock, including, without limitation the Series D Preferred Stock, and any option, warrant or other subscription or purchase right with respect to Common Stock or any Common Stock Equivalent. "Company" has the meaning set forth in the preamble to this Agreement. "Escrow Agreement" has the meaning set forth in the recitals to this Agreement. "Excess New Securities" has the meaning set forth in Section 2.2(a) of this Agreement. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder. "Exempt Issuances" has the meaning set forth in Section 2.1 of this Agreement. 3 "GAP Coinvestment" has the meaning set forth in the preamble to this Agreement. "GAP LLC" means General Atlantic Partners, LLC, a Delaware limited liability company and the general partner of GAP LP and the managing member of GapStar, and any successor to such entity. "GAP LP" has the meaning set forth in the preamble to this Agreement. "GapStar" has the meaning set forth in the preamble to this Agreement. "General Atlantic Director" has the meaning set forth in Section 3.2(a) of this Agreement. "General Atlantic Stockholders" means GAP LP, GAP Coinvestment, GapStar, GmbH Coinvestment and any Affiliate of GAP LLC that, after the date hereof, acquires Shares, and the term "General Atlantic Stockholder" shall mean any such Person. "GmbH Coinvestment" means GAPCO GmbH & Co. KG, a German limited partnership. "Governmental Authority" means the government of any nation, state, city, locality or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Independent Director" means a director of the Company who is considered an independent director for purposes of the Nasdaq Marketplace Rules in effect from time to time. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, encumbrance, lien (statutory or other) or preference, priority, right or other security interest or preferential arrangement of any kind or nature whatsoever (excluding preferred stock and equity related preferences). "Nasdaq" means The Nasdaq Stock Market, Inc. "New Issuance Notice" has the meaning set forth in Section 2.1 of this Agreement. "New Securities" has the meaning set forth in Section 2.1 of this Agreement. "Person" means any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited 4 liability company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Preemptive Rightholder(s)" has the meaning set forth in Section 2.1 of this Agreement. "Proportionate Percentage" has the meaning set forth in Section 2.2(a) of this Agreement. "Proposed Price" has the meaning set forth in Section 2.1 of this Agreement. "Requirement of Law" means, as to any Person, any law, statute, treaty, rule, regulation, right, privilege, qualification, license or franchise or determination of an arbitrator or a court or other governmental authority or stock exchange, in each case applicable or binding upon such Person or any of its property or to which such Person or any of its property is subject or pertaining to any or all of the transactions contemplated or referred to herein. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Series D Preferred Stock" has the meaning set forth in the recitals to this Agreement. "Shares" means, with respect to each Stockholder, all shares, whether now owned or hereafter acquired, of Common Stock and Series D Preferred Stock, and any other Common Stock Equivalents owned thereby; provided, however, for the purposes of any computation of the number of Shares pursuant to Sections 2.2 and 5.3, all outstanding Common Stock Equivalents shall be deemed converted, exercised or exchanged as applicable and the shares of Common Stock issuable upon such conversion, exercise or exchange shall be deemed outstanding, whether or not such conversion, exercise or exchange has actually been effected. "Standstill Ceiling" has the meaning set forth in Section 4.1(a) of this Agreement. "Standstill Expiration Date" means November 8, 2008. "Stock Option Plans" means the Company's stock option plans and employee purchase plans pursuant to which shares of restricted stock and options to purchase shares of Common Stock are reserved and available for grant to officers, directors, employees and consultants of the Company. "Stock Purchase Agreement" has the meaning set forth in the recitals to this Agreement. 5 "Stockholders" means the General Atlantic Stockholders and the Coinvestor Stockholders. "Stockholders Meeting" has the meaning set forth in Section 4.2 of this Agreement. "Subject Purchaser" has the meaning set forth in Section 2.1 of this Agreement. "Vectis Stockholders" has the meaning set forth in Section 4.1(c) of this Agreement. "Warrants" has the meaning set forth in the recitals to this Agreement. "Written Consent" has the meaning set forth in Section 4.2 of this Agreement. 2. Future Issuance of Shares; Preemptive Rights. 2.1 Offering Notice. Except for (a) options to purchase Common Stock or restricted stock which may be issued pursuant to the Stock Option Plans, (b) a subdivision of the outstanding shares of Common Stock into a larger number of shares of Common Stock, (c) capital stock issued upon exercise, conversion or exchange of any Common Stock Equivalent either (x) previously issued or (y) issued in accordance with the terms of this Agreement, (d) capital stock of the Company issued in consideration of an acquisition, approved by the Board of Directors, by the Company of another Person, (e) shares of Common Stock issued as a dividend on the Series D Preferred Stock and (f) shares of Common Stock or Common Stock Equivalents issued in strategic transactions (which may not be private equity or venture capital financing transactions) approved by the Board of Directors to Persons that are not principally engaged in financial investing ((a)-(f) being referred to collectively as "Exempt Issuances"), if the Company wishes to issue any capital stock or any other securities convertible into or exchangeable for capital stock of the Company pursuant to a private placement exempt from registration under the Securities Act, other than any such private placement that is made solely to Qualified Institutional Buyers (as defined in the Securities Act) in reliance on Rule 144A promulgated under the Securities Act (collectively, "New Securities") to any Person (the "Subject Purchaser"), then the Company shall offer such New Securities first to each of the General Atlantic Stockholders and the Coinvestor Stockholders (each, a "Preemptive Rightholder" and collectively, the "Preemptive Rightholders") by sending written notice (the "New Issuance Notice") to the Preemptive Rightholders, which New Issuance Notice shall state (x) the number of New Securities proposed to be issued and (y) the proposed purchase price per security of the New Securities (the "Proposed Price"). Upon delivery of the New Issuance Notice, such offer shall be irrevocable unless and until the rights provided for in Section 2.2 shall have been waived or shall have expired. 2.2 Preemptive Rights; Exercise. 6 (a) For a period of twenty (20) days after the giving of the New Issuance Notice pursuant to Section 2.1, each of the Preemptive Rightholders shall have the right to purchase its Proportionate Percentage (as hereinafter defined) of the New Securities at a purchase price equal to the Proposed Price and upon the same terms and conditions set forth in the New Issuance Notice. Each Preemptive Rightholder shall have the right to purchase that percentage of the New Securities determined by dividing (x) the total number of Shares then owned by such Preemptive Rightholder by (y) the total number of Shares owned by all of the Preemptive Rightholders (the "Proportionate Percentage"). If any Preemptive Rightholder does not fully subscribe for the number or amount of New Securities that it or he is entitled to purchase pursuant to the preceding sentence, then each Preemptive Rightholder which elected to purchase New Securities shall have the right for a five (5) day period to purchase that percentage of the remaining New Securities not so subscribed for (for the purposes of this Section 2.2(a), the "Excess New Securities") determined by dividing (x) the total number of Shares then owned by such fully participating Preemptive Rightholder by (y) the total number of Shares then owned by all fully participating Preemptive Rightholders who elected to purchase Excess New Securities. Each of the Stockholders may transfer all or any portion of its rights to purchase New Securities under this Section 2 to any of its Affiliates. (b) The right of each Preemptive Rightholder to purchase the New Securities or Excess New Securities, as the case may be, under subsection (a) above shall be exercisable by delivering written notice of the exercise thereof, prior to the expiration of the 20-day period referred to in subsection (a) above with respect to New Securities or prior to the expiration of the 5-day period referred to in subsection (a) above with respect to Excess New Securities, to the Company, which notice shall state the amount of New Securities that such Preemptive Rightholder elects to purchase pursuant to Section 2.2(a). The failure of a Preemptive Rightholder to respond within such 20-day or 5-day period shall be deemed to be a waiver of such Preemptive Rightholder's rights under Section 2.2(a), provided that each Preemptive Rightholder may waive its rights under Section 2.2(a) prior to the expiration of such 20-day or 5-day period by giving written notice to the Company. 2.3 Closing. The closing of the purchase of New Securities or Excess New Securities subscribed for by the Preemptive Rightholders under Section 2.2 shall be held at the executive office of the Company at 11:00 a.m., local time, on (a) the 30th day after the giving of the New Issuance Notice pursuant to Section 2.1, if the Preemptive Rightholders elect to purchase all of the New Securities under Section 2.2, (b) the date of the closing of the sale to the Subject Purchaser made pursuant to Section 2.4 if the Preemptive Rightholders elect to purchase some, but not all, of the New Securities under Section 2.2 or (c) at such other time and place as the parties to the transaction may agree. At such closing, the Company shall deliver certificates representing the New Securities, and such New Securities shall be issued free and clear of all Liens (other than those attributable to actions by the purchasers thereof) and the Company shall so represent and warrant, and further represent and warrant (in addition to other customary representations and warranties) that such New Securities shall be, upon 7 issuance thereof to the Preemptive Rightholders and after payment therefor, duly authorized, validly issued, fully paid and non-assessable. Each Preemptive Rightholder purchasing the New Securities shall deliver at the closing payment in full in immediately available funds for the New Securities purchased by him or it. At such closing all of the parties to the transaction shall execute such additional documents as are customary for transactions of this type. 2.4 Sale to Subject Purchaser. The Company may sell to the Subject Purchaser all of the New Securities not purchased by the Preemptive Rightholders pursuant to Section 2.2 on terms and conditions that are no more favorable to the Subject Purchaser than those set forth in the New Issuance Notice; provided, however, that such sale is bona fide and made pursuant to a contract entered into within ninety (90) days following the earlier to occur of (i) the waiver by the Preemptive Rightholders of their option to purchase New Securities or Excess New Securities pursuant to Section 2.2, or (ii) the expiration of the 20-day or 5-day period referred to in Section 2.2. If such sale is not consummated within such 90-day period for any reason, then the restrictions provided for herein shall again become effective, and no issuance and sale of New Securities may be made thereafter by the Company without again offering the same in accordance with this Section 2. The closing of any issuance and sale pursuant to this Section 2.4 shall be held at a time and place as the parties to the transaction may agree within such 90-day period. 3. Corporate Governance. 3.1 Board of Directors; Number and Composition. (a) The Company shall take all actions reasonably necessary to cause the nomination to the Board of Directors of one (1) individual designated by the General Atlantic Stockholders but only if the General Atlantic Stockholders are not entitled to elect one director of the Company by virtue of their rights as the holders of a majority of the shares of Series D Preferred Stock (the "General Atlantic Director"). (b) In addition, the Company shall cause each committee of the Board of Directors to include at least one General Atlantic Director, whether elected pursuant to this Agreement or by virtue of the rights of the General Atlantic Stockholders as holders of Series D Preferred Stock. (c) In addition, the Company shall cause one additional Independent Director to be appointed to the Board of Directors within six (6) months of the date hereof. The initial appointment of the Independent Director shall be approved by a majority of the Board of Directors. (d) In addition, the Company shall cause, as long as Cenwell Stockholders continues to own at least 750,000 shares of Series D Preferred Stock (subject to adjustment for stock splits, stock dividends in similar transactions) one 8 (1) individual designated by the Cenwell Stockholders to serve as a non-voting observer on the Board of Directors. 3.2 Reimbursement of Expenses; D&O Insurance. The Company shall reimburse the General Atlantic Director for all reasonable travel and accommodation expenses incurred by him in connection with the performance of his duties as director of the Company upon presentation of appropriate documentation therefor. The Company shall use reasonable commercial efforts to maintain a directors' liability insurance policy that is reasonably acceptable to the Board of Directors. 3.3 Meetings of the Board of Directors. The Company agrees to take such actions as are necessary to cause the Board of Directors to meet in person or telephonically not less frequently than once during each calendar month. 3.4 Annual Budget. Not less than thirty (30) days prior to the end of each fiscal year, the Company shall prepare and submit to the Board of Directors for its approval an annual operating budget of the Company for the next succeeding fiscal year in reasonable detail. 4. Standstill; Nasdaq Matters. 4.1 Standstill. Without the approval or written consent of the Board of Directors, none of the General Atlantic Stockholders or any of their Affiliates, and none of the Coinvestor Stockholders or any of their respective Affiliates shall, severally and not jointly, at any time prior to the Standstill Expiration Date: (a) purchase or otherwise acquire, or propose or offer to purchase or acquire, any shares of the Company's capital stock, whether by tender offer, market purchase, privately negotiated purchase, merger or otherwise, any shares of the Company's capital stock or any Common Stock Equivalents in excess of the number of shares of the Company's capital stock and Common Stock Equivalents purchased pursuant to the Stock Purchase Agreement (subject to adjustments and issuances of additional Common Stock Equivalents pursuant to the Series D Preferred Stock Certificate of Designation) with respect to each such Stockholder and its Affiliates considered severally and not jointly with any other Stockholder and its Affiliates (the "Standstill Ceiling"); provided, however, that in no event shall any such Stockholder acquire any Shares in a transaction in such an amount that when aggregated with the shares of the Company's capital stock already owned by such Stockholder, the acquisition of such shares of the Company's capital stock would require stockholder approval under applicable Nasdaq rules and policies; and provided, further, that the dividends that accrue on the shares of Series D Preferred Stock pursuant to the terms thereof shall be excluded for purposes of calculating whether or not a Stockholder and its Affiliates have exceeded the Standstill Ceiling; (b) except as specified in this Agreement, make, or in any way participate, directly or indirectly, in any "solicitation" of "proxy" (as such terms are defined or used in Regulation 14A of the Exchange Act) to vote, or seek to advise or 9 influence any Person with respect to the voting of, any shares of the Company's capital stock, or become a "participant" in any "election contest" (as such terms are used or defined in Regulation 14A of the Exchange Act) relating to the election of directors of the Company; provided, however, that none of the General Atlantic Stockholders, the Coinvestor Stockholders or any of their respective Affiliates shall be deemed to have engaged in a "solicitation" or to have become a "participant" by reason of the membership of designees of the General Atlantic Stockholders, the Coinvestor Stockholders or any of their respective Affiliates on the Board of Directors; (c) form, join or in any way participate in a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) or otherwise act in concert with any Person for the purpose of acquiring, holding, voting or disposing of any shares of the Company's capital stock; provided, however, that (i) the General Atlantic Stockholders may act as a group for the purpose of acquiring, holding, voting or disposing of any shares of the Company's capital stock, (ii) Vectis CP Holdings, LLC and any Affiliate thereof that acquires shares of the Company's capital stock (the "Vectis Stockholders") may act as a group for the purpose of acquiring, holding, voting or disposing of any shares of the Company's capital stock and (iii) Cenwell Limited, Campina Enterprises Limited and any Affiliate thereof that acquires shares of the Company's capital stock (the "Cenwell Stockholders") may act as a group for the purpose of acquiring, holding, voting or disposing of any shares of the Company's capital stock; and provided further, that, for the avoidance of doubt, the General Atlantic Stockholders, the Vectis Stockholders and the Cenwell Stockholders may not together act as a group for all purpose of acquiring, holding, voting or disposing of any shares of the Company's capital stock; or (d) request the Company (or its directors, officers, employees or agents), to take any action which would reasonably be expected to require pursuant to law the Company to make a public announcement or proposal or offer with respect to (i) any form of business combination or transaction involving the Company including, without limitation, a merger, consolidation, tender or exchange offer, sale or purchase of assets, or dissolution or liquidation of the Company or (ii) instigate, encourage or assist any Person to do any of the foregoing. 4.2 Nasdaq Matters. The Company shall use all commercially reasonable efforts to maintain the quotation and listing on Nasdaq of all of the shares of Common Stock issuable upon conversion of the Series D Preferred Stock and all of the shares of Common Stock issuable upon exercise of the Warrants. In addition, each of the General Atlantic Stockholders agree that as long as it is required to do so by Nasdaq, at any regular or special meeting of shareholders of the Company ("Stockholders Meeting") or in any written consent executed in lieu of such a Stockholders Meeting (a "Written Consent"), it will cause all voting securities owned in the aggregate by the General Atlantic Stockholders that would at any such Stockholders Meeting or in connection with any Written Consent constitute more than 19.99% of the outstanding voting power of the Company entitled to vote at such Stockholders Meeting or via such Written Consent to be 10 voted in the same proportion as the other shares of the Company's Common Stock (other than any held by the General Atlantic Stockholder) are voted. 5. Miscellaneous. 5.1 Notices. All notices, demands or other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first class mail, return receipt requested, telecopier, courier service or personal delivery: (a) if to the Company: Critical Path, Inc. 532 Folsom Street San Francisco, CA 94105 Telecopy: (415) 808-8898 Attention: Chief Financial Officer with a copy to, which shall not constitute notice: Pillsbury Winthrop LLP 50 Fremont Street San Francisco, CA 94105 Telecopy: 415-983-1200 Attention: Gregg F. Vignos, Esq. (b) if to any of the General Atlantic Stockholders: c/o General Atlantic Service Corporation 3 Pickwick Plaza Greenwich, CT 06830 Telecopy: (203) 622-8818 Attention: Matthew Nimetz with a copy to, which shall not constitute notice: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, NY 10019-6064 Telecopy: (212) 757-3990 Attention: Douglas A. Cifu, Esq. 11 (c) if to the Coinvestor Stockholders: (i) if to Vectis CP Holdings, LLC: c/o Vectis Group, LLC 117 Greenwich Street San Francisco, CA 94111 Telecopy: 415-352-5310 Attention: Matthew Hobart with a copy to, which shall not constitute notice: Kirkland & Ellis 153 East 53rd Street New York, NY 10022-4675 Telecopy: 212-446-4900 Attention: Michael Movsovich, Esq. (ii) if to Cenwell Limited c/o 7th Floor Cheung Kong Center 2 Queen's Road Central Hong Kong Telecopy: (852) 2845-2057 Attention: Mr. Edmond lp (iii) if to Campina Enterprises Limited c/o 22nd Floor Hutchison House 10 Harcourt Road Hong Kong Telecopy: (852) 2128-1778 Attention: Company Secretary All such notices, demands and other communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial courier service; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. Any party may by notice given in accordance with this Section 5.1 designate another address or Person for receipt of notices hereunder. 5.2 Successors and Assigns; Third Party Beneficiary. This Agreement shall inure to the benefit of and be binding upon successors and permitted 12 assigns of the parties hereto. No person other than the parties hereto and their successors and permitted assigns is intended to be a beneficiary of this Agreement. 5.3 Amendment and Waiver. (a) No failure or delay on the part of any party hereto in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the parties hereto at law, in equity or otherwise. (b) Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by any party from the terms of any provision of this Agreement, shall be effective only if it is made or given in writing and signed by (i) the Company, (ii) the General Atlantic Stockholders and (iii) the Coinvestor Stockholders holding a majority of the voting power of the Shares held by the Coinvestor Stockholders; provided, however, that to the extent that any such amendment or waiver adversely affects any of the Stockholders, such amendment or waiver shall require the prior written consent of each Stockholder so adversely affected; provided further, that any Stockholder may waive in writing any right that inures to such Stockholder. Any such amendment, supplement, modification, waiver or consent shall be binding upon the Company and all of the Stockholders. 5.4 Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 5.5 Specific Performance. The parties hereto intend that each of the parties have the right to seek damages or specific performance in the event that any other party hereto fails to perform such party's obligations hereunder. Therefore, if any party shall institute any action or proceeding to enforce the provisions hereof, any party against whom such action or proceeding is brought hereby waives any claim or defense therein that the plaintiff party has an adequate remedy at law. 5.6 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 5.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. 5.8 Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or 13 unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. 5.9 Rules of Construction. Unless the context otherwise requires, references to sections or subsections refer to sections or subsections of this Agreement. 5.10 Entire Agreement. This Agreement, together with the exhibits hereto, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, representations, warranties or undertakings, other than those set forth herein or therein or set forth in the Stock Purchase Agreement. This Agreement, together with the exhibits hereto, supersedes all prior agreements and understandings among the parties with respect to such subject matter. 5.11 Term of Agreement. Unless the Escrow Termination Date (as defined in the Escrow Agreement) shall have occurred, in which case this Agreement shall terminate and be void and of no further force or effect, this Agreement shall become effective upon the Escrow Release Date (as defined in the Escrow Agreement) and shall thereafter terminate upon the earlier of (a) with respect to a particular Stockholder, on the date that such Stockholder and its Affiliates beneficially own less than 5% of the actual outstanding shares of Common Stock (assuming conversion of the shares of Series D Preferred Stock) or (b) the twentieth anniversary of the date hereof. 5.12 Further Assurances. Each of the parties shall, and shall cause their respective Affiliates to, execute such documents and perform such further acts as may be reasonably required or desirable to carry out or to perform the provisions of this Agreement. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the undersigned have executed, or have caused to be executed, this Stockholders Agreement on the date first written above. CRITICAL PATH, INC. By: /s/ Laureen DeBuono ------------------------------- Name: Title: GENERAL ATLANTIC PARTNERS 74, L.P. By: GENERAL ATLANTIC PARTNERS, LLC, its General Partner By: /s/ William Ford ------------------------------- Name: Title: A Managing Member GAP COINVESTMENT PARTNERS II, L.P. By: /s/ William Ford ------------------------------- Name: Title: A General Partner GAPSTAR, LLC By: GENERAL ATLANTIC PARTNERS, LLC, its Managing Member By: /s/ William Ford ------------------------------- Name: Title: A Managing Member VECTIS CP HOLDINGS, LLC, a Delaware limited liability company By: VECTIS GROUP, LLC, its Managing Member By: /s/ Matthew Hobart ------------------------------- Name: Title: CENWELL LIMITED By: /s/ Cenwell ------------------------------- Name: Title: CAMPINA ENTERPRISES LIMITED By: /s/ Campina ------------------------------- Name: Title: Schedule I Coinvestors Vectis CP Holdings, LLC Cenwell Limited Campina Enterprises Limited EX-4.10 8 f80193ex4-10.txt EXHIBIT 4.10 EXHIBIT 4.10 REGISTRATION RIGHTS AGREEMENT among CRITICAL PATH, INC. GENERAL ATLANTIC PARTNERS 74, L.P., GAP COINVESTMENT PARTNERS II, L.P., GAPSTAR, LLC and THE OTHER PARTIES LISTED HEREIN ------------------------ Dated: November 8, 2001 ------------------------ TABLE OF CONTENTS
Page ---- 1. Definitions...................................................................1 2. General; Securities Subject to this Agreement.................................4 (a) Grant of Rights........................................................4 (b) Registrable Securities.................................................5 (c) Holders of Registrable Securities......................................5 3. Demand Registration...........................................................5 (a) Request for Demand Registration........................................5 (b) Incidental or "Piggy-Back" Rights with Respect to a Demand Registration...........................................................6 (c) Effective Demand Registration..........................................6 (d) Expenses...............................................................7 (e) Underwriting Procedures................................................7 (f) Selection of Underwriters..............................................8 4. Incidental or "Piggy-Back" Registration.......................................8 (a) Request for Incidental Registration....................................8 (b) Expenses...............................................................8 5. Holdback Agreements...........................................................9 (a) Restrictions on Public Sale by Designated Holders......................9 (b) Restrictions on Public Sale by the Company.............................9 6. Registration Procedures.......................................................9 (a) Obligations of the Company.............................................9 (b) Seller Information....................................................12 (c) Notice to Discontinue.................................................12 (d) Registration Expenses.................................................13 7. Indemnification; Contribution................................................13 (a) Indemnification by the Company........................................13 (b) Indemnification by Designated Holders.................................14 (c) Conduct of Indemnification Proceedings................................14 (d) Contribution..........................................................15 8. Rule 144.....................................................................16 9. Miscellaneous................................................................16 (a) Recapitalizations, Exchanges, etc.....................................16 (b) No Inconsistent Agreements............................................16 (c) Remedies..............................................................16 (d) Amendments and Waivers................................................17 (e) Notices...............................................................17
i
Page ---- (f) Successors and Assigns; Third Party Beneficiaries.....................19 (g) Counterparts..........................................................19 (h) Headings..............................................................19 (i) GOVERNING LAW.........................................................19 (j) Severability..........................................................19 (k) Rules of Construction.................................................20 (l) Entire Agreement......................................................20 (m) Further Assurances....................................................20 (n) Other Agreements......................................................20
ii REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated November 8, 2001 (this "Agreement"), among Critical Path, Inc., a California corporation (the "Company"), General Atlantic Partners 74, L.P., a Delaware limited partnership ("GAP LP"), GAP Coinvestment Partners II, L.P., a Delaware limited partnership ("GAP Coinvestment"), GapStar, LLC, a Delaware limited liability company ("GapStar"), Cenwell Limited ("Cenwell"), Campina Enterprises Limited ("Campina") and Vectis CP Holdings, LLC, a Delaware limited liability company ("Vectis"). WHEREAS, pursuant to the Stock and Warrant Purchase Agreement, dated November 8, 2001 (the "Stock Purchase Agreement"), among the Company, GAP LP, GAP Coinvestment, GapStar, Cenwell, Campina and Vectis, the Company has agreed to (i) issue and sell to GAP LP, GAP Coinvestment, GapStar, Cenwell, Campina and Vectis, an aggregate of 2,162,582 shares of Series D Cumulative Redeemable Convertible Participating Series D Preferred Stock, par value $0.001 per share, of the Company (the "Series D Preferred Stock"), (ii) issue and deliver to GAP LP, GAP Coinvestment and GapStar an aggregate of 1,837,418 shares of Series D Preferred Stock in exchange for a certain amount of convertible subordinated notes of the Company and (iii) issue and sell to GAP LP, GAP Coinvestment and GapStar warrants to purchase, at an exercise price of $1.05 per share, an aggregate of 2,500,000 shares of Common Stock (as hereinafter defined) (the "Warrants"); WHEREAS, pursuant to an Escrow Agreement, dated the date hereof, among the Company, GAP LP, GAP Coinvestment, GapStar, Cenwell, Campina, Vectis and Pillsbury Winthrop, LLP, as Escrow Agent (the "Escrow Agreement"), the parties have agreed to consummate the transaction contemplated by the Stock Purchase Agreement in escrow, including the execution and delivery of this Agreement; and WHEREAS, in order to induce (i) each of GAP LP, GAP Coinvestment, GapStar, Cenwell, Campina and Vectis to purchase shares of Series D Preferred Stock and (ii) each of GAP LP, GAP Coinvestment and GapStar to purchase the Warrants, the Company has agreed to grant registration rights with respect to the Registrable Securities (as hereinafter defined) as set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "Affiliate" shall mean any Person who is an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "Agreement" mean this Agreement as the same may be amended, supplemented or modified in accordance with the terms hereof. 2 "Approved Underwriter" has the meaning set forth in Section 3(f) of this Agreement. "Board of Directors" means the Board of Directors of the Company. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in the State of New York are authorized or required by law or executive order to close. "Campina" has the meaning set forth in the preamble to this Agreement. "Cenwell" has the meaning set forth in the preamble to this Agreement. "Cenwell Stockholders" means Cenwell, Campina and any Affiliates thereof that, after the date hereof, acquires Registrable Securities. "Commission" means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "Common Stock" means the Common Stock, par value $0.001 per share, of the Company or any other capital stock of the Company into which such stock is reclassified or reconstituted and any other common stock of the Company. "Company" has the meaning set forth in the preamble to this Agreement. "Company Underwriter" has the meaning set forth in Section 4(a) of this Agreement. "Demand Registration" has the meaning set forth in Section 3(a) of this Agreement. "Designated Holder" means each of the General Atlantic Stockholders, the Cenwell Stockholders, the Vectis Stockholders and any transferee of any of them to whom Registrable Securities have been transferred in accordance with Section 9(f) of this Agreement, other than a transferee to whom Registrable Securities have been transferred pursuant to a Registration Statement under the Securities Act or Rule 144 (or any successor rule thereto). "Escrow Agreement" has the meaning set forth in the recitals to this Agreement. "Escrow Release Date" has the meaning set forth in the Escrow Agreement. "Escrow Termination Date" has the meaning set forth in the Escrow Agreement. 3 "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder. "GAP Coinvestment" has the meaning set forth in the preamble to this Agreement. "GAP LLC" means General Atlantic Partners, LLC, a Delaware limited liability company and the general partner of GAP LP and the managing member of GapStar, and any successor to such entity. "GAP LP" has the meaning set forth in the preamble to this Agreement. "GapStar" has the meaning set forth in the preamble to this Agreement. "General Atlantic Stockholders" means GAP LP, GAP Coinvestment, GapStar, GmbH Coinvestment and any Affiliate of GAP LLC that, after the date hereof, acquires Registrable Securities. "GmbH Coinvestment" means GAPCO GmbH & Co. KG, a German limited partnership. "Holders' Counsel" has the meaning set forth in Section 6(a)(i) of this Agreement. "Incidental Registration" has the meaning set forth in Section 4(a) of this Agreement. "Indemnified Party" has the meaning set forth in Section 7(c) of this Agreement. "Indemnifying Party" has the meaning set forth in Section 7(c) of this Agreement. "Initiating Holders" has the meaning set forth in Section 3(a) of this Agreement. "Inspector" has the meaning set forth in Section 6(a)(vii) of this Agreement. "Liability" has the meaning set forth in Section 7(a) of this Agreement. "NASD" means the National Association of Securities Dealers, Inc. "Person" means any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, government (or an agency or political subdivision thereof) or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. 4 "Public Offering" means any public offering of the shares of Common Stock of the Company pursuant to an effective Registration Statement filed under the Securities Act. "Records" has the meaning set forth in Section 6(a)(vii) of this Agreement. "Registrable Securities" means each of the following: (a) any and all shares of Common Stock issued or issuable upon conversion of shares of Series D Preferred Stock or exercise of the Warrants, (b) any other shares of Common Stock acquired or owned by any of the Designated Holders after the date hereof if such Designated Holder is an Affiliate of the Company and (c) any shares of Common Stock issued or issuable to any of the Designated Holders with respect to the Registrable Securities by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise and any shares of Common Stock or voting common stock issuable upon conversion, exercise or exchange thereof. "Registration Expenses" has the meaning set forth in Section 6(d) of this Agreement. "Registration Statement" means a Registration Statement filed pursuant to the Securities Act. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Series D Preferred Stock" has the meaning set forth in the recitals to this Agreement. "Stock Purchase Agreement" has the meaning set forth in the recitals to this Agreement. "Valid Business Reason" has the meaning set forth in Section 3(a) of this Agreement. "Vectis" has the meaning set forth in the preamble of this Agreement. "Vectis Stockholders" means Vectis and any Affiliate thereof that, after the date hereof, acquires Registrable Securities. "Warrants" has the meaning set forth in the recitals to this Agreement. 2. General; Securities Subject to this Agreement. (a) Grant of Rights. Unless the Escrow Termination Date shall have occurred, in which case this Agreement shall terminate and be void and of no further force or effect, then effective upon the Escrow Release Date, the Company hereby 5 grants registration rights to the Designated Holders upon the terms and conditions set forth in this Agreement. (b) Registrable Securities. For the purposes of this Agreement, Registrable Securities will cease to be Registrable Securities, when (i) a Registration Statement covering such Registrable Securities has been declared effective under the Securities Act by the Commission and such Registrable Securities have been disposed of pursuant to such effective Registration Statement, (ii) (x) the entire amount of the Registrable Securities owned by a Designated Holder may be sold in a single sale, in the opinion of counsel satisfactory to the Company and such Designated Holder, each in their reasonable judgment, without any limitation as to volume pursuant to Rule 144 (or any successor provision then in effect) under the Securities Act and (y) such Designated Holder owning such Registrable Securities owns less than one percent (1%) of the outstanding shares of Common Stock on a fully diluted basis, or (iii) the Registrable Securities are proposed to be sold or distributed by a Person not entitled to the registration rights granted by this Agreement. (c) Holders of Registrable Securities. A Person is deemed to be a holder of Registrable Securities whenever such Person owns of record Registrable Securities, or holds an option to purchase, or a security convertible into or exercisable or exchangeable for, Registrable Securities whether or not such acquisition or conversion has actually been effected. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company may act upon the basis of the instructions, notice or election received from the registered owner of such Registrable Securities. Registrable Securities issuable upon exercise of an option or upon conversion of another security shall be deemed outstanding for the purposes of this Agreement. 3. Demand Registration. (a) Request for Demand Registration. At any time commencing one year after the date hereof, either the General Atlantic Stockholders or the Cenwell Stockholders (the "Initiating Holders"), may each make a written request to the Company to register, and the Company shall register, under the Securities Act and on an appropriate registration statement form as reasonably determined by the Company and approved by the Initiating Holders (a "Demand Registration"), the number of Registrable Securities stated in such request; provided, however, that the Company shall not be obligated to effect more than one such Demand Registration for the General Atlantic Stockholders (subject to Section 3(e)(ii) below) and more than one such Demand Registration for the Cenwell Stockholders (subject to Section 3(e)(ii) below). If following receipt of a written request for a Demand Registration the Board of Directors, in its good faith judgment, determines that any registration of Registrable Securities should not be made or continued because it would materially interfere with any material financing, acquisition, corporate reorganization or merger or other material transaction involving the Company (a "Valid Business Reason"), the Company may (x) postpone filing a Registration Statement relating to a Demand Registration until such Valid Business Reason no longer exists, but in no event for more than ninety (90) days, and 6 (y) in case a Registration Statement has been filed relating to a Demand Registration, if the Valid Business Reason has not resulted from actions taken by the Company, the Company, upon the approval of a majority of the Board of Directors, such majority to include at least one Director appointed by the General Atlantic Stockholders, may cause such Registration Statement to be withdrawn and its effectiveness terminated or may postpone amending or supplementing such Registration Statement. The Company shall give written notice of its determination to postpone or withdraw a Registration Statement and of the fact that the Valid Business Reason for such postponement or withdrawal no longer exists, in each case, promptly after the occurrence thereof. Notwithstanding anything to the contrary contained herein, the Company may not postpone or withdraw a filing under this Section 3(a) more than once in any twelve (12) month period. Each request for a Demand Registration by the Initiating Holders shall state the amount of the Registrable Securities proposed to be sold and the intended method of disposition thereof. (b) Incidental or "Piggy-Back" Rights with Respect to a Demand Registration. Each of the Designated Holders (other than Initiating Holders which have requested a registration under Section 3(a)) may offer its or his Registrable Securities under any Demand Registration pursuant to this Section 3(b). Within five (5) days after the receipt of a request for a Demand Registration from an Initiating Holder, the Company shall (i) give written notice thereof to all of the Designated Holders (other than Initiating Holders which have requested a registration under Section 3(a)) and (ii) subject to Section 3(e), include in such registration all of the Registrable Securities held by such Designated Holders from whom the Company has received a written request for inclusion therein within ten (10) days of the receipt by such Designated Holders of such written notice referred to in clause (i) above. Each such request by such Designated Holders shall specify the number of Registrable Securities proposed to be registered. The failure of any Designated Holder to respond within such 10 day period referred to in clause (ii) above shall be deemed to be a waiver of such Designated Holder's rights under this Section 3 with respect to such Demand Registration. Any Designated Holder may waive its rights under this Section 3 prior to the expiration of such 10-day period by giving written notice to the Company, with a copy to the Initiating Holders. If a Designated Holder sends the Company a written request for inclusion of part or all of such Designated Holder's Registrable Securities in a registration, such Designated Holder shall not be entitled to withdraw or revoke such request without the prior written consent of the Company in its sole discretion unless, as a result of facts or circumstances arising after the date on which such request was made relating to the Company or to market conditions, such Designated Holder reasonably determines that participation in such registration would have a material adverse effect on such Designated Holder. (c) Effective Demand Registration. The Company shall use all commercially reasonable efforts to cause any such Demand Registration to be filed not later than thirty (30) days after it receives a request under Section 3(a) hereof and to become and remain effective as soon as practicable thereafter but, in any event, not later than ninety (90) days after such filing. A registration shall not constitute a Demand Registration until it has become effective and remains continuously effective for the lesser of (i) the period during which all Registrable Securities registered in the Demand Registration are sold and (ii) 120 days; provided, however, that a registration shall not 7 constitute a Demand Registration if (x) after such Demand Registration has become effective, such registration or the related offer, sale or distribution of Registrable Securities thereunder is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason not attributable to the Initiating Holders and such interference is not thereafter eliminated or (y) the conditions specified in the underwriting agreement, if any, entered into in connection with such Demand Registration are not satisfied or waived, other than by reason of a failure by the Initiating Holder. (d) Expenses. The Company shall pay all Registration Expenses in connection with a Demand Registration, whether or not such Demand Registration becomes effective. (e) Underwriting Procedures. (i) If the Company or the Initiating Holders holding a majority of the Registrable Securities held by all of the Initiating Holders so elect, the Company shall use all commercially reasonable efforts to cause such Demand Registration to be in the form of a firm commitment underwritten offering and the managing underwriter or underwriters selected for such offering shall be the Approved Underwriter selected in accordance with Section 3(f). In connection with any Demand Registration under this Section 3 involving an underwritten offering, none of the Registrable Securities held by any Designated Holder making a request for inclusion of such Registrable Securities pursuant to Section 3(b) hereof shall be included in such underwritten offering unless such Designated Holder accepts the terms of the offering as agreed upon by the Company, the Initiating Holders and the Approved Underwriter, and then only in such quantity as will not, in the opinion of the Approved Underwriter, jeopardize the success of such offering by the Initiating Holders. If the Approved Underwriter advises the Company in its reasonable opinion that the aggregate amount of such Registrable Securities requested to be included in such offering is sufficiently large to have a material adverse effect on the success of such offering, then the Company shall include in such registration only the aggregate amount of Registrable Securities that the Approved Underwriter believes may be sold without any such material adverse effect and shall reduce the amount of Registrable Securities to be included in such registration by removing from such registration securities owned, first by the Company and second by the Designated Holders (including the Initiating Holders) pro rata based on the number of Registrable Securities owned by each such Designated Holder. (ii) If an Initiating Holder makes a request for a Demand Registration and, pursuant to Section 3(e)(i) above, the Approved Underwriter advises the Company to reduce the aggregate amount of Registrable Securities requested to be included in such offering such that less than seventy-five percent (75%) of the Registrable Securities requested to be included by any Initiating Holder are ultimately included in and sold pursuant to such Demand Registration, the Initiating Holder shall have the right to require the Company to effect an additional Demand Registration; provided, however, that in no event shall the aggregate number of Demand Registrations to be effected by the Company for any one Initiating Holder exceed two (2). 8 (f) Selection of Underwriters. If any Demand Registration of Registrable Securities is in the form of an underwritten offering, the Company shall select and obtain an investment banking firm of national reputation to act as the managing underwriter of the offering (the "Approved Underwriter"); provided, however, that the Approved Underwriter shall, in any case, also be approved by the Initiating Holders. 4. Incidental or "Piggy-Back" Registration. (a) Request for Incidental Registration. If at any time the Company proposes to file a Registration Statement under the Securities Act with respect to an offering by the Company for its own account (other than a Registration Statement on Form S-4 or S-8 or any successor thereto) or for the account of any stockholder of the Company other than the Designated Holders, then the Company shall give written notice of such proposed filing to each of the Designated Holders at least twenty (20) days before the anticipated filing date, and such notice shall describe the proposed registration and distribution and offer such Designated Holders the opportunity to register the number of Registrable Securities as each such Designated Holder may request (an "Incidental Registration"). The Company shall use all commercially reasonable efforts (within twenty (20) days of the notice provided for in the preceding sentence) to cause the managing underwriter or underwriters in the case of a proposed underwritten offering (the "Company Underwriter") to permit each of the Designated Holders who have requested in writing to participate in the Incidental Registration to include its or his Registrable Securities in such offering on the same terms and conditions as the securities of the Company or the account of such other stockholder, as the case may be, included therein. In connection with any Incidental Registration under this Section 4(a) involving an underwritten offering, the Company shall not be required to include any Registrable Securities in such underwritten offering unless the Designated Holders thereof accept the terms of the underwritten offering as agreed upon between the Company, such other stockholders, if any, and the Company Underwriter, and then only in such quantity as the Company Underwriter believes will not jeopardize the success of the offering by the Company. If the Company Underwriter determines that the registration of all or part of the Registrable Securities which the Designated Holders have requested to be included would materially adversely affect the success of such offering, then the Company shall be required to include in such Incidental Registration, to the extent of the amount that the Company Underwriter believes may be sold without causing such adverse effect, first, all of the securities to be offered for the account of the Company or on the account of the selling stockholder that caused the registration statement that has triggered the Incidental Registration to be filed, as the case may be; second, the Registrable Securities to be offered for the account of the Designated Holders pursuant to this Section 4, pro rata based on the number of Registrable Securities owned by each such Designated Holder; and third, any other securities requested to be included in such offering. (b) Expenses. The Company shall bear all Registration Expenses in connection with any Incidental Registration pursuant to this Section 4, whether or not such Incidental Registration becomes effective. 9 5. Holdback Agreements. (a) Restrictions on Public Sale by Designated Holders. To the extent (i) requested (A) by the Company or the Initiating Holders, as the case may be, in the case of a non-underwritten public offering and (B) by the Approved Underwriter or the Company Underwriter, as the case may be, in the case of an underwritten public offering and (ii) all of the Company's officers, directors and holders in excess of one percent (1%) of its outstanding capital stock execute agreements identical to those referred to in this Section 5(a), each Designated Holder agrees (x) not to effect any public sale or distribution of any Registrable Securities or of any securities convertible into or exchangeable or exercisable for such Registrable Securities, including a sale pursuant to Rule 144 under the Securities Act, or offer to sell, contract to sell (including without limitation any short sale), grant any option to purchase or enter into any hedging or similar transaction with the same economic effect as a public sale any Registrable Securities and (y) not to make any request for a Demand Registration under this Agreement, during the ninety (90) day period or such shorter period, if any, mutually agreed upon by such Designated Holder and the requesting party beginning on the effective date of the Registration Statement (except as part of such registration) for such public offering. No Designated Holder of Registrable Securities subject to this Section 5(a) shall be released from any obligation under any agreement, arrangement or understanding entered into pursuant to this Section 5(a) unless all other Designated Holders of Registrable Securities subject to the same obligation are also released. All Designated Holders of Registrable Securities shall be automatically released from any obligations under any agreement, arrangement or understanding entered into pursuant to this Section 5(a) immediately upon the expiration of the 90 day period. (b) Restrictions on Public Sale by the Company. The Company agrees not to effect any public sale or distribution of any of its securities, or any securities convertible into or exchangeable or exercisable for such securities (except pursuant to registrations on Form S-4 or S-8 or any successor thereto), during the period beginning on the effective date of any Registration Statement in which the Designated Holders of Registrable Securities are participating and ending on the earlier of (i) the date on which all Registrable Securities registered on such Registration Statement are sold and (ii) 120 days after the effective date of such Registration Statement (except as part of such registration). 6. Registration Procedures. (a) Obligations of the Company. Whenever registration of Registrable Securities has been requested pursuant to Section 3 or Section 4 of this Agreement, the Company shall use all commercially reasonable efforts to effect the registration and sale of such Registrable Securities in accordance with the intended method of distribution thereof as quickly as practicable, and in connection with any such request, the Company shall, as expeditiously as possible: (i) prepare and file with the Commission a Registration Statement on any form for which the Company then qualifies or which counsel for the 10 Company shall deem appropriate and which form shall be available for the sale of such Registrable Securities in accordance with the intended method of distribution thereof, and cause such Registration Statement to become effective; provided, however, that (x) before filing a Registration Statement or prospectus or any amendments or supplements thereto, the Company shall provide counsel selected by the Designated Holders holding a majority of the Registrable Securities being registered in such registration ("Holders' Counsel") with an adequate opportunity to review and comment on such Registration Statement and each prospectus included therein (and each amendment or supplement thereto) to be filed with the Commission, subject to such documents being under the Company's control, and (y) the Company shall notify the Holders' Counsel and each seller of Registrable Securities of any stop order issued or threatened by the Commission and take all action required to prevent the entry of such stop order or to remove it if entered; (ii) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for the lesser of (x) 120 days and (y) such shorter period which will terminate when all Registrable Securities covered by such Registration Statement have been sold, and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such Registration Statement; (iii) furnish to each seller of Registrable Securities, prior to filing a Registration Statement, at least one copy of such Registration Statement as is proposed to be filed, and thereafter such number of copies of such Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto), and the prospectus included in such Registration Statement (including each preliminary prospectus) and any prospectus filed under Rule 424 under the Securities Act as each such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; (iv) register or qualify such Registrable Securities under such other securities or "blue sky" laws of such jurisdictions as any seller of Registrable Securities may request, and to continue such qualification in effect in such jurisdiction for as long as permissible pursuant to the laws of such jurisdiction, or for as long as any such seller requests or until all of such Registrable Securities are sold, whichever is shortest, and do any and all other acts and things which may be reasonably necessary or advisable to enable any such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller; provided, however, that the Company shall not be required to (x) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 6(a)(iv), (y) subject itself to taxation in any such jurisdiction or (z) consent to general service of process in any such jurisdiction; 11 (v) notify each seller of Registrable Securities at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such Registration Statement contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and the Company shall promptly prepare a supplement or amendment to such prospectus and furnish to each seller of Registrable Securities a reasonable number of copies of such supplement to or an amendment of such prospectus as may be necessary so that, after delivery to the purchasers of such Registrable Securities, such prospectus shall not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (vi) enter into and perform customary agreements (including an underwriting agreement containing representations, warranties, covenants and indemnities for securities law matters and otherwise in customary form with the Approved Underwriter or Company Underwriter, if any, selected as provided in Section 3 or Section 4, as the case may be) and take such other actions as are prudent and reasonably required in order to expedite or facilitate the disposition of such Registrable Securities, including causing its officers to participate in "road shows" and other information meetings organized by the Approved Underwriter or Company Underwriter; (vii) make available at reasonable times for inspection by any seller of Registrable Securities, any managing underwriter participating in any disposition of such Registrable Securities pursuant to a Registration Statement, Holders' Counsel and any attorney, accountant or other agent retained by any such seller or any managing underwriter (each, an "Inspector" and collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's and its subsidiaries' officers, directors and employees, and the independent public accountants of the Company, to supply all information reasonably requested by any such Inspector in connection with such Registration Statement. Records that the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors (and the Inspectors shall confirm their agreement in writing in advance to the Company if the Company shall so request) unless (x) the disclosure of such Records is necessary, in the Company's judgment, to avoid or correct a misstatement or omission in the Registration Statement, (y) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction after exhaustion of all appeals therefrom or (z) the information in such Records was known to the Inspectors on a non-confidential basis prior to its disclosure by the Company or has been made generally available to the public. Each seller of Registrable Securities agrees that it shall, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company, at the Company's expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential; 12 (viii) if such sale is pursuant to an underwritten offering, obtain a "cold comfort" letters dated the effective date of the Registration Statement and the date of the closing under the underwriting agreement from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by "cold comfort" letters as the managing underwriter reasonably requests; (ix) furnish, at the request of any seller of Registrable Securities on the date such securities are delivered to the underwriters for sale pursuant to such registration or, if such securities are not being sold through underwriters, on the date the Registration Statement with respect to such securities becomes effective, an opinion, if reasonably available, dated such date, of counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the seller making such request, covering such legal matters with respect to the registration in respect of which such opinion is being given as the underwriters, if any, and such seller may reasonably request and are customarily included in such opinions; (x) comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable but no later than fifteen (15) months after the effective date of the Registration Statement, an earnings statement covering a period of twelve (12) months beginning after the effective date of the Registration Statement, in a manner which satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; (xi) cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed, provided that the applicable listing requirements are satisfied; (xii) cooperate with each seller of Registrable Securities and each underwriter participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the NASD; and (xiii) take all other steps reasonably necessary to effect the registration of the Registrable Securities contemplated hereby. (b) Seller Information. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish, and such seller shall furnish, to the Company such information regarding the distribution of such securities as the Company may from time to time reasonably request in writing. (c) Notice to Discontinue. Each Designated Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 6(a)(v), such Designated Holder shall forthwith discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Designated Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 6(a)(v) and, if so directed 13 by the Company, such Designated Holder shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Designated Holder's possession, of the prospectus covering such Registrable Securities which is current at the time of receipt of such notice. If the Company shall give any such notice, the Company shall extend the period during which such Registration Statement shall be maintained effective pursuant to this Agreement (including, without limitation, the period referred to in Section 6(a)(ii)) by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6(a)(v) to and including the date when sellers of such Registrable Securities under such Registration Statement shall have received the copies of the supplemented or amended prospectus contemplated by and meeting the requirements of Section 6(a)(v). (d) Registration Expenses. The Company shall pay all expenses arising from or incident to its performance of, or compliance with, this Agreement, including, without limitation, (i) Commission, stock exchange and NASD registration and filing fees, (ii) all fees and expenses incurred in complying with securities or "blue sky" laws (including reasonable fees, charges and disbursements of counsel to any underwriter incurred in connection with "blue sky" qualifications of the Registrable Securities as may be set forth in any underwriting agreement), (iii) all printing, messenger and delivery expenses and (iv) the fees, charges and expenses of counsel to the Company and of its independent public accountants and any other accounting fees, charges and expenses incurred by the Company (including, without limitation, any expenses arising from any "cold comfort" letters or any special audits incident to or required by any registration or qualification) and any reasonable legal fees, charges and expenses incurred by one counsel for the General Atlantic Stockholders. All of the expenses described in the preceding sentence of this Section 6(d) are referred to herein as "Registration Expenses." The Designated Holders of Registrable Securities sold pursuant to a Registration Statement shall bear the expense of any underwriter's discount or commission relating to registration and sale of such Designated Holders' Registrable Securities. 7. Indemnification; Contribution. (a) Indemnification by the Company. The Company agrees to indemnify and hold harmless each Designated Holder, its partners, directors, officers, affiliates and each Person who controls (within the meaning of Section 15 of the Securities Act) such Designated Holder from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) (each, a "Liability" and collectively, "Liabilities"), arising out of or based upon any untrue, or allegedly untrue, statement of a material fact contained in any Registration Statement, prospectus or preliminary prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which such statements were made, except insofar as such Liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission contained in such Registration Statement, preliminary 14 prospectus or final prospectus in reliance and in conformity with information concerning such Designated Holder furnished in writing to the Company by such Designated Holder expressly for use therein, including, without limitation, the information furnished to the Company pursuant to Section 7(b). The Company shall also provide customary indemnities to any underwriters of the Registrable Securities, their officers, directors and employees and each Person who controls such underwriters (within the meaning of Section 15 of the Securities Act) to the same extent as provided above with respect to the indemnification of the Designated Holders of Registrable Securities. (b) Indemnification by Designated Holders. In connection with any Registration Statement in which a Designated Holder is participating pursuant to Section 3 or Section 4 hereof, each such Designated Holder shall promptly furnish to the Company in writing such information with respect to such Designated Holder as the Company may reasonably request or as may be required by law for use in connection with any such Registration Statement or prospectus and all information required to be disclosed in order to make the information previously furnished to the Company by such Designated Holder not materially misleading or necessary to cause such Registration Statement not to omit a material fact with respect to such Designated Holder necessary in order to make the statements therein not misleading. Each Designated Holder agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statement, any underwriter retained by the Company and each Person who controls the Company or such underwriter (within the meaning of Section 15 of the Securities Act) to the same extent as the foregoing indemnity from the Company to the Designated Holders, but only if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with information with respect to such Designated Holder furnished in writing to the Company by such Designated Holder expressly for use in such Registration Statement or prospectus, including, without limitation, the information furnished to the Company pursuant to this Section 7(b); provided, however, that the total amount to be indemnified by such Designated Holder pursuant to this Section 7(b) shall be limited to the net proceeds (after deducting the underwriters' discounts and commissions) received by such Designated Holder in the offering to which the Registration Statement or prospectus relates. (c) Conduct of Indemnification Proceedings. Any Person entitled to indemnification hereunder (the "Indemnified Party") agrees to give prompt written notice to the indemnifying party (the "Indemnifying Party") after the receipt by the Indemnified Party of any written notice of the commencement of any action, suit, proceeding or investigation or threat thereof made in writing for which the Indemnified Party intends to claim indemnification or contribution pursuant to this Agreement; provided, however, that the failure so to notify the Indemnifying Party shall not relieve the Indemnifying Party of any Liability that it may have to the Indemnified Party hereunder (except to the extent that the Indemnifying Party is materially prejudiced or otherwise forfeits substantive rights or defenses by reason of such failure). If notice of commencement of any such action is given to the Indemnifying Party as above provided, the Indemnifying Party shall be entitled to participate in and, to the extent it may wish, jointly with any other Indemnifying Party similarly notified, to assume the defense of 15 such action at its own expense, with counsel chosen by it and reasonably satisfactory to such Indemnified Party. The Indemnified Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be paid by the Indemnified Party unless (i) the Indemnifying Party agrees to pay the same, (ii) the Indemnifying Party fails to assume the defense of such action with counsel reasonably satisfactory to the Indemnified Party or (iii) the named parties to any such action (including any impleaded parties) include both the Indemnifying Party and the Indemnified Party and such parties have been advised by such counsel that either (x) representation of such Indemnified Party and the Indemnifying Party by the same counsel would be inappropriate under applicable standards of professional conduct or (y) there may be one or more legal defenses available to the Indemnified Party which are different from or additional to those available to the Indemnifying Party. In any of such cases, the Indemnifying Party shall not have the right to assume the defense of such action on behalf of such Indemnified Party, it being understood, however, that the Indemnifying Party shall not be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all Indemnified Parties. No Indemnifying Party shall be liable for any settlement entered into without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the consent of such Indemnified Party, effect any settlement of any pending or threatened proceeding in respect of which such Indemnified Party is a party and indemnity has been sought hereunder by such Indemnified Party, unless such settlement includes an unconditional release of such Indemnified Party from all liability for claims that are the subject matter of such proceeding. (d) Contribution. If the indemnification provided for in this Section 7 from the Indemnifying Party is unavailable to an Indemnified Party hereunder in respect of any Liabilities referred to herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Liabilities in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions which resulted in such Liabilities, as well as any other relevant equitable considerations. The relative faults of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the Liabilities referred to above shall be deemed to include, subject to the limitations set forth in Sections 7(a), 7(b) and 7(c), any legal or other fees, charges or expenses reasonably incurred by such party in connection with any investigation or proceeding; provided that the total amount to be contributed by such Designated Holder shall be limited to the net proceeds (after deducting the underwriters' discounts and commissions) received by such Designated Holder in the offering. 16 The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 8. Rule 144. The Company covenants that it shall (a) file any reports required to be filed by it under the Exchange Act and (b) take such further action as each Designated Holder may reasonably request (including providing any information necessary to comply with Rule 144 under the Securities Act), all to the extent required from time to time to enable such Designated Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such rule may be amended from time to time or (ii) any similar rules or regulations hereafter adopted by the Commission. The Company shall, upon the request of any Designated Holder, deliver to such Designated Holder a written statement as to whether it has complied with such requirements. 9. Miscellaneous. (a) Recapitalizations, Exchanges, etc. The provisions of this Agreement shall apply to the full extent set forth herein with respect to (i) the shares of Common Stock, (ii) any and all shares of voting common stock of the Company into which the shares of Common Stock are converted, exchanged or substituted in any recapitalization or other capital reorganization by the Company and (iii) any and all equity securities of the Company or any successor or assign of the Company (whether by merger, consolidation, sale of assets or otherwise) which may be issued in respect of, in conversion of, in exchange for or in substitution of, the shares of Common Stock and shall be appropriately adjusted for any stock dividends, splits, reverse splits, combinations, recapitalizations and the like occurring after the date hereof. The Company shall use all commercially reasonable efforts to cause any successor or assign (whether by merger, consolidation, sale of assets or otherwise) to enter into a new registration rights agreement with the Designated Holders on terms substantially the same as this Agreement as a condition of any such transaction. (b) No Inconsistent Agreements. The Company shall not enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Designated Holders in this Agreement or grant any additional registration rights to any Person or with respect to any securities which are not Registrable Securities which are prior in right to or inconsistent with the rights granted in this Agreement. (c) Remedies. The Designated Holders, in addition to being entitled to exercise all rights granted by law, including recovery of damages, shall be entitled to specific performance of their rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to 17 waive in any action for specific performance the defense that a remedy at law would be adequate. (d) Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless consented to in writing by (i) the Company and (ii) the General Atlantic Stockholders, Cenwell Stockholders and Vectis Stockholders holding Registrable Securities representing (after giving effect to any adjustments) at least a majority of the aggregate number of Registrable Securities owned by all of the General Atlantic Stockholders, Cenwell Stockholders and Vectis Stockholders; provided, however, that to the extent any amendment or waiver shall adversely affect any of the Stockholders, such amendment or waiver shall require the prior written consent of each Stockholder so adversely affected. Any such written consent shall be binding upon the Company and all of the Designated Holders. (e) Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be made by registered or certified first-class mail, return receipt requested, telecopier, courier service or personal delivery: (i) if to the Company: Critical Path, Inc. 532 Folsom Street San Francisco, CA 94105 Telecopy: (415) 808-8898 Attention: Chief Financial Officer with a copy to: Pillsbury Winthrop LLP 50 Fremont Street San Francisco, CA 94105 Telecopy: (415) 983-1200 Attention: Gregg F. Vignos, Esq. (ii) if to GAP LP, GapStar or GAP Coinvestment: c/o General Atlantic Service Company 3 Pickwick Plaza Greenwich, CT 06830 Telecopy: (203) 622-8818 Attention: Matthew Nimetz 18 with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, NY 10019-6064 Telecopy: (212) 757-3990 Attention: Douglas A. Cifu, Esq. (iii) if to Cenwell: c/o 7th Floor Cheung Kong Center 2 Queens Road Central Hong Kong Telecopy: (852) 2845-2057 Attention: Mr. Edmond lp (iv) if to Campina: c/o 22nd Floor Hutchison House 10 Harcourt Road Hong Kong Telecopy: (852) 2128-1778 Attention: Company Secretary (v) if to Vectis: c/o Vectis Group, LLC 117 Greenwich Street San Francisco, CA 94111 Telecopy: 415-352-5310 Attention: Matthew Hobart with a copy to: Kirkland & Ellis 153 East 53rd Street New York, NY 10022-4675 Telecopy: 212-446-4900 Attention: Michael Movsovich, Esq. (vi) if to any other Designated Holder, at its address as it appears on the record books of the Company. 19 All such notices, demands and other communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial courier service; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. Any party may by notice given in accordance with this Section 9(e) designate another address or Person for receipt of notices hereunder. (f) Successors and Assigns; Third Party Beneficiaries. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto as hereinafter provided. The Demand Registration rights and related rights of the General Atlantic Stockholders or the Cenwell Stockholders contained in Section 3 hereof shall be (i) with respect to any Registrable Security that is transferred to an Affiliate of a General Atlantic Stockholder or a Cenwell Stockholder, automatically transferred to such Affiliate and (ii) with respect to any Registrable Security that is transferred in all cases to a non-Affiliate, transferred only with the consent of the Company which consent shall not be unreasonably withheld, conditioned or delayed. The incidental or "piggy-back" registration rights of the Designated Holders contained in Sections 3(b) and 4 hereof and the other rights of each of the Designated Holders with respect thereto shall be, with respect to any Registrable Security, automatically transferred to any Person who is the transferee of such Registrable Security so long as such transferee agrees to be bound by this Agreement. All of the obligations of the Company hereunder shall survive any such transfer. Except as provided in Section 7, no Person other than the parties hereto and their successors and permitted assigns is intended to be a beneficiary of this Agreement. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. (j) Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. 20 (k) Rules of Construction. Unless the context otherwise requires, references to sections or subsections refer to sections or subsections of this Agreement. (l) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto with respect to the subject matter contained herein. There are no restrictions, promises, representations, warranties or undertakings with respect to the subject matter contained herein, other than those set forth or referred to herein. This Agreement supersedes all prior agreements and understandings among the parties with respect to such subject matter. (m) Further Assurances. Each of the parties shall execute such documents and perform such further acts as may be reasonably required or desirable to carry out or to perform the provisions of this Agreement. (n) Other Agreements. Nothing contained in this Agreement shall be deemed to be a waiver of, or release from, any obligations any party hereto may have under, or any restrictions on the transfer of Registrable Securities or other securities of the Company imposed by, any other agreement including, but not limited to, the Stock Purchase Agreement or the Stockholders Agreement. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the undersigned have executed, or have caused to be executed, this Registration Rights Agreement on the date first written above. CRITICAL PATH, INC. By: /s/ Laureen DeBuono -------------------------------------------- Name: Title: GENERAL ATLANTIC PARTNERS 74, L.P. By: GENERAL ATLANTIC PARTNERS, LLC, its General Partner By: /s/ William Ford ------------------------------------ Name: Title: GAP COINVESTMENT PARTNERS II, L.P. By: /s/ William Ford -------------------------------------------- Name: Title: GAPSTAR, LLC By: GENERAL ATLANTIC PARTNERS, LLC, its Managing Member By: /s/ William Ford ------------------------------------ Name: Title: VECTIS CP HOLDINGS, LLC, a Delaware limited liability company By: VECTIS GROUP, LLC its Managing Member By: /s/ Matthew Hobart -------------------------------------------- Name: Title: CENWELL LIMITED By: -------------------------------------------- Name: Title: CAMPINA ENTERPRISES LIMITED By: -------------------------------------------- Name: Title: EX-4.11 9 f80193ex4-11.txt EXHIBIT 4.11 EXHIBIT 4.11 ESCROW AGREEMENT ESCROW AGREEMENT, dated November 8, 2001 (this "Escrow Agreement"), by and among General Atlantic Partners 74, L.P., a Delaware limited partnership, GAP Coinvestment Partners II, L.P., a Delaware limited partnership, GapStar, LLC, a Delaware limited liability company, Vectis CP Holdings, LLC , a Delaware limited liability company, Cenwell Limited and Campina Enterprises Limited (collectively, the "Purchasers"), Critical Path, Inc., a California Corporation ("Seller"), and Pillsbury Winthrop, LLP, as Escrow Agent (the "Escrow Agent"). WHEREAS, the Purchasers and Seller are parties to the Stock and Warrant Purchase and Exchange Agreement, dated the date hereof (the "Purchase Agreement"), pursuant to which the (i) Purchasers are acquiring from Seller an aggregate of 4,000,000 shares of Series D Cumulative Redeemable Convertible Participating Preferred Stock, par value $0.001 per share, of Seller (the "Series D Preferred Stock") and (ii) the GAP Purchasers (as defined in the Purchase Agreement) are acquiring from the Seller warrants (the "Warrants"), to purchase, at an exercise price of $1.05 per share, an aggregate of 2,500,000 shares of common stock, par value $0.001 per share, of Seller (the "Common Stock"); WHEREAS, the Purchase Agreement provides for the escrow hereby established to be held by the Escrow Agent; and WHEREAS, capitalized terms used herein, unless otherwise indicated, have the respective meanings ascribed to them in the Purchase Agreement. Accordingly, the parties agree as follows: 1. Establishment of Escrow. 1.1 Escrow Deposit. 1.1.1 On November 9, 2001, pursuant to (i) Section 2.1 of the Purchase Agreement, the Purchasers will deposit with the Escrow Agent $29,735,502.50 representing the entire purchase price payable pursuant to Section 2.1 for the Purchased Shares, (ii) Section 2.2 of the Purchase Agreement, the GAP Purchasers will deposit with the Escrow Agent the GAP Sub Notes in the aggregate face amount of $64,630,000 together with signed and undated Note Powers for such GAP Sub Notes, and (iii) Section 2.3 of the Purchase Agreement, the GAP Purchasers will deposit with the Escrow Agent $1,000.00 representing the entire purchase price for the Warrants and (the items in clause (i)-(iii) referred to collectively, as the "Purchasers' Deposit") to be held and disbursed in accordance with the terms hereof. 1.1.2 On November 9, 2001, pursuant to Sections 2.1, 2.2 and 2.3 of the Purchase Agreement, Seller is depositing with the Escrow Agent (i) stock certificates in definitive form representing the number of Purchased Shares set forth opposite each Purchaser's name on Schedule 2.1 to the Purchase Agreement, updated, but 2 registered in the name of such Purchasers, (ii) stock certificates in definitive form representing the number of Exchange Shares set forth opposite each GAP Purchaser's name on Schedule 2.2 to the Purchase Agreement, undated but registered in the name of such GAP Purchaser, (iii) the GAP LP Warrant , (iv) the GAP Coinvestment Warrant, and (v) the GapStar Warrant, (collectively, the "Seller's Deposit" and, together with the Purchasers' Deposit, the "Deposit"). 1.1.3 The Escrow Agent acknowledges receipt of and agrees to accept the Deposit and establish and maintain a separate account for each Purchaser's cash portion of the Deposit as provided herein (the "Escrow Account"). 1.2 Escrow Fund. The cash portion of the Deposit, as from time to time invested and reinvested as herein provided, less any distributions pursuant hereto, is hereinafter referred to as the "Escrow Fund." 2. Investment of Escrow Fund. 2.1 Investment. The Escrow Agent shall invest any or all of the Escrow Fund and any income or interest earned or accrued with respect thereto only in time deposits and certificates of deposit of any commercial bank incorporated in the United States of America of recognized standing having capital and surplus in excess of $50,000,000. Except as otherwise provided in Section 5.3, in no event shall the Escrow Agent have any liability for any investment hereunder, including, without limitation, any loss of the principal amount of any investment or in connection with the rate of return on any investment. 2.2 Distribution of Interest. All interest accrued from the date hereof to and including the Escrow Release Date (as defined below) on investments made pursuant to Section 2.1 shall be for the account of each of the Purchasers. On the Escrow Release Date, the Escrow Agent shall distribute to each of the Purchasers all interest then accrued for the account of each of the Purchasers pursuant to this Section 2.2 and not theretofore distributed hereunder. 3. Distributions from the Escrow. 3.1 Distributions. 3.1.1 Upon the satisfaction of the Escrow Release Condition (as hereinafter defined) and the Nasdaq Escrow Approval Condition (as hereinafter defined), the Purchasers shall execute and deliver to the Escrow Agent a Certificate directing the Escrow Agent to take the action specified in Section 3.1.2(a). Upon the satisfaction of the Escrow Release Condition, but not the Nasdaq Escrow Approval Condition, Purchasers shall execute and deliver to the Escrow Agent a Certificate directing the Escrow Agent to take the action specified in Section 3.1.2(b). If subsequent to the delivery of the Certificate referred to in the previous sentence and on or prior to March 31, 2002, the Nasdaq Escrow Approval Condition is satisfied, the GAP Purchasers shall execute and deliver to the Escrow Agent a Certificate directing the Escrow Agent to take the action specified in Section 3.1.2(c). 3 3.1.2 (a) Upon receipt by the Escrow Agent of a Certificate signed by the GAP Purchasers stating that the Escrow Release Condition and the Nasdaq Escrow Approval Condition have occurred, the Escrow Agent shall promptly, but in any case within 24 hours of receipt, (i) distribute to Seller the Purchasers' Deposit and (ii) deliver to the Purchasers the Seller's Deposit and the interest on the Escrow Fund payable pursuant to Section 2.2 of this Agreement. (b) Upon receipt by the Escrow Agent of a Certificate signed by the GAP Purchasers stating that the Escrow Release Condition has occurred but the Nasdaq Escrow Approval Condition has not occurred, the Escrow Agent shall promptly, but in any case within 24 hours, (i) distribute to the Seller the Purchasers' Deposit, less the Consideration Holdback Amount (as defined below) and (ii) deliver to the Purchasers the Seller's Deposit, less the Purchased Shares Holdback (as defined below) and the interest on the Escrow Fund payable pursuant to Section 2.2 of this Agreement. (c) Upon receipt by the Escrow Agent of a Certificate signed by the GAP Purchasers stating that the Nasdaq Escrow Approval Condition has occurred, the Escrow Agent shall promptly, but in any case within 24 hours, (i) distribute to the Seller the Consideration Holdback Amount and (ii) deliver to the GAP Purchasers the Purchased Shares Holdback. 3.1.3 For purposes of this Agreement, the "Escrow Release Condition" shall mean the entry on or before January 31, 2002 of a final order by District Court Judge William H. Orrick, not subject to further review, approving an executed, final, Stipulation and Agreement of Settlement in the litigation entitled In Re Critical Path Inc. Securities Litigation (the "Actions") and that (A) provides for the certification of the "Class" (as defined in paragraph 1 of the MOU), (B) contains terms and conditions for the payment of cash and warrants to purchase the Common Stock to the Class that do not differ from the amounts set forth in paragraph 2 of the MOU and (C) dismisses the Action with prejudice as set forth in paragraph 3 of the MOU and provides for a broad form general release for the Defendants and the other parties as provided in paragraph 3 of the MOU. 3.1.4 "Escrow Release Date" shall mean the date upon which the notice specified in the first sentence of Section 3.1.1 is delivered by the GAP Purchasers. 3.1.5 "Nasdaq Escrow Approval Condition" means the earlier to occur of (i) the date upon which the Company obtains written confirmation from Nasdaq that the approval of a majority of the Company's stockholders, present in person or proxy at a properly convened meeting of the Company's stockholders ("Stockholder Approval") to the issuance of the shares of Preferred Stock to the GAP Purchasers is not required under the applicable Nasdaq rules and regulations and (ii) the date upon which the Company consummates all action required by the Nasdaq and applicable California law to obtain Stockholder Approval for the issuance to the GAP Purchasers of the portion of the shares of Series D Preferred Stock that constitute the 4 amount of shares of Series D Preferred Stock (determined assuming conversion of all of the shares of Series D Preferred Stock) in excess of 19.9% of the outstanding shares of the Common Stock on the date hereof. 3.1.6 "Consideration Holdback Amount" shall mean a total of $19,220,960, consisting of $9,485,464 aggregate purchase price amount (and $24,265,101 aggregate face amount) of GAP Sub Notes and $9,735,496 of cash. 3.1.7 "Purchased Shares Holdback" shall mean a total of 1,397,888 shares of Preferred Stock. 3.1.8 On the earlier of (i) receipt of a joint notice executed by all of the Purchasers and Seller or (ii) January 31, 2002 (the "Escrow Termination Date"), the Escrow Agent shall return the Purchaser's Deposit to the Purchasers and the Seller's Deposit to Seller. 3.1.9 If the Nasdaq Escrow Approval Condition has not been satisfied by April 30, 2002, the Escrow Agent shall return the Consideration Holdback Amount to the GAP Purchasers, together with any remaining interest in the Escrow Account and return the Purchased Shares Holdback to the Seller. 3.2 Tax Reporting. Seller and each of the Purchasers shall provide the Escrow Agent with its Tax Identification Number (TIN) as assigned by the Internal Revenue Service. All interest or other income earned under this Escrow Agreement shall be allocated and paid as provided herein and reported by the recipient to the Internal Revenue Service as having been so allocated and paid. 4. Termination of this Escrow Agreement. This Escrow Agreement shall terminate upon the distribution or return of all of the Purchasers' Deposit, all of Seller's Deposit and all other sums and documents held by the Escrow Agent pursuant to this Escrow Agreement. 5. Duties of Escrow Agent. 5.1 Duties Limited. The Escrow Agent shall perform only the duties expressly set forth herein, and shall not have any liability under, or duty to inquire into, the terms and provisions of any other agreement, including but not limited to the Purchase Agreement, except as expressly set forth herein, in performing its duties hereunder. Except as to the due execution and delivery of this Escrow Agreement by a duly authorized officer, the Escrow Agent has no responsibility as to the validity of this Escrow Agreement or any document related thereto. 5.2 Reliance. The Escrow Agent may rely upon, and shall incur no liability for acting or refraining from acting upon, any written notice, instruction, request, consent, certificate, statement or other document furnished to it pursuant to this Escrow Agreement and believed by it to be genuine and to have been signed or presented by the proper party or parties, and the Escrow Agent shall be under no duty to inquire into or investigate the validity, accuracy or content of any such document. 5 5.3 Good Faith. In no event shall the Escrow Agent have any liability for any error of judgment or for any act done or omitted by it in good faith, or for any mistake of fact or law, or for anything which it may do or refrain from doing hereunder, except for its own gross negligence or willful misconduct arising out of or in connection with this Escrow Agreement. The Purchasers and Seller agree to indemnify the Escrow Agent for, and defend and hold it harmless against, any loss, liability or expense arising out of or in connection with its actions as Escrow Agent hereunder, including the reasonable costs and expenses incurred in defending any such claim of liability, except that none of the Purchasers or the Seller shall be liable for any loss, liability or expense incurred on account of the gross negligence or willful misconduct on the part of the Escrow Agent. The Escrow Agent may consult with counsel from time to time and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or omitted to be taken by the Escrow Agent hereunder or in good faith and in accordance with the opinion of such counsel. The reasonable fees and disbursements of such counsel shall be promptly paid one half by the Purchasers and one half by Seller pursuant to the provisions of Section 7 hereof. 5.4 Limited Notice. The Escrow Agent shall be deemed to have no notice of, or duties with respect to, any agreement or agreements (whether or not a copy thereof is delivered to the Escrow Agent), other than as expressly set forth herein. 5.5 Limited Actions. The Escrow Agent shall not take any action by reason of any notice or instruction given by any of the parties or by any other person, firm or corporation, except only (i) such notices or instructions as are herein specifically provided for and (ii) orders or process of any court entered or issued with competent jurisdiction. In the event that the Escrow Agent shall be uncertain as to its duties or rights hereunder, it shall be entitled to refrain from taking any action until it shall be directed otherwise in writing by each of the Purchasers and Seller or by an order of a court of competent jurisdiction. 5.6 Conflicts. 5.6.1 In the event that any of the terms and provisions of any other agreement between any of the parties conflict or are inconsistent with any of the terms and provisions of this Escrow Agreement, the terms and provisions of this Escrow Agreement shall govern and control in all respects the duties and liabilities of the Escrow Agent. 5.6.2 In the event that the Escrow Agent shall be uncertain as to its duties or rights hereunder or shall receive instructions, claims or demands from any party hereto which, in its opinion, conflict with any of the provisions of this Agreement, it shall be entitled to refrain from taking any action and its sole obligation shall be to keep safely all property held in escrow until it shall be directed otherwise in writing by all of the other parties hereto or by a final order or judgment of a court of competent jurisdiction. 6 6. Resignation; Successor Escrow Agent. 6.1 Resignation. The Escrow Agent may resign at any time by giving 30 days' prior written notice of such resignation to the Purchasers and Seller. On the 30th day following delivery of such notice, the Escrow Agent shall have no further obligation hereunder except to hold the Escrow Fund and any other amounts and documents held by it pursuant to this Escrow Agreement as depositary. After resignation, the Escrow Agent shall have no further obligation to invest amounts then in the Escrow Fund (absent written instructions with respect thereto executed by the Seller and the Purchasers) and shall not take any action until the Purchasers and Seller have jointly designated a successor escrow agent. If the Purchasers and Seller are unable to agree upon a successor escrow agent within 30 days of receipt of notice from the Escrow Agent, the Escrow Agent may designate its successor, and if the Escrow Agent declines to designate its successor, the Purchasers shall designate the successor escrow agent. The Escrow Agent shall promptly deliver the Escrow Fund and any other amounts and documents held by it pursuant to this Escrow Agreement to such successor escrow agent and shall thereafter have no further obligations hereunder. Upon receipt of the Escrow Fund and other amounts and documents, the successor escrow agent shall thereupon be bound by all of the provisions hereof. 6.2 Termination. The Purchasers and Seller acting jointly may terminate the appointment of the Escrow Agent hereunder upon notice specifying the date upon which such termination shall take effect. In the event of such termination, the Purchasers and Seller shall jointly appoint and designate in such termination notice a successor escrow agent and the Escrow Agent shall turn over to such successor escrow agent the Escrow Fund and any other amounts and documents held by it pursuant to this Escrow Agreement. Upon receipt of the Escrow Fund and other amounts and documents, the successor escrow agent shall thereupon be bound by all of the provisions hereof, and the Escrow Agent shall have no further obligations hereunder. 7. Fees and Expenses of Escrow Agent. The Purchasers and Seller shall each pay directly to the Escrow Agent one half of the Escrow Agent's reasonable fees for the Escrow Agent's services hereunder and all expenses, disbursements and advances (including reasonable attorneys' fees) incurred in carrying out the Escrow Agent's duties hereunder (the "Escrow Agent's Fees"). 8. Miscellaneous. 8.1 Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, sent by facsimile transmission, overnight delivery service or certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, telegraphed or sent by facsimile transmission, or by overnight delivery service, one day after the date of deposit to such overnight delivery service or, if mailed, three days after the date of deposit in the United States mail, as follows: 7 if to Seller: Critical Path, Inc. 532 Folsom Street San Francisco, CA 94105 Attention: Chief Financial Officer Telecopy: (415) 808-8898 with a copy to: Pillsbury Winthrop LLP P.O. Box 7880 San Francisco, CA 94105-7880 Attention: Gregg F. Vignos, Esq. Telecopy: (415) 983-1200 if to the GAP Purchasers: c/o General Atlantic Service Corporation 3 Pickwick Plaza Greenwich, CT 06830 Telecopy: (203) 622-8818 Attention: Matthew Nimetz with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Attention: Douglas A. Cifu, Esq. Telecopy: (212) 757-3990 if to Vectis CP Holdings, LLC: c/o Vectis Group 117 Greenwich Street San Francisco, CA 94111 Telecopy: (415) 352-5310 Attention: Matthew Hobart with a copy to: Kirkland & Ellis 153 East 53rd Street New York, NY 10022-4675 Telecopy: (212) 446-4900 Attention: Michael Movsovich, Esq. 8 if to Cenwell Limited: c/o 12th Floor Cheung Kong Center 2 Queen's Road Central Hong Kong Telecopy: 852-2485-2057 Attention: Mr. Edmond lp. if to Campina Enterprises Limited: c/o 22nd Floor Hutchison House 10 Harcourt Road Hong Kong Telecopy: 852-2128-1778 Attention: Company Secretary if to the Escrow Agent: Pillsbury Winthrop LLP 50 Fremont Street San Francisco, CA 94104 Attention: Gregg F. Vignos, Esq. Telecopy: 415-983-1200 Any party may by notice given in accordance with this Section 8.1 to the other parties designate another address for receipt of notices hereunder. In the event that the Escrow Agent, in its sole discretion, shall determine that an emergency exists, the Escrow Agent may use such other means of communication as the Escrow Agent deems advisable. If any notice is required to be given to both the Escrow Agent and another party, such notice shall be given in a manner that results in the same effective date for each such notice. 8.1.1 In the event funds transfer instructions are given (other than in writing at the time of execution of this Escrow Agreement), whether in writing, by telecopier or otherwise, the Escrow Agent is authorized to seek confirmation of such instructions by telephone call-back to the person or persons designated on Schedule II hereto, and the Escrow Agent may rely upon the confirmations of anyone purporting to be the person or persons so designated. The persons and telephone numbers for call-backs may be changed only in a writing actually received and acknowledged by the Escrow Agent. The parties to this Agreement acknowledge that such security procedure is commercially reasonable. 8.1.2 It is understood that the Escrow Agent and the beneficiary's bank in any funds transfer may rely solely upon any account numbers or 9 similar identifying number provided either of the other parties hereto to identify (i) the beneficiary, (ii) the beneficiary's bank, or (iii) an intermediary bank. The Escrow Agent may apply any of the escrowed funds for any payment order it executes using any such identifying number, even where its use may result in a person other than the beneficiary being paid, or transfer of funds to a bank other than the beneficiary's bank, or an intermediary bank designated. 8.2 Entire Agreement. This Escrow Agreement is entered into and delivered pursuant to the Purchase Agreement and sets forth the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto. 8.3 Governing Law. This Escrow Agreement shall be governed and construed in accordance with the laws of the State of New York without regard to its principles of conflicts of laws. 8.4 Jurisdiction; Venue. Each of the parties hereto by its execution hereof: 8.4.1 irrevocably submits to the jurisdiction of the state courts of the State of New York and to the jurisdiction of the United States District Court for the Southern District of New York, for the purpose of any suit, action or other proceeding arising out of or based on this Agreement or the subject matter hereof; and 8.4.2 waives to the extent not prohibited by applicable law, and agrees not to assert, by way of motion, as a defense or otherwise, in any such proceeding brought in any of the above-named courts, any claim that it is not subject personally to the jurisdiction of such courts, that its property is exempt or immune from attachment or execution, that any such proceeding brought in an inconvenient forum, that the venue of such proceeding is improper, or that this Agreement, or the subject matter hereof, may not be enforced in or by such court. The parties hereto hereby agree that any action brought under this Agreement shall be brought in one of the above-mentioned courts. The parties hereto hereby consent to service of process in any such proceeding in any manner permitted by the laws of the State of New York, and agree that service of process by registered or certified mail, return receipt requested, at its address specified in or pursuant to Section 8.5 is reasonably calculated to give actual notice. 8.5 Binding Effect. This Escrow Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, legal representatives, successors and assigns. 8.6 Waivers and Amendments. This Escrow Agreement may be amended, modified, superseded, cancelled, renewed or extended, and the terms or conditions hereof may be waived, only by a written instrument signed by the parties, or, in the case of a waiver, by the party waiving compliance. No delay on the part of any 10 party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any right, power or privilege hereunder, nor any single or partial exercise of any right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. 8.7 Counterparts. This Escrow Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 8.8 Further Assurances. Each of the parties shall execute such documents and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby. 8.9 Variations in Pronouns. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require. 8.10 Headings. The headings in this Escrow Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Escrow Agreement. 8.11 Conflict Waiver. Each party to this Escrow Agreement acknowledges that the Escrow Agent is counsel for the Seller and has in the past and will in the future perform legal services for Seller in matters related to and unrelated to this Escrow Agreement and the parties hereto hereby (i) acknowledge that they have had an opportunity to ask for information relevant to this disclosure; (ii) acknowledge that the Escrow Agent represented the Seller in the transaction contemplated by this Escrow Agreement and has not represented any Purchaser in connection with such transaction; and (iii) give its informed written consent to the representation of the Seller in connection with the Purchase Agreement; and the transactions contemplated thereby, including litigation arising thereunder. 11 IN WITNESS WHEREOF, the parties have caused this Escrow Agreement to be executed on the date first written above. GENERAL ATLANTIC PARTNERS 74, L.P. By: GENERAL ATLANTIC PARTNERS, LLC, its General Partner By: /s/ William Ford ---------------------------------------- Name: Title: A Managing Member Address for Notice to General Atlantic Partners 74, L.P., GAPp Coinvestment Partners II, L.P. and GapStar, LLC: c/o General Atlantic Service Corporation 3 Pickwick Plaza Greenwich, CT 06830 Attn: Matthew Nimetz Tel: 203-629-8600 Fax: 203-622-8818 With copies to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, NY 10019-60064 Attn: Douglas A. Cifu, Esq. Tel: 212-373-3426 Fax: 212-757-3990 GAP COINVESTMENT PARTNERS II, L.P. By: /s/ William Ford ---------------------------------------- Name: Title: A General Partner GAPSTAR, LLC By: GENERAL ATLANTIC PARTNERS, LLC, its Managing Member By: /s/ William Ford ---------------------------------------- Name: Title: A Managing Member 12 CENWELL LIMITED By: /s/ Cenwell ---------------------------------------- Name: Title: Address for Notice to Cenwell Limited: c/o 12th Floor Cheung Kong Center 2 Queen's Road Central Hong Kong Attn: Mr. Edmond lp. Fax: 852-2845-2057 CAMPINA ENTERPRISES LIMITED By: /s/ Campina ---------------------------------------- Name: Title: c/o 22nd Floor Hutchison House 10 Harcourt Road Hong Kong Attn: Company Secretary Fax: 852-2128-1778 VECTIS CP HOLDINGS, LLC, a Delaware limited liability company By: VECTIS GROUP LLC, its Managing Member By: /s/ Matthew Hobart ---------------------------------------- Name: Title: Address for Notice to Vectis CP Holdings, LLC: 117 Greenwich Street San Francisco, CA 94111 Attn: Matthew Hobart Fax: 415-352-5310 13 CRITICAL PATH, INC. By: /s/ Laureen DeBuono ---------------------------------------- Name: Title: Address for Notice to Critical Path, Inc.: 532 Folsom Street San Francisco, CA 94105 Attn: Chief Financial Officer Fax: (415) 808-8898 With copies to: Pillsbury Winthrop LLP P.O. Box 7880 San Francisco, CA 94120-7880 Attention: Gregg F. Vignos Tel: 415-983-1000 Fax: 415-983-1200 PILLSBURY WINTHROP LLP, Escrow Agent By: /s/ Gregg Vignos ---------------------------------------- Name: Title: Address for Notice to the Escrow Agent: Pillsbury Winthrop LLP P.O. Box 7880 San Francisco, CA 94120-7880 Attention: Gregg F. Vignos Tel: 415-983-1000 Fax: 415-983-1200 EX-10.4 10 f80193ex10-4.txt EXHIBIT 10.4 EXHIBIT 10.4 HILLS PLAZA I OFFICE LEASE SRI HILLS PLAZA VENTURE, LLC, a Delaware limited liability company, Landlord and CRITICAL PATH, INC., a California corporation, Tenant DATED AS OF: November 16, 2001 TABLE OF CONTENTS
Paragraph Page - --------- ---- 1. Premises ...................................................................1 2. Certain Basic Lease Terms ..................................................1 3. Term; Delivery of Possession of Premises ...................................2 4. Premises As-Is .............................................................2 5. Monthly Rent ...............................................................4 6. Letter of Credit ...........................................................5 7. Additional Rent: Increases in Operating Expenses and Tax Expenses ..........5 8. Use of Premises; Compliance with Law .......................................9 9. Alterations and Restoration ................................................10 10. Repair .....................................................................12 11. Abandonment ................................................................12 12. Liens ......................................................................13 13. Assignment and Subletting ..................................................13 14. Indemnification of Landlord ................................................16 15. Insurance ..................................................................17 16. Mutual Waiver of Subrogation Rights ........................................18 17. Utilities ..................................................................18 18. Personal Property and Other Taxes ..........................................20 19. Rules and Regulations ......................................................20 20. Surrender; Holding Over ....................................................20 21. Subordination and Attornment ...............................................21 22. Financing Condition ........................................................22 23. Entry by Landlord ..........................................................22 24. Insolvency or Bankruptcy ...................................................22 25. Default and Remedies .......................................................23 26. Damage or Destruction ......................................................25 27. Eminent Domain .............................................................25 28. Landlord's Liability; Sale of Building .....................................26 29. Estoppel Certificates ......................................................27 30. Right of Landlord to Perform ...............................................27 31. Late Charge ................................................................27 32. Attorneys' Fees; Waiver of Jury Trial ......................................27 33. Waiver .....................................................................28 34. Notices ....................................................................28 35. Deleted ....................................................................28 36. Defined Terms and Marginal Headings ........................................28 37. Time and Applicable Law ....................................................28 38. Successors .................................................................28 39. Entire Agreement; Modifications ............................................28 40. Light and Air ..............................................................29 41. Name of Building ...........................................................29 42. Severability ...............................................................29 43. Authority ..................................................................29 44. No Offer ...................................................................29 45. Real Estate Brokers ........................................................29 46. Consents and Approvals .....................................................29 47. Reserved Rights ............................................................29 48. Financial Statements .......................................................30 49. Signage ....................................................................30 50. Nondisclosure of Lease Terms ...............................................31 51. Hazardous Substance Disclosure .............................................31 52. Option to Renew ............................................................31 53. Parking ....................................................................32 54. First Rights Contingency ...................................................33 55. Canine Access ..............................................................33
EXHIBITS: A - Outline of Premises B - Rules and Regulations C - Form of Letter of Credit LEASE THIS LEASE is made as of the 16th day of November, 2001, between SRI HILLS PLAZA VENTURE, LLC, a Delaware limited liability company ("Landlord"), and CRITICAL PATH, INC., a California corporation ("Tenant"). 1. Premises. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, on the terms and conditions set forth herein, the space outlined on the attached Exhibit A (the "Premises"). The Premises are located on the floor(s) specified in Paragraph 2 below of the building (the "Building") presently known as Hills Plaza Phase I, located at 345 Spear Street, San Francisco, California. The Building is part of a combined office, retail and residential condominium project (the "Project") located on the entire block of Spear Street between Harrison Street and Folsom Street, in San Francisco, California. The Building, the parcel(s) of land (the "Land") on which the Building is located and any other improvements on the Land, the common areas of the Project and the underground garage for the Project are referred to herein as the "Real Property." Tenant's lease of the Premises shall include the right to use, in common with others and subject to the other provisions of this Lease, the public lobbies, entrances, stairs, elevators and other public portions of the Building. All of the windows and outside walls of the Premises and any space in the Premises used for shafts, stacks, pipes, conduits, ducts, electrical equipment or other utilities or Building facilities are reserved solely to Landlord and Landlord shall have rights of access through the Premises for the purpose of operating, maintaining and repairing the same. Notwithstanding the preceding sentence, during the term of this Lease Tenant shall have the non-exclusive license, in common with use by Landlord and other tenants of the Building, to use the vertical shafts and horizontal raceways and ducts within the Premises for purposes of installation therein of telephone, data and electrical wires and cables which are part of the Initial Alterations (as defined in Paragraph 4.a.) or Alterations (as defined in Paragraph 9) approved by Landlord pursuant to this Lease, provided that such license is more particularly set forth in an amendment to this Lease executed by Landlord and Tenant. 2. Certain Basic Lease Terms. As used herein, the following terms shall have the meaning specified below: a. Floors on which the Premises are located: Sixth (6th) floor. Landlord and Tenant hereby stipulate for all purposes of this Lease that the Premises contains a total of 63,467 rentable square feet. The parties further hereby stipulate that the portion of the Premises shown on Exhibit A attached hereto as "Parcel A" contains a total of 45,467 rentable square feet, and that the portion of the Premises shown on Exhibit A attached hereto as "Parcel B" contains a total of 18,000 rentable square feet. Notwithstanding the foregoing, upon Tenant's notice to Landlord given no later than five (5) days prior to the Parcel A Rent Commencement Date (as defined in Paragraph 2.c. below), Tenant may redesignate the portions of the Premises which comprise Parcel A and Parcel B, respectively, provided that such redesignated Parcel A shall in any event contain 45,467 rentable square feet, and such redesignated Parcel B shall in any event contain 18,000 rentable square feet. In the event of such redesignation, the parties shall promptly enter into an amendment to this Lease showing the so redesignated Parcels. b. Lease term: The term of this Lease shall commence on the date (the "Commencement Date") Landlord delivers the Premises to Tenant in the condition required by the first sentence of Paragraph 4.a below. The term of this Lease shall end on the date (the "Expiration Date") which is the last day of the one hundred twentieth (120th) full calendar month following the Parcel A Rent Commencement Date. The scheduled Commencement Date (the "Scheduled Commencement Date") is one (1) Business Day (as defined in Paragraph 17.a. below) following the First Rights Contingency Satisfaction Date (as defined in Paragraph 54 below) is satisfied. c. Monthly Rent: The respective sums set forth as follows:
Parcel A: Lease Years 1: $132,612.08 Lease Years 2, 3, 4 & 5: $143,978.83 Lease Years 6, 7 & 8: $147,767.75 Lease Years 9 & 10: $155,345.58
1
Parcel B: Lease Years 1: $52,500.00 Lease Years 2, 3, 4 & 5: $57,000.00 Lease Years 6, 7 & 8: $58,500.00 Lease Years 9 & 10: $61,500.00
Notwithstanding the foregoing, Tenant's obligation to pay Monthly Rent for Parcel A shall not commence until the Parcel A Rent Commencement Date, and Tenant's obligation to pay Monthly Rent for Parcel B shall not commence until the Parcel B Rent Commencement Date. Lease Year 1 shall commence on the Parcel A Rent Commencement Date and end on the last day of the twelfth (12th) full calendar month thereafter, and each subsequent Lease Year shall be the twelve (12) full calendar month period commencing on the day after the expiration of the prior Lease Year. The "Parcel A Rent Commencement Date" shall be the date that is the earlier of (i) the date that is one hundred twenty (120) days following the First Rights Contingency Satisfaction Date, or (ii) the date Tenant commences occupancy of Parcel A or any portion thereof for the conduct of business. The "Parcel B Rent Commencement Date" shall be the date that is the earlier of (i) January 1, 2003, or (ii) the date Tenant commences occupancy of Parcel B or any portion thereof for the conduct of business. d. Letter of Credit: $2,500,000. e. Tenant's Share: 16.38% (11.73% as to Parcel A and 4.65% as to Parcel B). f. Base Year: The calendar year 2002. Base Tax Year: The fiscal tax year ending June 30, 2003. g. Business of Tenant: Software and software related services. h. Real estate brokers: Shorenstein Management, Inc., and Insignia, Esq. 3. Term; Delivery of Possession of Premises. a. The term of this Lease shall commence as provided in Paragraph 2.b., and, unless sooner terminated pursuant to the terms hereof or at law, shall expire on the Expiration Date (defined in Paragraph 2.b.). Upon either party's request after the Commencement Date has occurred hereunder, the parties shall execute a written confirmation of the Commencement Date and the Expiration Date. b. Landlord shall act diligently and in good faith to deliver the Premises to Tenant on the Scheduled Commencement Date; provided, however that Landlord shall have no obligation to deliver the Premises to Tenant prior to Landlord's receipt of the Letter of Credit required of Tenant pursuant to Paragraph 6 below. If Landlord, for any reason whatsoever, cannot deliver possession of the Premises to Tenant on the Scheduled Commencement Date, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, nor shall the same amend Tenant's obligations under this Lease; provided, however, that in the event that Landlord does not deliver the Premises to Tenant on or prior to the date that is thirty (30) days after the Scheduled Commencement Date, as such date shall be extended for delays caused by Force Majeure or Tenant's failure to deliver the Letter of Credit (such date, as so extended, the "Trigger Date"), then Tenant shall have the right to terminate this Lease by notice to Landlord given, if at all, within ten (10) days after the Trigger Date. For purposes of this Lease, "Force Majeure" shall mean strikes, lock-outs, labor disputes, shortages of material or labor, fire, earthquake, flood or other casualty, acts of God, or any other cause (other than financial inability) beyond the reasonable control of Landlord, except that for purposes of this Paragraph 3.b. a holdover of the Premises by any tenant or other occupant shall not be considered Force Majeure. 4. Premises As-Is. a. Premises As-Is. Landlord shall deliver the Premises to Tenant, and Tenant shall accept the Premises from Landlord, broom clean, but otherwise in their "as is" state and condition as of the delivery date. Except as provided below in this Paragraph 4, Landlord shall have no obligation to make or pay for any improvements or renovations in or to the Premises or the Building or to otherwise prepare the Premises or the Building for Tenant's occupancy. The parties acknowledge that Tenant intends to make certain alterations and improvements (the "Initial Alterations") to the Premises after the delivery thereof to prepare the same for Tenant's initial occupancy. The construction of the Initial Alterations shall be governed by Paragraph 9 hereof. The general contractor selected by Tenant in accordance with Paragraph 9 hereof to construct the Initial Alterations is referred to hereinafter as "Contractor." Landlord agrees that Tenant shall have the right to utilize any furniture, equipment or improvements existing in the Premises as of the 2 Commencement Date, and if Tenant shall remove the same from the Premises in connection with the construction of the Initial Alterations or subsequently approved Alterations, any salvage value or proceeds attributable thereto shall belong solely to Tenant. b. Landlord's Allowance. Landlord shall contribute toward the cost of the design, construction and installation of the Initial Alterations (including, without limitation, Contractor's fee and, if Tenant does not select Turner-Shorenstein, L.P. ("TSLP") as Contractor, the Alteration Operations Fee provided for in Paragraph 9) an amount not to exceed Two Million Six Hundred Sixty-Five Thousand Six Hundred Fourteen Dollars ($2,665,614.00) (which equals $42.00 per rentable square foot of the Premises) ("Landlord's Allowance"); provided, however that not more than Two Hundred Fifty-Three Thousand Eight Hundred Sixty-Eight Dollars ($253,868.00) (which equals $4.00 per rentable square foot of the Premises) of Landlord's Allowance may be applied to Tenant's reasonable space planning, architectural and engineering costs for the design of the Initial Alterations. No portion of Landlord's Allowance may be applied to the cost of personal property, equipment, trade fixtures, moving expenses, furniture (including work stations and modular office furniture, regardless of the method of attachment to walls and/or floors), signage or, except as provided below, free rent. In the event that after completion of the Initial Alterations and payment of the total cost thereof (including the Alteration Operations Fee due pursuant to Paragraph 9.a. below in connection therewith), the entire amount of Landlord's Allowance has not been utilized, the remaining portion of Landlord's Allowance, but not to exceed Six Hundred Thirty-Four Thousand Six Hundred Seventy Dollars ($634,670.00) (which equals $10.00 per rentable square foot of the Premises), may be applied against the Monthly Rent first due from Tenant pursuant to this Lease. Tenant acknowledges that Landlord's Allowance is to be applied to the Initial Alterations (and the associated costs described above) covering the entire Premises (i.e. all of Parcel A and Parcel B). If Tenant does not improve the entire Premises, then, without limitation of any other rights or remedies of Landlord hereunder, Landlord's Contribution shall be adjusted on a prorata per rentable square foot basis to reflect the number of rentable square feet actually being improved. For purposes of the preceding sentence, space shall be conclusively deemed "improved" if it has finished ceilings, floors and walls, with Building systems furnished thereto (e.g. lighting, HVAC, sprinklers and other fire and life safety equipment), that reflects a continuity of design concept to the balance of the Premises, and is in a condition which would allow for legal occupancy of the space for general office purposes. Notwithstanding anything to the contrary in this Paragraph 4.b., Landlord's Allowance shall be available for disbursement pursuant to the terms hereof only for the first twelve (12) months after the Commencement Date. Accordingly, if any portion of Landlord's Allowance is not utilized prior to the date that is twelve (12) months from the Commencement Date, such unused portion shall be forfeited by Tenant. Landlord shall disburse Landlord's Allowance directly to Contractor, or subcontractors, or Tenant's design consultants as provided in clause (i) above, or to Tenant, as Landlord shall determine, in monthly installments. Each disbursement shall be conditioned upon Landlord's receipt of invoices to be furnished by Tenant covering work actually performed, construction in place and materials delivered to the site (as may be applicable). To the extent permitted by law, Landlord may withhold the amount of any and all retention percentages provided for in original contracts or subcontracts until the earlier of (i) the expiration of the applicable lien period or (ii) Landlord's receipt of a waiver of lien rights from the general contractor, subcontractors or suppliers whose invoices are applicable to the respective disbursement for, and/or on account of, the work or materials covered by such invoice. In the event the cost of the Initial Alterations exceeds Landlord's Allowance set forth above, Tenant shall pay all such excess costs (the "Excess Cost"), after the full amount of Landlord's Allowance has been disbursed hereunder (other than the retentions described above), directly to Contractor or the subcontractors or suppliers involved and shall furnish to Landlord copies of receipted invoices therefor and such waivers of lien rights as Landlord may reasonably require. If the Alteration Operations Fee is applicable, then, at the time Landlord makes any disbursement of Landlord's Allowance, Landlord shall retain from Landlord's Allowance, as a partial payment of the Alteration Operations Fee, a proportionate amount of the Alteration Operations Fee based upon Landlord's reasonable estimation of the amount required to be withheld from each disbursement in order to ensure that the entire Alteration Operations Fee is retained over the course of construction on a prorata basis. At such time as Landlord's Allowance has been entirely disbursed, Tenant shall, within fifteen (15) days of written demand, pay to Landlord the remainder, if any, of the Alteration Operations Fee not yet paid to Landlord. In addition to Landlord's Allowance, Landlord shall pay for the entire cost of the Landlord's Work described in Paragraph 4.c. below. c. Landlord's Work. Regardless of whether Tenant selects TSLP or another general contractor as Contractor, Landlord shall cause TSLP to perform the following work ("Landlord's Work") at Landlord's cost: i. Perform all work necessary within the finished walls of the existing core area restrooms on the sixth (6th) floor of the Building to cause such restrooms to comply with The Americans With Disabilities Act, to the extent such work is required to cause such restrooms to comply, as of Landlord's Work 3 Completion Date (as defined below), with the provisions of the ADA that are applicable to such restrooms as of such date. ii. Demolish existing stairs connecting the fifth (5th) and sixth (6th) floors of the Building (including rails and perimeter railing). Furnish and install new steel beams and/or reinforce existing beams around stair opening. Furnish and install new metal decking at opening. Pour lightweight concrete on top of metal decking to finished floor. Fireproof deck and beams as required. iii. Perform all work necessary (if any) to cause the common areas of the Building that are reasonably anticipated to be in Tenant's path of travel to the Premises to comply with the ADA, to the extent such work is required to cause such common areas to comply, as of Landlord's Work Completion Date, with the provisions of the ADA that are applicable to such common areas as of such date. In no event shall Landlord's Work include any work required by reason of or triggered by (x) the Initial Alterations or any other Alterations of Tenant (except as required pursuant to Paragraph 8.b. below), (y) Tenant's particular use of the Premises (as opposed to Tenant's use of the Premises for their permitted purposes in a normal and customary manner), or (z) Tenant's particular employees or employment practices or the canine access rights granted to Tenant pursuant to Paragraph 55 below. Landlord's Work may be performed during the period of construction of the Initial Alterations, and shall in any event be substantially completed on or prior to the date ("Landlord's Work Completion Date") that is the later of February 15, 2002 or the Rent Commencement Date, subject to extension for delays caused by Force Majeure or by Tenant (including Tenant's construction of the Initial Alterations). If Tenant does not select TSLP as Contractor, Landlord and Tenant shall cause their respective contractors to cooperate with each other in the coordination of the construction of Landlord's Work and the Initial Alterations. Landlord's Work shall be "substantially completed" for purposes of the foregoing so long as any remaining portions of Landlord's Work are so-called "punch list" items which do not preclude issuance of a certificate of occupancy (or other permit for legal occupancy) for the Premises which would have otherwise been issued. Landlord shall promptly complete such punch list items. 5. Monthly Rent. a. Beginning on the Parcel A Rent Commencement Date, and thereafter on or before the first day of each calendar month during the term hereof, Tenant shall pay to Landlord, as monthly rent for Parcel A, the Monthly Rent specified in Paragraph 2 above. Beginning on the Parcel B Rent Commencement Date, and thereafter on or before the first day of each calendar month during the term hereof, Tenant shall pay to Landlord, as monthly rent for Parcel B, the Monthly Rent specified in Paragraph 2 above. If the Parcel A Rent Commencement Date or the Parcel B Rent Commencement Date is a day other than the first day of a calendar month, or if the term of this Lease terminates on a day other than the last day of a calendar month, then the Monthly Rent payable for such partial month shall be appropriately prorated on the basis of a thirty (30)-day month. Monthly Rent and the Additional Rent specified in Paragraph 7 shall be paid by Tenant to Landlord, in advance, without deduction, offset, prior notice or demand (except as expressly set forth in this Lease), in immediately available funds of lawful money of the United States of America, or by good check as described below, at the office of Shorenstein Company, L.P., at 555 California Street, 49th floor, San Francisco, California 94104, or to such other person or at such other place as Landlord may from time to time designate in writing. Payments made by check must be drawn either on a California financial institution or on a financial institution that is a member of the federal reserve system. Notwithstanding the foregoing, Tenant shall pay to Landlord within one (1) Business Day after the First Rights Contingency Satisfaction Date, the Monthly Rent due for Parcel A for the first full calendar month after the Parcel A Rent Commencement Date, and such payment shall be applied against the Monthly Rent first due under this Lease. b. All amounts payable by Tenant to Landlord under this Lease, or otherwise payable in connection with Tenant's occupancy of the Premises, in addition to the Monthly Rent hereunder and Additional Rent under Paragraph 7, shall constitute rent owed by Tenant to Landlord hereunder. c. Any rent not paid by Tenant to Landlord within five (5) days after the date due shall bear interest from the date due to the date of payment by Tenant at an annual rate of interest (the "Interest Rate") equal to the lesser of (i) the maximum annual interest rate allowed by law on such due date for business loans (not primarily for personal, family or household purposes) not exempt from the usury law, or (ii) a rate equal to the sum of four (4) percentage points over the six-month United States Treasury bill rate (the "Treasury Rate") in effect from time to time during such delinquency (or if there is no such publicly announced rate, the rate quoted by the San Francisco Main Office of Bank of America, N.A., or any successor bank thereto, in pricing ninety (90)-day commercial loans to substantial commercial borrowers). Notwithstanding the foregoing, Landlord shall give Tenant notice of non-payment of rent when due and five (5) days after delivery of such notice to cure such non-payment once in each calendar year before assessing interest in such calendar year pursuant to this Paragraph 5.c. Failure by Tenant to pay rent when due, including any interest accrued under this subparagraph, after the expiration of any applicable notice and cure 4 period provided in Paragraph 25.a. below, shall constitute an Event of Default (as defined in Paragraph 25 below) giving rise to all the remedies afforded Landlord under this Lease and at law for nonpayment of rent. d. No security or guaranty which may now or hereafter be furnished to Landlord for the payment of rent due hereunder or for the performance by Tenant of the other terms of this Lease shall in any way be a bar or defense to any of Landlord's remedies under this Lease or at law. 6. Letter of Credit. a. As security for the performance by Tenant of Tenant's obligations hereunder, Tenant shall cause to be delivered to Landlord within one (1) Business Day after the First Rights Contingency Satisfaction Date, an original irrevocable standby letter of credit (the "Letter of Credit") in the amount of Two Million Five Hundred Thousand Dollars ($2,500,000.00), naming Landlord as beneficiary, which Landlord may draw upon to cure any Event of Default under this Lease (or any default under this Lease where there exist circumstances under which Landlord is enjoined or otherwise prevented by operation of law from giving to Tenant a written notice which would be necessary for such failure of performance to constitute an Event of Default under this Lease), or to compensate Landlord for any damage Landlord incurs as a result of Tenant's failure to perform any of its obligations hereunder; provided, however, that neither the Letter of Credit nor any proceeds therefrom shall be deemed an advance rent deposit or an advance payment of any other kind, or a measure or limitation of Landlord's damages or constitute a bar or defense to any of the Landlord's other remedies under this Lease or at law upon Tenant's default. The Letter of Credit shall be issued by a major national commercial bank reasonably acceptable to Landlord, with a service and claim point for the Letter of Credit in San Francisco, California, have an expiration date not earlier than sixty (60) days after the Expiration Date (or, in the alternative, have a term of not less than one (1) year and be automatically renewable for an additional one (1) year period unless notice of non-renewal is given by the issuer to Landlord not later than sixty (60) days prior to the expiration thereof) and shall provide that Landlord may make partial and multiple draws thereunder, up to the face amount thereof. The Letter of Credit shall be in the form attached hereto as Exhibit C (as modified to the extent required to comply with any changes after the date hereof to laws applicable thereto), and shall otherwise be in form and content satisfactory to Landlord. If the Letter of Credit has an expiration date earlier than sixtieth (60th) day after the Expiration Date, then throughout the term hereof (including any renewal or extension of the term) Tenant shall provide evidence of renewal of the Letter of Credit to Landlord at least forty-five (45) days prior to the date the Letter of Credit expires. If Landlord draws on the Letter of Credit pursuant to the terms hereof, Tenant shall immediately replenish the Letter of Credit or provide Landlord with an additional letter of credit conforming to the requirement of this paragraph so that the amount available to Landlord from the Letter(s) of Credit provided hereunder is the amount specified above. Tenant's failure to deliver any replacement, additional or extension of the Letter of Credit, or evidence of renewal of the Letter of Credit, within the time specified under this Lease shall entitle Landlord to draw upon the Letter of Credit then in effect. If Landlord liquidates the Letter of Credit as provided in the preceding sentence, Landlord shall hold the funds received from the Letter of Credit as security for Tenant's performance under this Lease, and Landlord shall be deemed to hold a perfected, first priority security interest in such funds (and Tenant does hereby appoint Landlord its attorney-in-fact for purposes of filing such financing statements or other instruments as Landlord shall deem advisable to further evidence and/or perfect such security interest). Landlord shall not be required to segregate such security deposit from its other funds and no interest shall accrue or be payable to Tenant with respect thereto. No holder of a Superior Interest (as defined in Paragraph 21 below), nor any purchaser at any judicial or private foreclosure sale of the Real Property or any portion thereof, shall be responsible to Tenant for such security deposit unless and only to the extent such holder or purchaser shall have actually received the same. If Landlord transfers such security deposit to the grantee or transferee of Landlord's interest in the Real Property, Landlord shall be released from any further responsibility or liability for such security. If Tenant is not in default at the expiration or termination of this Lease, Landlord shall return to Tenant the Letter of Credit or the balance of the security deposit then held by Landlord, as applicable, within sixty (60) days thereafter; provided, however, that in no event shall any such return be construed as an admission by Landlord that Tenant has performed all of its covenants and obligations hereunder. b. Notwithstanding the foregoing, on the commencement of Lease Year 6, and on the commencement of each Lease Year thereafter (each such anniversary, a "Reduction Date"), so long as no Event of Default (as defined in Paragraph 25 below) by Tenant under this Lease has occurred and is continuing as of such Reduction Date, and so long as no breach or default by Tenant under this Lease which, with notice or the passage of time or both could ripen into an Event of Default (an "Unmatured Default"), shall be continuing as of the Reduction Date, the amount required under the Letter of Credit shall be reduced by Five Hundred Thousand Dollars ($500,000.00). Accordingly, if all Reductions are made as so scheduled, during Lease Year 10 the Letter of Credit will be reduced to zero and will not be required. If Tenant is entitled to such reduction, Tenant may replace or amend the then existing Letter of Credit to reflect such reduced amount on or after the applicable Reduction Date. If Landlord disallows any such reduction by reason of an Unmatured Default, and if Tenant cures the Unmatured Default prior to the same becoming an Event of Default, the date that is five (5) days after the date such Unmatured Default is cured shall become the new Reduction Date for purposes of making the reduction which was previously disallowed. 7. Additional Rent: Increases in Operating Expenses and Tax Expenses. 5 a. Operating Expenses. Tenant shall pay to Landlord, at the times hereinafter set forth, Tenant's Share, as specified in Paragraph 2.e. above, of any increase in the Operating Expenses (as defined below) incurred by Landlord in each calendar year subsequent to the Base Year specified in Paragraph 2.f. above, over the Operating Expenses incurred by Landlord during the Base Year. The amounts payable under this Paragraph 7.a. and Paragraph 7.b. below are termed "Additional Rent" herein. The term "Operating Expenses" shall mean the total costs and expenses incurred by Landlord in connection with the management, operation, maintenance, repair and ownership of the Real Property, including, without limitation, the following costs: (1) salaries, wages, bonuses and other compensation (including hospitalization, medical, surgical, retirement plan, pension plan, union dues, life insurance, including group life insurance, welfare and other fringe benefits, and vacation, holidays and other paid absence benefits) relating to employees of Landlord or its agents engaged in the operation, repair, or maintenance of the Real Property; (2) payroll, social security, workers' compensation, unemployment and similar taxes with respect to such employees of Landlord or its agents, and the cost of providing disability or other benefits imposed by law or otherwise, with respect to such employees; (3) the cost of uniforms (including the cleaning, replacement and pressing thereof) provided to such employees; (4) premiums and other charges incurred by Landlord with respect to fire, other casualty, rent and liability insurance, any other insurance as is deemed necessary or advisable in the reasonable judgment of Landlord, or any insurance required by the holder of any Superior Interest (as defined in Paragraph 21 below), and, after the Base Year, costs of repairing an insured casualty to the extent of the deductible amount under the applicable insurance policy; provided that, if Landlord does not carry earthquake insurance during the Base Year, but obtains earthquake insurance subsequent to the Base Year, then the initial annual premium for the earthquake insurance shall not be included in Operating Expenses, and Operating Expenses in any given year subsequent to the first calendar year in which Landlord obtains earthquake insurance shall include only the increases in the annual premium over the annual premium paid for the earthquake insurance for the first calendar year after the Base Year in which Landlord carries the same; (5) water charges and sewer rents or fees; (6) license, permit and inspection fees; (7) sales, use and excise taxes on goods and services purchased by Landlord in connection with the operation, maintenance or repair of the Real Property and Building systems and equipment; (8) telephone, telegraph, postage, stationery supplies and other expenses incurred in connection with the operation, maintenance, or repair of the Real Property; (9) management fees and expenses; (10) costs of repairs to and maintenance of the Real Property, including building systems and appurtenances thereto and normal repair and replacement of worn-out equipment, facilities and installations, but excluding the replacement of major building systems (except to the extent provided in (16) and (17) below); (11) fees and expenses for janitorial, window cleaning, guard, extermination, water treatment, rubbish removal, plumbing and other services and inspection or service contracts for elevator, electrical, mechanical and other building equipment and systems or as may otherwise be necessary or proper for the operation, repair or maintenance of the Real Property; (12) costs of supplies, tools, materials, and equipment used in connection with the operation, maintenance or repair of the Real Property; (13) accounting, legal and other professional fees and expenses; (14) fees and expenses for painting the exterior or the public or common areas of the Building and the cost of maintaining the sidewalks, landscaping and other common areas of the Real Property; (15) costs and expenses for electricity, chilled water, air conditioning, water for heating, gas, fuel, steam, heat, lights, power and other energy related utilities required in connection with the operation, maintenance and repair of the Real Property; (16) the cost of any capital improvements made by Landlord to the Real Property or capital assets acquired by Landlord after the Base Year in order to comply with any local, state or federal law, ordinance, rule, regulation, code or order of any governmental entity or insurance requirement (collectively, "Legal Requirement") with which the Real Property was not required to comply during the Base Year, or to comply with any amendment or other change to the enactment or interpretation of any Legal Requirement from its enactment or interpretation during the Base Year; (17) the cost of any capital improvements made by Landlord to the Building or capital assets acquired by Landlord after the Base Year for the protection of the health and safety of the occupants of the Real Property or that are designed to reduce other Operating Expenses; (18) the cost of furniture, draperies, carpeting, landscaping and other customary and ordinary items of personal property (excluding paintings, sculptures and other works of art) provided by Landlord for use in common areas of the Building or in the Building office (to the extent that such Building office is dedicated to the operation and management of the Real Property); (19) any expenses and costs resulting from substitution of work, labor, material or services in lieu of any of the above itemizations, or for any additional work, labor, services or material resulting from compliance with any Legal Requirement applicable to the Real Property or any parts thereof (excluding costs of capital improvements made in order to comply with Legal Requirements with which the Real Property was required to comply during the Base Year); (20) Building office rent or rental value, to the extent that such Building office is dedicated to the operation and management of the Real Property; and (21) the Building's prorata share of the Project costs under the Master Declaration (as described in Paragraph 21 below). Notwithstanding anything to the contrary herein, as to the common areas of the Project and the garage of the Project, Operating Expenses shall include only the Building's prorata share (as reasonably determined by Landlord in its good faith business judgment) of the above described costs and expenses for such common areas and garage of the Project. Further, Landlord and Tenant acknowledge that certain of the building systems serving the Building also serve the other office building in the Project and that certain of the improvements, alterations or repairs made by Landlord to the Building or the Land that are properly included in Operating Expenses pursuant to the above may be a part of improvements, alterations or repairs that also benefit the other office building in the Project. In light of the foregoing, Landlord shall determine, in its reasonable and good faith business judgment, the proper allocation 6 of any such item of Operating Expenses between the Building and any other building that benefits from the Operating Expense so that Tenant shall be responsible only for Operating Expenses to the extent they are attributable or allocable to the Building and the Land. Landlord and Tenant also acknowledge that certain of the items of Operating Expenses referenced above are applicable only to the office space within the Building and certain of such items are applicable to both the office space and the retail space in the Building. Landlord shall properly allocate the cost of such items to the office space and to the retail space in accordance with standard accounting principles. With respect to the costs of items included in Operating Expenses under (16) and (17), such costs shall be amortized over a reasonable period, as determined by Landlord, together with interest on the unamortized balance at a rate per annum equal to three (3) percentage points over the Treasury Rate charged at the time such item is constructed or acquired, or at such higher rate as may have been paid by Landlord on funds borrowed for the purpose of constructing or acquiring such item, but in either case not more than the maximum rate permitted by law at the time such item is constructed or acquired. Operating Expenses shall not include the following: (i) depreciation on the Building or equipment or systems therein; (ii) debt service; (iii) rental under any ground or underlying lease; (iv) interest (except as expressly provided in this Paragraph 7.a.); (v) Tax Expenses (as defined in Paragraph 7.b. below); (vi) attorneys' and other professional fees and expenses incurred in connection with lease negotiations with prospective or existing Building tenants or the enforcement of leases affecting the Real Property; (vii) the cost (including any amortization thereof) of any improvements or alterations which would be properly classified as capital expenditures according to generally accepted property management practices (except to the extent expressly included in Operating Expenses pursuant to this Paragraph 7.a.); (viii) the cost of decorating, improving for tenant occupancy, painting or redecorating portions of the Building to be demised to tenants; (ix) wages, salaries, benefits or other similar compensation paid to executive employees of Landlord or Landlord's agents above the rank of Building manager; (x) advertising and promotional expenditures, and costs of signage identifying any tenant of the Building (other than Building directory or floor directory signage); (xi) real estate broker's or other leasing commissions; (xii) penalties or other costs incurred due to a violation by Landlord, as determined by written admission, stipulation, final judgment or arbitration award, of any of the terms and conditions of this Lease or any other lease relating to the Building except to the extent such costs reflect costs that would have been incurred by Landlord absent such violation; (xiii) subject to the provisions of item (4) above, repairs and other work occasioned by fire, windstorm or other casualty, to the extent Landlord is reimbursed by insurance proceeds, and other work paid from insurance or condemnation proceeds; (xiv) costs, penalties or fines arising from Landlord's violation of any applicable governmental rule or authority except to the extent such costs reflect costs that would have been incurred by Landlord absent such violation; (xv) overhead and profit increments (including as part of management fees) paid to subsidiaries or affiliates of Landlord for management or other services on or to the Building or for supplies or other materials to the extent that the cost of the services, supplies or materials materially exceed the amounts normally payable for similar goods and services under similar circumstances (taking into account the market factors in effect on the date any relevant contracts were negotiated) in comparable buildings in the San Francisco financial district; (xvi) charitable and political contributions; (xviii) rentals and other related expenses incurred in leasing air conditioning systems, elevators or other equipment ordinarily considered to be of a capital nature (except equipment that is not affixed to the Building and is used in providing janitorial services, and except to the extent such costs would otherwise be includable pursuant to items (16) and (17) as set forth in the immediately preceding paragraph); (xix) costs directly and solely attributable to the garage in the Building, including, without limitation, payroll for clerks, attendants, book-keeping, parking, insurance premiums, parking management fees, parking tickets, janitorial services, striping and painting of surfaces (provided, however, that the cost of providing utilities to the garage shall be included in Operating Expenses); (xx) any expense for which Landlord is actually directly reimbursed by a tenant or other party (other than through a provision similar to the first paragraph of this Paragraph 7.a.), including, without limitation, payments for Excess Services; (xxii) the cost of services made available at no additional charge to any tenant in the Building but not to Tenant; or (xxiii) the cost of any Hazardous Materials (as defined in Paragraph 8.c. below) abatement or removal activities where such activities are not necessitated by the Handling (as defined in Paragraph 8.c. below) of Hazardous Materials by Tenant or any other Tenant Party, provided, however, Operating Expenses may include the costs attributable to those actions taken by Landlord in connection with the ordinary operation and maintenance of the Building, including costs incurred in removing limited amounts of Hazardous Materials from the Building when such removal is directly related to such ordinary maintenance and operation. b. Tax Expenses. Tenant shall pay to Landlord as Additional Rent under this Lease, at the times hereinafter set forth, Tenant's Share, as specified in Paragraph 2.e. above, of any increase in Tax Expenses (as defined below) incurred by Landlord in each calendar year, over Tax Expenses incurred by Landlord during the Base Tax Year. Notwithstanding the foregoing, if any reassessment, reduction or recalculation of any item included in Tax Expenses during the term results in a reduction of Tax Expenses, then for purposes of calculating Tenant's Share of increases in Tax Expenses from and after the calendar year in which such adjustment occurs, Tax Expenses for the Base Tax Year shall be adjusted to reflect such reduction. The term "Tax Expenses" shall mean all taxes, assessments (whether general or special), excises, transit charges, housing fund assessments or other housing charges, improvement districts, levies or fees, ordinary or extraordinary, unforeseen as well as foreseen, of any kind, which are assessed, levied, charged, 7 confirmed or imposed on the Real Property, on Landlord with respect to the Real Property, on the act of entering into leases of space in the Real Property, on the use or occupancy of the Real Property or any part thereof, with respect to services or utilities consumed in the use, occupancy or operation of the Real Property, on any improvements, fixtures and equipment and other personal property of Landlord located in the Real Property and used in connection with the operation of the Real Property, or on or measured by the rent payable under this Lease or in connection with the business of renting space in the Real Property, including, without limitation, any gross income tax or excise tax levied with respect to the receipt of such rent, by the United States of America, the State of California, the City and County of San Francisco, any political subdivision, public corporation, district or other political or public entity or public authority, and shall also include any other tax, fee or other excise, however described, which may be levied or assessed in lieu of, as a substitute (in whole or in part) for, or as an addition to, any other Tax Expense. Tax Expenses shall include reasonable attorneys' fees, costs and disbursements incurred in connection with proceedings to contest, determine or reduce Tax Expenses. If it shall not be lawful for Tenant to reimburse Landlord for any increase in Tax Expenses as defined herein, the Monthly Rent payable to Landlord prior to the imposition of such increases in Tax Expenses shall be increased to net Landlord the same net Monthly Rent after imposition of such increases in Tax Expenses as would have been received by Landlord prior to the imposition of such increases in Tax Expenses. Tax Expenses shall not include income, franchise, transfer, inheritance or capital stock taxes, unless, due to a change in the method of taxation, any of such taxes is levied or assessed against Landlord in lieu of, as a substitute (in whole or in part) for, or as an addition to, any other charge which would otherwise constitute a Tax Expense; nor shall Tax Expenses include interest, fines or other penalties imposed by reason of Landlord's failure to pay Tax Expenses prior to delinquency, unless such failure occurs during any calendar year in which Tenant has failed to timely pay any Monthly Rent, Additional Rent or other amounts payable by Tenant to Landlord pursuant to this Lease. Landlord and Tenant acknowledge and agree that certain other buildings exist or encroach upon the Land, that Tenant shall have no liability as to any item of Tax Expense attributable or allocable to, or assessed against, buildings other than the Building and that Landlord's good faith determination of the proper allocation of any item of Tax Expense allocable to buildings other than the Building shall be binding on Landlord and Tenant. c. Adjustment for Occupancy Factor. Notwithstanding any other provision herein to the contrary, in the event the Building is not fully occupied during the Base Year or any calendar year during the term after the Base Year, an adjustment shall be made by Landlord in computing Operating Expenses for the Base Year and such calendar year so that those Operating Expenses which vary based on levels of occupancy shall be computed for such year as though the Building had been fully occupied during such year. In addition, if any particular work or service includable in Operating Expenses is not furnished to a tenant who has undertaken to perform such work or service itself, Operating Expenses shall be deemed to be increased by an amount equal to the additional Operating Expenses which would have been incurred if Landlord had furnished such work or service to such tenant. The parties agree that statements in this Lease to the effect that Landlord is to perform certain of its obligations hereunder at its own or sole cost and expense shall not be interpreted as excluding any cost from Operating Expenses or Tax Expenses if such cost is an Operating Expense or Tax Expense pursuant to the terms of this Lease. d. Intention Regarding Expense Pass-Through. It is the intention of Landlord and Tenant that the Monthly Rent paid to Landlord throughout the term of this Lease shall be absolutely net of all increases, respectively, in Tax Expenses and Operating Expenses over, respectively, Tax Expenses for the Base Tax Year and Operating Expenses for the Base Year, and the foregoing provisions of this Paragraph 7 are intended to so provide. e. Notice and Payment. On or before the first day of each calendar year during the term hereof subsequent to the Base Year, or as soon as practicable thereafter, Landlord shall give to Tenant notice of Landlord's estimate of the Additional Rent, if any, payable by Tenant pursuant to Paragraphs 7.a. and 7.b. for such calendar year subsequent to the Base Year. On or before the first day of each month during each such subsequent calendar year, Tenant shall pay to Landlord one-twelfth (1/12th) of the estimated Additional Rent; provided, however, that if Landlord's notice is not given prior to the first day of any calendar year Tenant shall continue to pay Additional Rent on the basis of the prior year's estimate until the month after Landlord's notice is given. If at any time it appears to Landlord that the Additional Rent payable under Paragraphs 7.a. and/or 7.b. will vary from Landlord's estimate by more than five percent (5%), Landlord may, by written notice to Tenant, revise its estimate for such year, and subsequent payments by Tenant for such year shall be based upon the revised estimate. On the first monthly payment date after any new estimate is delivered to Tenant, Tenant shall also pay any accrued cost increases, based on such new estimate. f. Annual Accounting. Landlord shall maintain true, correct and complete records of the Operating Expenses and Tax Expenses in accordance with sound accounting practices. Within ninety (90) days after the close of each calendar year subsequent to the Base Year, or as soon after such ninety (90) day period as practicable, but in any event within one hundred eighty (180) days after the close of each such calendar year, Landlord shall deliver to Tenant a statement of the Additional Rent payable under Paragraphs 7.a. and 7.b. for such year. The statement shall be based on the results of an audit of the operations of the Building prepared for the applicable year by a nationally recognized certified public accounting firm selected 8 by Landlord. Upon Tenant's request made no later than ninety (90) days after receipt of Landlord's annual statement, Landlord shall promptly deliver to Tenant a copy of the auditor's statement on which Landlord's annual statement is based, and such other information regarding the annual statement as may be reasonably requested by Tenant to ascertain Landlord's compliance with this Paragraph 7. At Landlord's option, Landlord may deliver such auditor's statement to Tenant together with Landlord's annual statement, or otherwise deliver such auditor's statement to Tenant prior to Tenant's request therefor. Landlord's annual statement shall be final and binding upon Landlord and Tenant (except for revisions to take into account any subsequent reassessment affecting the calculation of Tax Expenses included in such statement, which revisions shall be made if at all, within one hundred eighty (180) days after the close of the calendar year in which Landlord receives the revised tax bill) unless, within sixty (60) days after Tenant's receipt thereof or Tenant's receipt of any such revisions due to a reassessment or Tenant's receipt of any correction thereof by Landlord pursuant to the following provisions, as applicable), Tenant shall contest or Landlord shall correct any item therein by giving written notice to the other, specifying each item contested or corrected, respectively, and the reason therefor. If the annual statement shows that Tenant's payments of Additional Rent for such calendar year pursuant to Paragraph 7.e. hereof exceeded Tenant's obligations for the calendar year, Landlord shall at its option either (1) credit the excess to the next succeeding installments of rent or (2) pay the excess to Tenant within thirty (30) days after delivery of such statement. If the annual statement shows that Tenant's payments of Additional Rent for such calendar year pursuant to Paragraph 7.e. hereof were less than Tenant's obligation for the calendar year, Tenant shall pay the deficiency to Landlord within thirty (30) days after delivery of such statement. g. Proration for Partial Lease Year. If this Lease terminates on a day other than the last day of a calendar year, the Additional Rent payable by Tenant pursuant to this Paragraph 7 applicable to the calendar year in which this Lease terminates shall be prorated on the basis that the number of days from the commencement of such calendar year to and including such termination date bears to three hundred sixty-five (365). 8. Use of Premises; Compliance with Law. a. Use of Premises. The Premises shall be used solely for general office purposes for the business of Tenant as described in Paragraph 2.g. above (which includes a server room) or for any other general office use consistent with the operation of the Building as a first-class high-rise office building in the San Francisco financial district, and for no other use or purpose. Landlord represents and warrants to Tenant that the Building is zoned and otherwise entitled so as to permit the Premises to be used for general office purposes, provided, however, that the foregoing shall not relieve Tenant from responsibility for obtaining a building permit and other applicable permits in connection with Tenant's construction of the Initial Alterations or any subsequent Alterations. Tenant shall not do or suffer or permit anything to be done in or about the Premises or the Real Property, nor bring or keep anything therein, which would in any way subject Landlord, Landlord's agents or the holder of any Superior Interest (as defined in Paragraph 21) to any liability, increase the premium rate of or affect any fire, casualty, liability, rent or other insurance relating to the Real Property or any of the contents of the Building, or cause a cancellation of, or give rise to any defense by the insurer to any claim under, or conflict with, any policies for such insurance. If any act or omission of Tenant results in any such increase in premium rates, Tenant shall pay to Landlord upon demand the amount of such increase. Tenant shall not do or suffer or permit anything to be done in or about the Premises or the Real Property which will in any way unreasonably obstruct or interfere with the rights of other tenants or occupants of the Building or injure or annoy them, or use or suffer or permit the Premises to be used for any immoral or unlawful purpose, nor shall Tenant cause, maintain, suffer or permit any nuisance in, on or about the Premises or the Real Property. Without limiting the foregoing, no loudspeakers or other similar device which can be heard outside the Premises shall, without the prior written approval of Landlord, be used in or about the Premises. Tenant shall not commit or suffer to be committed any waste in, to or about the Premises. Tenant agrees not to employ any person, entity or contractor for any work in the Premises (including moving Tenant's equipment and furnishings in, out or around the Premises) whose presence is likely to give rise to a labor or other disturbance in the Building and, if necessary to prevent such a disturbance in a particular situation, Landlord may require Tenant to employ union labor for the work. Landlord will advise Tenant, upon request, as to whether a given person, entity or contractor, in Landlord's reasonable judgment, is likely to cause a labor or other disturbance. b. Compliance with Law. Tenant shall not do or permit anything to be done in or about the Premises which will in any way conflict with any Legal Requirement (as defined in Paragraph 7.a.(16) above) now in force or which may hereafter be enacted. Tenant, at its sole cost and expense, shall promptly comply with all such present and future Legal Requirements relating to the condition, use or occupancy of the Premises, and shall perform all work to the Premises or other portions of the Real Property required to effect such compliance (or, as to work to the Base Building (as defined below) or outside of the Premises, Landlord, at Landlord's election, may perform such work at Tenant's cost). Notwithstanding the foregoing, however, (I) Tenant shall not be required to perform any changes to the Base Building unless such changes are related to or affected or triggered by (i) Tenant's Alterations (as defined in Paragraph 9 below), other than 9 the Initial Alterations (which are addressed in clause (II) below), (ii) Tenant's particular use of the Premises (as opposed to Tenant's use of the Premises for general office purposes in a normal and customary manner), or (iii) Tenant's particular employees or employment practices, and (II) Tenant shall not be required to perform any changes to portions of the Building systems located outside of the Premises, or to other components of the Base Building located outside of the Premises, by reason of the Initial Alterations unless such changes are related to or affected or triggered by (i) Tenant's failure to design and construct the Initial Alterations in compliance with applicable building codes and other Legal Requirements, or (ii) inclusion in the Initial Alterations of improvements which are not normal and customary general office improvements (such as, without limitation, library, file, computer or meeting rooms, classroom facilities or kitchens or cafeterias or other areas requiring floor reinforcement or enhanced systems requirements). Upon Tenant's request with its submission to Landlord of the plans and specifications for the Initial Alterations, Landlord will advise Tenant if any of the Initial Alterations are within the preceding clause (ii). The judgment of any court of competent jurisdiction or the admission of Tenant in an action against Tenant, whether or not Landlord is a party thereto, that Tenant has violated any Legal Requirement shall be conclusive of that fact as between Landlord and Tenant. Tenant shall immediately furnish Landlord with any notices received from any insurance company or governmental agency or inspection bureau regarding any unsafe or unlawful conditions within the Premises or the violation of any Legal Requirement. In no event shall Tenant's compliance obligations hereunder include any work required of Landlord as Landlord's Work pursuant to Paragraph 4.c. above. "Base Building" means the structural portions of the Building (including exterior walls, roof, foundation, floor slabs and core of the Building), all Building systems, including, without limitation, elevator, plumbing, heating, electrical, security, life safety and power, except (i) those special or supplemental systems (including air-conditioning systems), and equipment used in connection therewith , and non-Building standard lighting and electrical wiring installed specifically for Tenant or any other tenants and (ii) the portion of any Building system within the Premises or any other specific tenant space, the maintenance, repair or compliance of which is the responsibility of Tenant or such other tenant, respectively. c. Hazardous Materials. Tenant shall not cause or permit the storage, use, generation, release, handling or disposal (collectively, "Handling") of any Hazardous Materials (as defined below), in, on, or about the Premises or the Real Property by Tenant or any agents, employees, contractors, licensees, subtenants, customers, guests or invitees of Tenant (collectively with Tenant, "Tenant Parties"), except that Tenant shall be permitted to use normal quantities of office supplies or products (such as copier fluids or cleaning supplies) customarily used in the conduct of general business office activities ("Common Office Chemicals"), provided that the Handling of such Common Office Chemicals shall comply at all times with all Legal Requirements, including Hazardous Materials Laws (as defined below). Notwithstanding anything to the contrary contained herein, however, in no event shall Tenant permit any usage of Common Office Chemicals in a manner that may cause the Premises or the Real Property to be contaminated by any Hazardous Materials or in violation of any Hazardous Materials Laws. After obtaining knowledge thereof, Tenant shall immediately advise Landlord in writing of (a) any and all enforcement, cleanup, remedial, removal, or other governmental or regulatory actions instituted, completed, or threatened pursuant to any Hazardous Materials Laws relating to any Hazardous Materials affecting the Premises; and (b) all claims made or threatened by any third party against Tenant, Landlord, the Premises or the Real Property relating to damage, contribution, cost recovery, compensation, loss, or injury resulting from any Hazardous Materials on or about the Premises. Without Landlord's prior written consent, Tenant shall not take any remedial action or enter into any agreements or settlements in response to the presence of any Hazardous Materials in, on, or about the Premises. Tenant shall be solely responsible for and shall indemnify, defend and hold Landlord and all other Indemnitees (as defined in Paragraph 14.b. below), harmless from and against all Claims (as defined in Paragraph 14.b. below), arising out of or in connection with, or otherwise relating to (i) any Handling of Hazardous Materials by any Tenant Party or Tenant's breach of its obligations hereunder, or (ii) any removal, cleanup, or restoration work and materials necessary to return the Real Property or any other property of whatever nature located on the Real Property to their condition existing prior to the Handling of Hazardous Materials in, on or about the Premises by Tenant or any Tenant Party. Tenant's obligations under this paragraph shall survive the expiration or other termination of this Lease. For purposes of this Lease, "Hazardous Materials" means any explosive, radioactive materials, hazardous wastes, or hazardous substances, including without limitation asbestos containing materials, PCB's, CFC's, or substances defined as "hazardous substances" in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601-9657; the Hazardous Materials Transportation Act of 1975, 49 U.S.C. Section 1801-1812; the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901- 6987; or any other Legal Requirement regulating, relating to, or imposing liability or standards of conduct concerning any such materials or substances now or at any time hereafter in effect (collectively, "Hazardous Materials Laws"). d. Applicability of Paragraph. The provisions of this Paragraph 8 are for the benefit of Landlord, the holder of any Superior Interest (as defined in Paragraph 21 below), and the other Indemnitees only and are not nor shall they be construed to be for the benefit of any tenant or occupant of the Building. 9. Alterations and Restoration. 10 a. Tenant shall not make or permit to be made any alterations, modifications, additions, decorations or improvements to the Premises, or any other work whatsoever that would directly or indirectly involve the penetration or removal (whether permanent or temporary) of, or require access through, in, under, or above any floor, wall or ceiling, or surface or covering thereof in the Premises (collectively, "Alterations"), except as expressly provided in this Paragraph 9. If Tenant desires any Alteration, except for Cosmetic Alterations as described in the next paragraph, Tenant must obtain Landlord's prior written approval of such Alteration, which approval shall not be unreasonably withheld or delayed, provided, however, that Landlord shall have at least ten (10) Business Days from Landlord's receipt of Final Plans (as defined below) for any Alterations in which to grant or reasonably withhold its approval of such Alterations. "Final Plans" means working plans and specifications (the "Working Drawings") for all of the work and improvements which Tenant desires to be included within the Alterations (including any related Alterations), and which show work and improvements that comply with all applicable Legal Requirements and the Building Construction Standards (as defined below), and shall be in sufficient detail as to enable the general contractor for the work to obtain all necessary governmental permits for construction of all of the Alterations (including any related Alterations) and to secure complete bids from qualified contractors to perform the work for all of the Alterations (including any related Alterations). In the case of the Initial Alterations, the aforesaid ten (10) Business Day period shall commence on the later of the date of this Lease or Landlord's receipt of the Final Plans for the Initial Alterations. Notwithstanding the foregoing, Tenant may submit the Final Plans for the Initial Alterations in logical stages or trade groupings, in which case the aforesaid ten (10) Business Day period shall apply to the plans and specifications for each such stage or grouping after submission thereof; provided, however, that Landlord reserves the right to modify its approval, conditions or requirements with respect to the plans and specifications for any such prior stage or grouping to the extent made necessary by the requirements of the plans and specifications for any subsequently submitted stage or grouping. Notwithstanding the foregoing or anything to the contrary contained elsewhere in this Paragraph 9, Tenant shall have the right, without Landlord's consent, to make any Alteration to the Premises that meets all of the following criteria (a "Cosmetic Alteration"): (a) the Alteration is decorative in nature (such as paint, carpet or other wall or floor finishes, movable partitions or other such work), (b) Tenant provides Landlord with ten (10) days' advance written notice of the commencement of such Alteration, (c) such Alteration does not affect the Building's electrical, mechanical, life safety, plumbing, security, or HVAC systems or any other portion of the Base Building or any part of the Building other than the Premises, (d) the work will not decrease the value of the Premises, does not require a building permit or other governmental permit, uses only new materials comparable in quality to those being replaced and is performed in a workman-like manner and in accordance with all Legal Requirements, and (e) the cost of such Alteration, when aggregated with the cost of all other Cosmetic Alterations performed during the previous twelve (12) month period, does not exceed Sixty-Five Thousand Dollars ($65,000.00) in the aggregate as to all of the Premises. At the time Tenant notifies Landlord of any Cosmetic Alteration, Tenant shall give Landlord a copy of Tenant's plans for the work. If the Cosmetic Alteration is of such a nature that formal plans will not be prepared for the work, Tenant shall provide Landlord with a reasonably specific description of the work. All Alterations shall be made at Tenant's sole cost and expense, including the expense of complying with all present and future Legal Requirements, and the expense of any other work required to be performed in other areas within or outside the Premises by reason of the Alterations; provided, however, that as to the Initial Alterations Tenant's duty to perform compliance work outside of the Premises shall be subject to clause (II) of Paragraph 8.b. Alterations shall be made, at Tenant's election, by Landlord's contractor or by a contractor reasonably approved by Landlord. If Tenant, in its sole discretion, hires Landlord's contractor to perform the Alterations (including, without limitation, the Initial Alterations), Landlord's contractor shall be entitled to receive a fee for such work of fifteen percent (15%) of the first $100,000 of the construction costs of such work, and the fee for any construction costs over such amount shall be as negotiated by Tenant and Landlord's contractor. If Landlord's contractor does not perform the Alterations pursuant to the above, Tenant shall pay Landlord on demand prior to or during the course of such construction an amount (the "Alteration Operations Fee") equal to five percent (5%) of the total cost of the Alterations (and for purposes of calculating the Alteration Operations Fee, such cost shall include architectural and engineering fees, but shall not include permit fees) as compensation to Landlord for electrical energy consumed in connection with the work, freight elevator operation, additional cleaning expenses, additional security services, review of plans and specifications, and for other miscellaneous costs incurred by Landlord as result of the work. Notwithstanding the foregoing, (i) the Alteration Operations Fee shall not be due with respect to Cosmetic Alterations, and in lieu thereof Tenant shall reimburse Landlord within thirty (30) days after Landlord's demand for the actual and reasonable fees paid by Landlord to third party architects, engineers or other consultants retained by Landlord to review the Cosmetic Alterations and confirm that they qualify as such, and (ii) the Alteration Operations Fee with respect to the Initial Alterations shall be an amount equal to Sixty-Three Thousand Four Hundred Sixty-Seven Dollars ($63,467.00). All such work shall be performed diligently and in a first-class workmanlike manner and in accordance with plans and specifications reasonably approved by Landlord, and shall comply with all Legal Requirements and Landlord's reasonable construction procedures and requirements for the Building, as in effect from time to time (including Landlord's reasonable requirements relating to insurance and contractor qualifications) (the "Building Construction Standards"). In no event shall Tenant employ any person, entity 11 or contractor to perform work in the Premises whose presence may give rise to a labor or other disturbance in the Building. Default by Tenant in the payment of any sums agreed to be paid by Tenant for or in connection with an Alteration (regardless of whether such agreement is pursuant to this Paragraph 9 or separate instrument) shall entitle Landlord to all the same remedies as for non-payment of rent hereunder, subject to the expiration of any applicable notice and cure period under Paragraph 25.a. below. Any Alterations, including, without limitation, moveable partitions that are affixed to the Premises (but excluding moveable, free standing partitions) and all carpeting, shall at once become part of the Building and the property of Landlord. Tenant shall give Landlord not less than five (5) days prior written notice of the date the construction of the Alteration is to commence. Landlord may post and record an appropriate notice of nonresponsibility with respect to any Alteration and Tenant shall maintain any such notices posted by Landlord in or on the Premises. b. Upon Tenant's written request expressly referring to this Paragraph 9.b., Landlord shall advise Tenant at the time of Landlord's approval of any Alteration requested by Tenant or, if pursuant to Paragraph 9.a. Landlord's approval is not required, within five (5) Business Days after such written request by Tenant, whether Landlord will require the removal of the Alteration and restoration of the Premises to its previous condition at the expiration or sooner termination of this Lease. Those Alterations so required by Landlord to be removed from the Premises at the expiration or sooner termination of this Lease shall be so removed by Tenant and the Premises shall be restored by Tenant to their condition prior to the making of the Alterations, ordinary wear and tear excepted. If Tenant fails to request such determination by Landlord as set forth above, then at Landlord's sole election exercised at the expiration or sooner termination of this Lease any or all such Alterations shall be removed and the Premises so restored. If Tenant requests such determination by Landlord as set forth above, and Landlord fails to timely respond thereto, Landlord shall be deemed to have exercised its right to require that Tenant remove such Alterations at the expiration or sooner termination of this Lease and restore the Premises as set forth above. Notwithstanding the foregoing, Tenant shall not be obligated to remove from the Premises any of the Initial Alterations which are normal and customary general office improvements. The removal of the Alterations and the restoration of the Premises shall be performed by a general contractor selected by Tenant and reasonably approved by Landlord, in which event Tenant shall pay the general contractor's fees and costs in connection with such work. Any separate work letter or other agreement which is hereafter entered into between Landlord and Tenant pertaining to Alterations shall be deemed to automatically incorporate the terms of this Lease without the necessity for further reference thereto. 10. Repair. a. By taking possession of the Premises, Tenant agrees that the Premises are in good condition and repair, but the foregoing shall not relieve Landlord from its obligation to perform Landlord's Work as required by Paragraph 4.c. above, or from its repair obligations pursuant to Paragraphs 10.b. and 26 below. Tenant, at Tenant's sole cost and expense, shall keep the Premises and every part thereof (including the interior walls and ceilings of the Premises, those portions of the Building systems located within and exclusively serving the Premises, and improvements and Alterations) in good condition and repair, ordinary wear and tear excepted. Tenant waives all rights to make repairs at the expense of Landlord as provided by any Legal Requirement now or hereafter in effect. It is specifically understood and agreed that, except as specifically set forth in this Lease, Landlord has no obligation and has made no promises to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof, and that no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant. Tenant hereby waives the provisions of California Civil Code Sections 1932(1), 1941 and 1942 and of any similar Legal Requirement now or hereafter in effect. b. Landlord shall repair and maintain in good condition and repair the Base Building (other than the portions of Building systems that are Tenant's responsibility to maintain and repair pursuant to Paragraph 10.a. above) and common areas of the Real Property; provided, however, that to the extent repairs which Landlord is required to make pursuant to this Paragraph 10.b. are necessitated by the negligence or willful misconduct of Tenant or Tenant's agents, employees or contractors, then Tenant shall reimburse Landlord for the cost of such repair within thirty (30) days after Landlord's demand to the extent Landlord is not reimbursed therefor by insurance (assuming for such purpose that Landlord carries the insurance it is required to carry pursuant to Paragraph 15.d. below). Landlord shall in no event be obligated to repair any ordinary wear and tear to the Premises. Landlord shall repair and maintain the Real Property in accordance with the foregoing provisions to the standards of other first-class high-rise office buildings in the San Francisco financial district. 11. Abandonment. Tenant shall not abandon (within the meaning of California Civil Code Section 1951.2) the Premises or any part thereof at any time during the term hereof. Tenant understands that if Tenant so abandons the Premises, the risk of fire, other casualty and vandalism to the Premises and the Building will be increased. Accordingly, such action by Tenant shall constitute an Event of Default hereunder. Upon the expiration or earlier termination of this Lease, or if Tenant abandons or surrenders all or any part of the Premises or is dispossessed of the Premises by process of law, or otherwise, any movable furniture, equipment, trade fixtures, or other personal property belonging to Tenant and left on the Premises shall at the option of Landlord be deemed to be abandoned and, whether or not the property is deemed 12 abandoned, Landlord shall have the right to remove such property from the Premises and charge Tenant for the removal and any restoration of the Premises as provided in Paragraph 9. Landlord may charge Tenant for the storage of Tenant's property left on the Premises at such rates as Landlord may from time to time reasonably determine, or, Landlord may, at its option, store Tenant's property in a public warehouse at Tenant's expense. Notwithstanding the foregoing, neither the provisions of this Paragraph 11 nor any other provision of this Lease shall impose upon Landlord any obligation to care for or preserve any of Tenant's property left upon the Premises, and Tenant hereby waives and releases Landlord from any claim or liability in connection with the removal of such property from the Premises and the storage thereof and specifically waives the provisions of California Civil Code Section 1542 with respect to such release. Landlord's action or inaction with regard to the provisions of this Paragraph 11 shall not be construed as a waiver of Landlord's right to require Tenant to remove its property, restore any damage to the Premises and the Building caused by such removal, and make any restoration required pursuant to Paragraph 9 above. 12. Liens. Tenant shall not permit any mechanic's, materialman's or other liens arising out of work performed at the Premises by or on behalf of Tenant to be filed against the fee of the Real Property nor against Tenant's interest in the Premises. Landlord shall have the right to post and keep posted on the Premises any notices which it deems necessary for protection from such liens. If any such liens are filed, Landlord may, upon twenty (20) days' written notice to Tenant, without waiving its rights based on such breach by Tenant and without releasing Tenant from any obligations hereunder, pay and satisfy the same and in such event the sums so paid by Landlord shall be due and payable by Tenant immediately without notice or demand, with interest from the date paid by Landlord through the date Tenant pays Landlord, at the Interest Rate. Tenant agrees to indemnify, defend and hold Landlord and the other Indemnitees (as defined in Paragraph 14.b. below) harmless from and against any Claims (as defined in Paragraph 14.b. below) for mechanics', materialmen's or other liens in connection with any Alterations, repairs or any work performed, materials furnished or obligations incurred by or for Tenant, other than Claims due to Landlord's failure to disburse Landlord's Allowance in accordance with the requirements of Paragraph 4.b. above. 13. Assignment and Subletting. a. Landlord's Consent. Landlord's and Tenant's agreement with regard to Tenant's right to transfer all or part of its interest in the Premises is as expressly set forth in this Paragraph 13. Tenant agrees that, except upon Landlord's prior written consent, which consent shall not (subject to Landlord's rights under Paragraph 13.d. below) be unreasonably withheld, neither this Lease nor all or any part of the leasehold interest created hereby shall, directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, be assigned, mortgaged, pledged, encumbered or otherwise transferred by Tenant or Tenant's legal representatives or successors in interest (collectively an "assignment") and neither the Premises nor any part thereof shall be sublet or be used or occupied for any purpose by anyone other than Tenant (collectively, a "sublease"). Except where Landlord's consent is expressly not required hereunder, any assignment or subletting without Landlord's prior written consent shall, at Landlord's option, be void and shall constitute an Event of Default entitling Landlord to exercise all remedies available to Landlord under this Lease and at law. The parties hereto agree and acknowledge that, among other circumstances for which Landlord may reasonably withhold its consent to an assignment or sublease, it shall be reasonable for Landlord to withhold its consent where: (i) the assignment or subletting would increase the operating costs for the Building or the burden on the Building services, or generate additional foot traffic, elevator usage or security concerns in the Building, or create an increased probability of the comfort and/or safety of Landlord and other tenants in the Building being compromised or reduced, (ii) the space will be used for a school or training facility, an entertainment, sports or recreation facility, retail sales to the public (unless Tenant's permitted use is retail sales), a personnel or employment agency (other than executive offices of the same not having substantial dealings with the public), an office or facility of any governmental or quasi-governmental agency or authority having any on-premises dealings with the general public, a place of public assembly (including without limitation a meeting center, theater or public forum), any use by or affiliation with a foreign government (including without limitation an embassy or consulate or similar office), or a facility for the provision of social, welfare or clinical health services or sleeping accommodations (whether temporary, daytime or overnight); (iii) the proposed assignee or subtenant is a current tenant of the Building, or is a prospective tenant of the Building with whom Landlord has entered into a letter of intent (or similar document) or exchanged an offer and counteroffer, and in either such case, Landlord has or will have, in the applicable delivery period, available space in the Building that is comparable to the Premises or the portion thereof subject to such subletting, as applicable, or that otherwise meets such tenant's or prospective tenant's needs (including delivery schedule); (iv) Landlord reasonably disapproves of the proposed assignee or subtenant's reputation or creditworthiness; (v) Landlord reasonably determines that the character of the business that would be conducted by the proposed assignee or subtenant at the Premises, or the manner of conducting such business, would be inconsistent with the character of the Building as a first-class office building; (vi) the assignment or subletting may conflict with any exclusive uses granted to other tenants of the Real Property, or with the terms of any easement, covenant, condition or restriction, or other agreement affecting the Real Property; (vii) the assignment or subletting would involve a change in use from that expressly permitted under this Lease; or (viii) Landlord reasonably determines that there is a material risk that the proposed assignee may be unable to perform all of Tenant's obligations under this Lease or the proposed 13 subtenant may be unable to perform all of its obligations under the proposed sublease. Landlord's foregoing rights and options shall continue throughout the entire term of this Lease. For purposes of this Paragraph 13, the following events shall be deemed an assignment or sublease, as appropriate: (i) the issuance of equity interests (whether stock, partnership interests or otherwise) in Tenant or any subtenant or assignee, or any entity controlling any of them, to any person or group of related persons, in a single transaction or a series of related or unrelated transactions, such that, following such issuance, such person or group shall have Control (as defined below) of Tenant or any subtenant or assignee; (ii) a transfer of Control of Tenant or any subtenant or assignee, or any entity controlling any of them, in a single transaction or a series of related or unrelated transactions (including, without limitation, by consolidation, merger, acquisition or reorganization), except that the transfer of outstanding capital stock or other listed equity interests by persons or parties other than "insiders" within the meaning of the Securities Exchange Act of 1934, as amended, through the "over-the-counter" market or any recognized national or international securities exchange, shall not be included in determining whether Control has been transferred; (iii) a reduction of Tenant's assets to the point that this Lease is substantially Tenant's only asset; or (iv) a change or conversion in the form of entity of Tenant, any subtenant or assignee, or any entity controlling any of them, which has the effect of limiting the liability of any of the partners, members or other owners of such entity. "Control" shall mean direct or indirect ownership of 50% or more of all of the voting stock of a corporation or 50% or more of the legal or equitable interest in any other business entity, or the power to direct the operations of any entity (by equity ownership, contract or otherwise). If this Lease is assigned, whether or not in violation of the terms of this Lease, Landlord may collect rent from the assignee. If the Premises or any part thereof is sublet, Landlord may, upon an Event of Default by Tenant hereunder, collect rent from the subtenant. In either event, Landlord may apply the amount collected from the assignee or subtenant to Tenant's monetary obligations hereunder. The consent by Landlord to an assignment or subletting hereunder shall not relieve Tenant or any assignee or subtenant from obtaining Landlord's express prior written consent to any other or further assignment or subletting. Neither an assignment or subletting nor the collection of rent by Landlord from any person other than Tenant, nor the application of any such rent as provided in this Paragraph 13.a. shall be deemed a waiver of any of the provisions of this Paragraph 13.a. or release Tenant from its obligation to comply with the provisions of this Lease and Tenant shall remain fully and primarily liable for all of Tenant's obligations under this Lease. b. Processing Expenses. Tenant shall pay to Landlord, as Landlord's cost of processing each proposed assignment or subletting for which Landlord's consent is required hereunder, an amount equal to the sum of (i) Landlord's reasonable attorneys' and other professional fees, plus (ii) the sum of $750.00 for the cost of Landlord's administrative, accounting and clerical time (collectively, "Processing Costs"), and the amount of all direct and indirect costs and expenses incurred by Landlord arising from the assignee or sublessee moving into the subject space (including, without limitation, costs of freight elevator operation for moving of furnishings and trade fixtures, security service, janitorial and cleaning service, and rubbish removal service). Notwithstanding anything to the contrary herein, Landlord shall not be required to process any request for Landlord's consent to an assignment or subletting until Tenant has paid to Landlord the amount of Landlord's estimate of the Processing Costs and all other direct and indirect costs and expenses of Landlord and its agents arising from the assignee or subtenant taking occupancy. c. Consideration to Landlord. In the event of any assignment or sublease, except with respect to an assignment or sublease pursuant to Paragraph 13.g., Landlord shall be entitled to receive, as additional rent hereunder, fifty percent (50%) of any consideration (including, without limitation, payment for leasehold improvements and any "Leasehold Profit" as defined below) paid by the assignee or subtenant for the assignment or sublease and, in the case of a sublease, fifty percent (50%) of the excess of the amount of rent paid for the sublet space by the subtenant over the amount of Monthly Rent under Paragraph 5 above and Additional Rent under Paragraph 7 above attributable to the sublet space for the corresponding month; except that Tenant may recapture, on an amortized basis over the term of the sublease or assignment, together with interest on the unamortized balance at a rate per annum equal to three (3) percentage points over the Treasury Rate charged as of the commencement date of such assignment or sublease (i) any brokerage commissions paid by Tenant in connection with the subletting or assignment (not to exceed commissions typically paid in the market at the time of such subletting or assignment), (ii) reasonable legal fees paid by Tenant in connection with such assignment or subletting (provided that such legal fees shall not exceed One Thousand Five Hundred Dollars ($1,500.00) for an assignment of the Lease and shall not exceed Seven Hundred Fifty Dollars ($750.00) for any single sublease) and (iii) any improvement allowance or construction costs incurred by Tenant in connection with the assignment or sublease (collectively the "Assignment or Subletting Costs"), provided that, as a condition to Tenant recapturing the Assignment or Subletting Costs, Tenant shall provide to Landlord, within ninety (90) days of Landlord's execution of Landlord's consent to the assignment or subletting, a detailed accounting of the Assignment or Subletting Costs theretofore incurred by Tenant and supporting documents, such as receipts and construction invoices, and within one-hundred eighty (180) days of Landlord's execution of Landlord's consent to the assignment or subletting, a detailed accounting of all Assignment or Subletting Costs to be taken into account hereunder and supporting documents, such as receipts and construction invoices. To effect the foregoing, Tenant shall deduct from the 14 monthly amounts received by Tenant from the subtenant or assignee as rent or Fconsideration (i) the Monthly Rent and Additional Rent payable by Tenant to Landlord for the subject space and (ii) the incremental amount, on an amortized basis, of the Assignment or Subletting Costs, and fifty percent (50%) of the then remaining sum shall be paid promptly to Landlord. "Leasehold Profit" shall be the value allocated to the leasehold between the parties to the assignment or sublease, but in no event less than the excess of the present value of the fair market rent of the Premises for the remaining term of this Lease after such assignment or sublease, over the present value of the Monthly Rent payable hereunder for such remaining term, as reasonably determined by Landlord. Upon Landlord's request, Tenant shall assign to Landlord all amounts to be paid to Tenant by any such subtenant or assignee and that belong to Landlord, and shall direct such subtenant or assignee to pay the same directly to Landlord. If there is more than one sublease under this Lease, the amounts (if any) to be paid by Tenant to Landlord pursuant to the preceding sentence shall be separately calculated for each sublease and amounts due Landlord with regard to any one sublease may not be offset against rental and other consideration pertaining to or due under any other sublease. d. Procedures. If Tenant desires to assign this Lease or any interest therein or sublet all or part of the Premises, Tenant shall give Landlord written notice thereof and the terms proposed (the "Sublease Notice"), which Sublease Notice, in the case of a proposed sublease, shall designate the space proposed to be sublet. Landlord shall have the prior right and option (to be exercised by written notice to Tenant given within thirty (30) days after receipt of Tenant's notice) (i) to sublet from Tenant the portion of the Premises proposed by Tenant to be sublet, for the term for which such portion is proposed to be sublet, but at the lesser of the proposed sublease rent or the same rent (including Additional Rent as provided for in Paragraph 7 above) as Tenant is required to pay to Landlord under this Lease for the same space, computed on a pro rata square footage basis, and during the term of such sublease Tenant shall be released of its obligations under this Lease with regard to the subject space, provided, however, that if the portion of the Premises proposed by Tenant to be sublet consists of space on more than one floor of the Building, Landlord may exercise (or not exercise) its sublet option under this clause (i) separately as to the proposed sublet space on each such floor, (ii) in the case of any proposed assignment of this Lease or any proposed sublet of all or any portion of the Premises the term of which is greater than five (5) years or expires during the last fifteen (15) months of the term of this Lease, to terminate this Lease in its entirety (in the case of any proposed assignment) or as it pertains to the portion of the Premises so proposed by Tenant to be sublet (in the case of any such proposed sublet), provided, however, that if the portion of the Premises proposed by Tenant to be sublet consists of space on more than one floor of the Building, Landlord may exercise (or not exercise) its termination option under this clause (ii) separately as to the proposed sublet space on each such floor, or (iii) to approve Tenant's proposal to assign or sublet conditional upon Landlord's subsequent written approval of the specific assignment or sublease obtained by Tenant and the specific assignee or subtenant named therein. If Landlord exercises its option in (i) above, then Landlord may, at Landlord's sole cost, construct improvements in the subject space and, so long as the improvements are suitable for general office purposes, Landlord shall have no obligation to restore the subject space to its original condition following the termination of the sublease. If Landlord exercises its option described in (iii) above, then Tenant shall have six (6) months thereafter to submit to Landlord, for Landlord's written approval, Tenant's proposed assignment or sublease agreement (in which the proposed assignee or subtenant shall be named, and which agreement shall otherwise meet the requirements of Paragraph 13.e. below), together with a current financial statement of such proposed assignee or subtenant and any other information reasonably requested by Landlord. If Tenant fails to submit the specific assignment or sublease and other required information within such time, or if the terms of the specific assignment or sublease submitted by Tenant vary from the terms set forth in the Sublease Notice approved by Landlord pursuant to (iii) above, then Tenant shall be required to submit a new Sublease Notice for Landlord's evaluation pursuant to the procedures set forth in this paragraph. If Landlord fails to exercise any such option to sublet or to terminate, this shall not be construed as or constitute a waiver of any of the provisions of Paragraphs 13.a., b., c. or d. herein. If Landlord exercises any option to sublet or to terminate, any costs of demising the portion of the Premises affected by such subleasing or termination shall be borne by Tenant. In addition, Landlord shall have no liability for any real estate brokerage commission(s) or with respect to any of the costs and expenses that Tenant may have incurred in connection with its proposed assignment or subletting, and Tenant agrees to indemnify, defend and hold Landlord and all other Indemnitees harmless from and against any and all Claims (as defined in Paragraph 14.b. below), including, without limitation, claims for commissions arising from such proposed assignment or subletting. Landlord's foregoing rights and options shall continue throughout the entire term of this Lease. e. Documentation. No permitted assignment or subletting by Tenant shall be effective until there has been delivered to Landlord a fully executed counterpart of the assignment or sublease which expressly provides that (i) the assignee or subtenant may not further assign or sublet the assigned or sublet space without Landlord's prior written consent (which, in the case of a further assignment proposed by an assignee, shall not be unreasonably withheld, subject to Landlord's rights under the provisions of this Paragraph 13), subject, however, to an assignee's right to further assign this Lease without Landlord's consent pursuant to Paragraph 13.g. below, (ii) the assignee or subtenant will comply with all of the provisions of this Lease applicable to the Premises (or, in the case of a sublease, applicable to the portion of the Premises covered by such sublease), and Landlord may enforce the Lease provisions directly against such assignee or subtenant (except that, in the case of a sublease, the subtenant's liability for rent shall not exceed the rent set forth in the sublease), (iii) in the case of an assignment, the assignee assumes all of Tenant's obligations under this Lease arising on or after the date of the assignment, and (iv) in the case of a sublease, the subtenant 15 agrees to be and remain jointly and severally liable with Tenant for the payment of rent pertaining to the sublet space in the amount set forth in the sublease, and for the performance of all of the terms and provisions of this Lease which are applicable to the sublet space. In addition to the foregoing, no sublease by Tenant shall be effective until there has been delivered to Landlord a fully executed counterpart of Landlord's consent to sublease form. The failure or refusal of a subtenant or assignee to execute any such instrument shall not release or discharge the subtenant or assignee from its liability as set forth above. Notwithstanding the foregoing, however, no subtenant or assignee shall be permitted to occupy the Premises unless and until such subtenant or assignee provides Landlord with certificates evidencing that such subtenant or assignee is carrying all insurance coverage required of such subtenant or assignee under this Lease. f. No Merger. Without limiting any of the provisions of this Paragraph 13, if Tenant has entered into any subleases of any portion of the Premises, the voluntary or other surrender of this Lease by Tenant, or a mutual cancellation by Landlord and Tenant, shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subleases or subtenancies or, at the option of Landlord, operate as an assignment to Landlord of any or all such subleases or subtenancies. If Landlord does elect that such surrender or cancellation operate as an assignment of such subleases or subtenancies, Landlord shall in no way be liable for any previous act or omission by Tenant under the subleases or for the return of any deposit(s) under the subleases that have not been actually delivered to Landlord, nor shall Landlord be bound by any sublease modification(s) executed without Landlord's consent or for any advance rental payment by the subtenant in excess of one month's rent. g. Affiliates. Notwithstanding anything to the contrary in Paragraphs 13.a. through 13.d., but subject to Paragraphs 13.e. and 13.f., Tenant may assign this Lease or sublet the Premises or any portion thereof, without Landlord's consent, to any partnership, corporation or other entity which controls, is controlled by, or is under common control with Tenant or Tenant's parent (control being defined for such purposes as ownership of at least 50% of the equity interests in, and the power to direct the management of, the relevant entity) or to any partnership, corporation or other entity resulting from a merger or consolidation with Tenant, or to any person or entity which acquires substantially all the assets of Tenant (whether as a direct purchase of such assets or a purchase of all or substantially all of Tenant's stock, partnership or other equity interests) as a going concern (collectively, an "Affiliate"), provided that (i) Landlord receives at least ten (10) days' prior written notice of an assignment or subletting, (ii) the Affiliate's net worth is not less than Tenant's net worth immediately prior to the assignment or subletting, (iii) except in the case of an assignment by a merger or consolidation where Tenant is not the surviving entity, or by the acquisition of substantially all of Tenant's assets, the Affiliate has proven experience in the operation of a first-class business of a type consistent with the use of the Building as a first-class office Building in the San Francisco financial district, (iv) except in the case of an assignment by a merger or consolidation where Tenant is not the surviving entity, the Affiliate remains an Affiliate for the duration of the subletting or the balance of the term in the event of an assignment, (v) the Affiliate assumes (in the event of an assignment) in writing all of Tenant's obligations under this Lease and agrees (in the event of a sublease) that such subtenant will, at Landlord's election, attorn directly to Landlord in the event that this Lease is terminated for any reason, (vi) Landlord receives a fully executed copy of an assignment or sublease agreement between Tenant and the Affiliate at least ten (10) days prior to the effective date of such assignment or sublease, and (vii) in the case of an assignment, the essential purpose of such assignment is to transfer an active, ongoing business with substantial assets in addition to this Lease, and in the case of an assignment or sublease the transaction is for legitimate business purposes unrelated to this Lease and the transaction is not a subterfuge by Tenant to avoid it obligations under this Lease or the restrictions on assignment and subletting contained herein. 14. Indemnification of Landlord. a. Landlord and the holders of any Superior Interests (as defined in Paragraph 21 below) shall not be liable to Tenant and Tenant hereby waives all claims against such parties for any loss, injury or other damage to person or property in or about the Premises or the Real Property from any cause whatsoever, including without limitation, water leakage of any character from the roof, walls, basement, fire sprinklers, appliances, air conditioning, plumbing or other portion of the Premises or the Real Property, or gas, fire, explosion, falling plaster, steam, electricity, or any malfunction within the Premises or the Real Property, or acts of other tenants of the Building; provided, however, that the foregoing waiver shall be inapplicable to any loss, injury or damage to the extent resulting from Landlord's gross negligence or willful misconduct. Tenant acknowledges that from time to time throughout the term of this Lease, construction work may be performed in and about the Building and the Real Property by Landlord, contractors of Landlord, or other tenants or their contractors, and that such construction work may result in noise and disruption to Tenant's business. In addition to and without limiting the foregoing waiver or any other provision of this Lease, Tenant agrees that Landlord shall not be liable for, and Tenant expressly waives and releases Landlord and the other Indemnitees (as defined in Paragraph 14.b. below) from any Claims (as defined in Paragraph 14.b. below), including without limitation, any and all Special Claims and Damages (as defined in Paragraph 28 below), arising or alleged to be arising as a result of any such construction activity; provided, however, that the foregoing waiver (other than as it applies to Special Claims and Damages) shall be inapplicable to any loss, injury or damage to the extent resulting from Landlord's gross negligence or willful misconduct. Landlord shall use its good faith efforts to minimize such noise and disruption to Tenant's business, and, without limitation, Landlord shall perform any extraordinarily noisy or disruptive work after Business Hours 16 or on weekends to the extent such procedures would be generally followed by managers of other first class high rise office buildings in the San Francisco financial district (except to the extent an emergency and/or Legal Requirements require otherwise, as reasonably determined by Landlord). b. Tenant shall hold Landlord and the holders of any Superior Interest, and the constituent shareholders, partners or other owners thereof, and all of their agents, contractors, servants, officers, directors, employees and licensees (collectively with Landlord, the "Indemnitees") harmless from and indemnify the Indemnitees against any and all claims, liabilities, damages, costs and expenses, including reasonable attorneys' fees and costs incurred in defending against the same (collectively, "Claims"), to the extent arising from (a) the acts or omissions of Tenant or any other Tenant Parties (as defined in Paragraph 8.c. above) in, on or about the Real Property, or (b) any construction or other work undertaken by or on behalf of Tenant in, on or about the Premises, whether prior to or during the term of this Lease (but excluding any construction work undertaken by or on behalf of Landlord), or (c) any breach or Event of Default under this Lease by Tenant, or (d) any accident, injury or damage, howsoever and by whomsoever caused, to any person or property, occurring in, on or about the Premises (including, without limitation, the balconies contained within the Premises); except to the extent such Claims have been released pursuant to Paragraph 16 below or such Clams are caused by the negligence or willful misconduct of Landlord or its authorized representatives, by Landlord's breach of its obligations under this Lease, or by the negligence or willful misconduct of the Indemnitee seeking the benefit of the foregoing indemnity. In case any action or proceeding be brought against any of the Indemnitees by reason of any such Claim, Tenant, upon notice from Landlord, covenants to resist and defend at Tenant's sole expense such action or proceeding by counsel reasonably satisfactory to Landlord. The provisions of this Paragraph 14.b. shall survive the expiration or earlier termination of this Lease with respect to any injury, illness, death or damage occurring prior to such expiration or termination. 15. Insurance. a. Tenant's Insurance. Tenant shall, at Tenant's expense, maintain during the term of this Lease (and, if Tenant occupies or conducts activities in or about the Premises prior to or after the term hereof, then also during such pre-term or post-term period): (i) commercial general liability insurance including contractual liability coverage, with minimum coverages of $1,000,000 per occurrence combined single limit for bodily injury and property damage, $1,000,000 for products-completed operations coverage, $100,000 fire legal liability, $1,000,000 for personal and advertising injury (which coverage shall not be subject to the contractual liability exclusion), with a $2,000,000 general aggregate limit, for injuries to, or illness or death of, persons and damage to property occurring in or about the Premises or otherwise resulting from Tenant's operations in the Building, (ii) property insurance protecting Tenant against loss or damage by fire and such other risks as are insurable under then-available standard forms of "all risk" insurance policies (excluding earthquake and flood but including water damage), covering Tenant's personal property and trade fixtures in or about the Premises or the Real Property, and any improvements and/or Alterations in the Premises, for the full replacement value thereof without deduction for depreciation, except that Tenant shall not be required to insure any of the Initial Alterations or subsequent Alterations in the Premises which are normal and customary general office improvements; (iii) workers' compensation insurance in statutory limits; (iv) at least three months' coverage for loss of business income and continuing expenses, providing protection against any peril included within the classification "all risk," excluding earthquake and flood but including water damage; and (v) if Tenant operates owned, leased or non-owned vehicles on the Real Property, comprehensive automobile liability insurance with a minimum coverage of $1,000,000 per occurrence, combined single limit. The policies described above in clauses (i) and (v) shall protect Tenant, as named insured, and Landlord and all the other Indemnitees and any other parties designated by Landlord, as additional insureds; shall insure Landlord's and such other parties' contingent liability with regard to acts or omissions of Tenant; and shall specifically include all liability assumed by Tenant under this Lease (provided, however, that such contractual liability coverage shall not limit or be deemed to satisfy Tenant's indemnity obligations under this Lease). The policies described in clause (ii) above shall protect Tenant, as named insured, and Landlord and all the other Indemnitees and any other parties designated by Landlord, as additional insureds and as loss payees, as their respective interests may appear. If any of the policies described above in this Paragraph 15.a. are subject to deductibles, the deductible amounts (including by way of a self-insured retention) shall not be in excess of those approved in advance in writing by Landlord in its reasonable discretion. Landlord reserves the right to increase the foregoing amount of liability coverage from time to time as Landlord reasonably determines is required to adequately protect Landlord and the other parties designated by Landlord from the matters insured thereby (provided, however, that Landlord makes no representation that the limits of liability required hereunder from time to time shall be adequate to protect Tenant), and to require that Tenant cause any of its contractors, vendors, movers or other parties conducting activities in or about or occupying the Premises to obtain and maintain insurance as reasonably determined by Landlord and as to which Landlord and such other parties reasonably designated by Landlord shall be additional insureds. b. Policy Form. Each insurance policy required pursuant to Paragraph 15.a. above shall be issued by an insurance company licensed in the State of California and with a general policyholders' rating of "A" or better and a financial size ranking of "Class VIII" or higher in the most recent edition of Best's Insurance Guide. Each insurance policy, other than Tenant's workers' compensation insurance, shall 17 (i) provide that it may not be materially changed, cancelled or allowed to lapse unless thirty (30) days' prior written notice to Landlord and any other insureds designated by Landlord is first given, (ii) provide that no act or omission of Tenant shall affect or limit the obligations of the insurer with respect to any other insured, (iii) include all waiver of subrogation rights endorsements necessary to effect the provisions of Paragraph 16 below, and (iv) provide that the policy and the coverage provided shall be primary, that Landlord, although an additional insured, shall nevertheless be entitled to recovery under such policy for any damage to Landlord or the other Indemnitees by reason of acts or omissions of Tenant, and that any coverage carried by Landlord shall be noncontributory with respect to policies carried by Tenant. Each such insurance policy or, if consistent with then current industry practice, a certificate thereof, shall be delivered to Landlord by Tenant on or before the effective date of such policy and thereafter Tenant shall deliver to Landlord renewal policies or, if consistent with then current industry practice, renewal certificates, at least thirty (30) days prior to the expiration dates of expiring policies. If Tenant fails to procure such insurance or to deliver such policies or certificates, and such failure shall continue for three (3) Business Days after notice thereof from Landlord to Tenant, Landlord may, at its option, procure the same for Tenant's account, and the cost thereof shall be paid to Landlord by Tenant upon demand. Landlord may at any time, and from time to time, inspect and/or copy any and all insurance policies required by this Lease. c. No Implication. Nothing in this Paragraph 15 shall be construed as creating or implying the existence of (i) any ownership by Tenant of any fixtures, additions, Alterations, or improvements in or to the Premises or (ii) any right on Tenant's part to make any addition, Alteration or improvement in or to the Premises. d. Landlord's Insurance. During the term hereof, Landlord shall keep the Building and all Initial Alterations and subsequent Alterations in the Premises made pursuant to Paragraph 4 hereof (but excluding any Initial Alterations or subsequent Alterations which are not normal and customary general office improvements, and also excluding any personal property, trade fixtures or other fixtures, office equipment, furniture, artwork and other decorations in any portion of the Premises not affixed to and a part of the Building) insured through reputable insurance underwriters against perils covered by a standard "all risk" insurance policy or policies as such policies are in use from time to time for comparable first-class high-rise office buildings in the San Francisco financial district (excluding, at Landlord's option, perils such as earthquake, flood and other standard "all risk" policy form exclusions), with a deductible provision, if any, that does not materially exceed that which prudent, efficient operators of first-class high-rise office buildings in the San Francisco financial district would carry from time-to-time in the exercise of reasonable business judgment, in an amount or amounts equal to not less than eighty percent (80%) of the full replacement value of the Building (excluding the land and the footings, foundations and installations below the basement level) and such Initial Alterations and subsequent Alterations (or such greater percentage as shall be required to preclude Landlord from being deemed a coinsurer) , without deduction for depreciation, including the costs of demolition and debris removal, or such other fire and property damage insurance as Landlord shall reasonably determine to give substantially equal or greater protection. During the term hereof, Landlord shall keep in force general liability insurance in the amount and coverage as Landlord deems commercially reasonable. 16. Mutual Waiver of Subrogation Rights. Each party hereto hereby releases the other respective party and, in the case of Tenant as the releasing party, the other Indemnitees, and the respective partners, shareholders, agents, employees, officers, directors and authorized representatives of such released party, from any Claims such releasing party may have for damage to the Building, the Premises or any of such releasing party's fixtures, personal property, improvements and alterations in or about the Premises, the Building or the Real Property that is caused by or results from risks insured against under any fire and extended coverage insurance policies actually carried by such releasing party or deemed to be carried by such releasing party; provided, however, that such waiver shall be limited to the extent of the net insurance proceeds payable by the relevant insurance company with respect to such loss or damage (or in the case of deemed coverage, the net proceeds that would have been payable). For purposes of this Paragraph 16, Landlord and Tenant shall be deemed to be carrying the insurance policies that they are required to carry pursuant to Paragraph 15 but do not actually carry. Each party hereto shall cause each such fire and extended coverage insurance policy obtained by it to provide that the insurance company waives all rights of recovery by way of subrogation against the other respective party and the other released parties in connection with any matter covered by such policy. 17. Utilities. a. Basic Services. Landlord shall furnish the following utilities and services ("Basic Services") for the Premises: (i) during the hours of 8 A.M. to 6 P.M. ("Business Hours") Monday through Friday (except public holidays) ("Business Days"), electricity for Building standard lighting and power suitable for the use of the Premises for ordinary general office purposes, (ii) during Business Hours on Business Days, heat and air conditioning required in Landlord's reasonable judgment for the comfortable use and occupancy of the Premises for ordinary general office purposes, (iii) unheated water for the restroom(s) and drinking fountain(s), if any, in the public areas serving the Premises, (iv) elevator service to the floor(s) of the Premises by nonattended automatic elevators for general office pedestrian usage, and (v) on Business Days, janitorial services limited to emptying and removal of general office refuse, light vacuuming as needed 18 and window washing as determined by Landlord. Notwithstanding the above, but subject to any temporary shutdown for repairs, for security purposes, for compliance with any Legal Requirements, or due to Force Majeure, (A) Tenant shall have access to the Premises 24 hours a day, each day of the Lease term, and (B) the services described in (iii) and (iv) above shall be provided to the Premises 24 hours a day, each day of the Lease term, without additional charge to Tenant. In addition, Tenant may use and Landlord shall make available to Tenant water, heat, air conditioning, electric current, elevator and janitorial service in excess of that provided in Basic Services ("Excess Services," which shall include without limitation any power usage other than through existing standard 110-volt AC outlets; electricity and/or water consumed by Tenant in connection with any dedicated or supplemental heating, ventilating and/or air conditioning, computer power, telecommunications and/or other special units or systems of Tenant; chilled, heated or condenser water; or water used for any purpose other than ordinary drinking and lavatory purposes), provided that the Excess Services desired by Tenant are reasonably available to Landlord and to the Premises (it being understood that in no event shall Landlord be obligated to make available to the Premises more than the pro rata share of the capacity of any Excess Service available to the Building or the applicable floor of the Building, as the case may be), and provided further that Tenant complies with the non-discriminatory procedures established by Landlord from time to time for requesting and paying for such Excess Services and with all other provisions of this Paragraph 17. Landlord reserves the right to install in the Premises or the Real Property electric current and/or water meters (including, without limitation, any additional wiring, conduit or panel required therefor) to measure the electric current or water consumed by Tenant or to cause the usage to be measured by other reasonable methods (e.g. by temporary "check" meters or by survey). Subject to Tenant's payment for the same as an Excess Service, Landlord agrees to make available to Tenant supplemental condenser water sufficient to provide capacity for an additional thirty (30) tons of cooling for Tenant's server room. b. Payment for Utilities and Services. The cost of Basic Services shall be included in Operating Expenses. In addition, Tenant shall pay to Landlord within thirty (30) days after Landlord's demand (i) the cost, at Landlord's prevailing rate in the Building, of any Excess Services used by Tenant, (ii) the cost of installing, operating, maintaining or repairing any meter or other device used to measure Tenant's consumption of utilities, but only if such meter or other device establishes Tenant's use of Excess Services, (iii) the cost of installing, operating, maintaining or repairing any Temperature Balance Equipment (as defined in Paragraph 17.c. below) for the Premises and/or any equipment required in connection with any Excess Services requested by Tenant, and (iv) any cost otherwise incurred by Landlord in keeping account of or determining any Excess Services used by Tenant. Landlord's failure to bill Tenant for any of the foregoing shall not waive Landlord's right to bill Tenant for the same at a later time, provided that such bill is delivered to Tenant no later than hundred eighty (180) days from the end of the calendar year in which such utilities or services were performed or such costs incurred by Landlord, as applicable. c. Temperature Balance. If the temperature otherwise maintained in any portion of the Premises by the heating, air conditioning or ventilation system is affected as a result of (i) the type or quantity of any lights, machines or equipment (excluding typical office equipment in typical densities for office use, which typical equipment and densities shall in no event include dedicated computer rooms) used by Tenant in the Premises, (ii) the occupancy of such portion of the Premises by more than one person per one hundred seventy-five (175) square feet of rentable area therein, (iii) an electrical load for lighting or power in excess of the limits specified in Paragraph 17.d. below, or (iv) any rearrangement of partitioning or other improvements, then at Tenant's sole cost, Landlord may install any equipment, or modify any existing equipment (including the standard air conditioning equipment) Landlord reasonably determines to be necessary to restore the temperature balance (such new equipment or modifications to existing equipment termed herein "Temperature Balance Equipment"). Tenant agrees to keep closed, when necessary, draperies which, because of the sun's position, must be closed to provide for the efficient operation of the air conditioning system, and Tenant agrees to cooperate with Landlord and to abide by the regulations and requirements which Landlord may prescribe for the proper functioning and protection of the heating, ventilating and air conditioning system. Landlord makes no representation to Tenant regarding the adequacy or fitness of the heating, air conditioning or ventilation equipment in the Building to maintain temperatures that may be required for, or because of, any computer or communications rooms, machine rooms, conference rooms or other areas of high concentration of personnel or electrical usage, or any other uses other than or in excess of the fractional horsepower normally required for office equipment, and Landlord shall have no liability for loss or damage suffered by Tenant or others in connection therewith. d. Utility Connections. Tenant shall not connect or use any apparatus or device in the Premises (i) using current in excess of 110 volts, or (ii) which would cause Tenant's electrical demand load to exceed 1.0 watt per rentable square foot for overhead lighting or 2.0 watts per rentable square foot for convenience outlets, or (iii) which would exceed the capacity of the existing panel or transformer serving the Premises (unless Tenant pays the cost of modifying any such panel or transformer to increase its capacity so as to be sufficient for Tenant's requirements). Tenant shall not connect with electric current (except through existing outlets in the Premises or such additional outlets as may be installed in the Premises as part of initial improvements or Alterations approved by Landlord), or water pipes, any apparatus or device for the purpose of using electrical current or water. Notwithstanding the foregoing, Landlord acknowledges that Tenant shall have the right, at Tenant's sole cost and expense, to install, as part of the Initial Alterations, an additional electrical panel (400 amp, 277/480 3 phase) to serve the Premises, subject to Landlord's reasonable approval as to the plans and specifications with respect thereto and the other procedures and requirements of Paragraph 19 9 above applicable to the Initial Alterations. Landlord represents and warrants to Tenant that power for such panel (i.e. 400 amp, 277/480 3 phase power) is currently available from the existing bus duct on the sixth (6th) floor of the Building. Landlord will not permit additional coring of the floor of the Premises in order to install new electric outlets in the Premises unless Landlord is satisfied, on the basis of such information to be supplied by Tenant at Tenant's expense, that coring of the floor in order to install such additional outlets will not weaken the structure of the floor. e. Interruption of Services. Landlord's obligation to provide access to and utilities and services for the Premises are subject to the Rules and Regulations of the Building, applicable Legal Requirements (including the rules or actions of the public utility company furnishing the utility or service), and shutdowns for maintenance and repairs, for security purposes, or due to strikes, lockouts, labor disputes, fire or other casualty, acts of God, or other causes beyond the reasonable control of Landlord. In the event of an interruption in, or failure or inability to provide access to or any service or utility for the Premises for any reason, such interruption, failure or inability shall not constitute an eviction of Tenant, constructive or otherwise, or impose upon Landlord any liability whatsoever, including, but not limited to, liability for consequential damages or loss of business by Tenant. Tenant hereby waives the provisions of California Civil Code Section 1932(1) or any other applicable existing or future Legal Requirement permitting the termination of this Lease due to such interruption, failure or inability. Notwithstanding the foregoing, if any interruption in, or failure or inability to provide access to the Premises or any of the services or utilities described in Paragraph 17.a. is within Landlord's reasonable control and continues for ten (10) or more consecutive days after Tenant's written notice thereof to Landlord, and Tenant is unable to conduct and does not conduct any business in a material portion of the Premises as a result thereof, then Tenant shall be entitled to an abatement of Monthly Rent under Paragraph 5 hereof and Additional Rent under Paragraph 7 hereof, which abatement shall commence as of the first day after the expiration of such ten (10) day period and terminate upon the cessation of such interruption, failure or inability, and which abatement shall be based on the portion of the Premises rendered inaccessible or unusable for Tenant's business by such interruption, failure or inability. The abatement provision set forth above shall be inapplicable to any interruption, failure or inability described in this Paragraph 17.e. that is caused by (x) damage from fire or other casualty (it being acknowledged that such situation shall be governed by Paragraph 26), or (y) the gross negligence or willful misconduct of Tenant or its agents, employees or contractors, except where Tenant reimburses Landlord for the deductible required under Landlord's property damage/rental loss insurance. f. Governmental Controls. In the event any governmental authority having jurisdiction over the Real Property or the Building promulgates or revises any Legal Requirement or building, fire or other code or imposes mandatory or voluntary controls or guidelines on Landlord or the Real Property or the Building relating to the use or conservation of energy or utilities or the reduction of automobile or other emissions (collectively "Controls") or in the event Landlord is required or elects to make alterations to the Real Property or the Building in order to comply with such mandatory or voluntary Controls, Landlord may, in its sole discretion, comply with such Controls or make such alterations to the Real Property or the Building related thereto. Such compliance and the making of such alterations shall not constitute an eviction of Tenant, constructive or otherwise, give rise to an abatement of rent pursuant to Paragraph 17.e. or otherwise, or impose upon Landlord any liability whatsoever, including, but not limited to, liability for consequential damages or loss of business by Tenant. Landlord shall use its good faith efforts to minimize disruption to Tenant's business caused by any such alterations, and, without limitation, Landlord shall perform any extraordinarily noisy or disruptive work after Business Hours or on weekends to the extent such procedures would be generally followed by managers of other first class high rise office buildings in the San Francisco financial district (except to the extent an emergency and/or Legal Requirements require otherwise, as reasonably determined by Landlord). 18. Personal Property and Other Taxes. Tenant shall pay, at least ten (10) days before delinquency, any and all taxes, fees, charges or other governmental impositions levied or assessed against Landlord or Tenant (a) upon Tenant's equipment, furniture, fixtures, improvements which are not normal and customary general office improvements, and other personal property (including carpeting installed by Tenant) located in the Premises, (b) by virtue of any Alterations made by Tenant to the Premises, and (c) upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. If any such fee, charge or other governmental imposition is paid by Landlord, Tenant shall reimburse Landlord for Landlord's payment upon demand. 19. Rules and Regulations. Tenant shall comply with the rules and regulations set forth on Exhibit B attached hereto, as such rules and regulations may be modified or amended by Landlord from time to time (the "Rules and Regulations"), provided such amendments or modifications shall be reasonable and non-discriminatory and shall not materially increase the burdens or obligations imposed by this Lease upon Tenant and shall not prohibit the conduct of any business in the Premises which Tenant is permitted to conduct pursuant to Paragraphs 2.g. and 8 hereof. Landlord shall not be responsible to Tenant for the nonperformance or noncompliance by any other tenant or occupant of the Building of or with any of the Rules and Regulations, but Landlord shall not enforce the Rules and Regulations in a discriminatory manner. In the 20 event of any conflict between the Rules and Regulations and the balance of this Lease, the balance of this Lease shall control. 20. Surrender; Holding Over. a. Surrender. Upon the expiration or other termination of this Lease, Tenant shall surrender the Premises to Landlord vacant and broom-clean, with all improvements and Alterations (except as provided in Paragraph 9 above) in their original condition, except for reasonable wear and tear and damage from casualty or condemnation; provided, however, that prior to the expiration or termination of this Lease Tenant shall remove from the Premises any Alterations that Tenant is required by Landlord to remove under the provisions of Paragraph 9, and all of Tenant's equipment and other personal property, trade fixtures, and furniture. If such removal is not completed at the expiration or other termination of this Lease, Landlord may remove the same at Tenant's expense. Any damage to the Premises or the Building caused by such removal shall be repaired promptly by Tenant (including the patching or repairing of ceilings and walls) or, if Tenant fails to do so, Landlord may do so at Tenant's expense. The removal of the Initial Alterations and other Alterations from the Premises shall be governed by Paragraph 9 above. Tenant's obligations under this paragraph shall survive the expiration or other termination of this Lease. Upon expiration or termination of this Lease or of Tenant's possession, Tenant shall surrender all keys to the Premises or any other part of the Building and shall make known to Landlord the combination of locks on all safes, cabinets and vaults that may be located in the Premises. b. Holding Over. If Tenant remains in possession of the Premises after the expiration or earlier termination of this Lease with the express written consent of Landlord, Tenant's occupancy shall be a month-to-month tenancy at a rent agreed upon by Landlord and Tenant, but in no event less than the greater of (i) one hundred fifty percent (150%) of the Monthly Rent and Additional Rent payable under this Lease during the last full month prior to the date of the expiration of this Lease or (ii) the then fair market rental (as reasonably determined by Landlord) for the Premises. Except as provided in the preceding sentence, the month-to-month tenancy shall be on the terms and conditions of this Lease, except that any renewal options, expansion options, rights of first refusal, rights of first negotiation or any other rights or options pertaining to additional space in the Building contained in this Lease shall be deemed to have terminated and shall be inapplicable thereto. Landlord's acceptance of rent after such holding over with Landlord's written consent shall not result in any other tenancy or in a renewal of the original term of this Lease. If Tenant remains in possession of the Premises after the expiration or earlier termination of this Lease without Landlord's consent, Tenant's continued possession shall be on the basis of a tenancy at sufferance and Tenant shall pay as Monthly Rent during the holdover period an amount equal to the greater of (i) one hundred fifty percent (150%) of the fair market rental (as reasonably determined by Landlord) for the Premises or (ii) two hundred percent (200%) of the Monthly Rent and Additional Rent payable under this Lease for the last full month prior to the date of such expiration or termination. c. Indemnification. If Tenant remains in possession of the Premises after the expiration or earlier termination of this Lease without the express written consent of Landlord, and such occupancy shall continue for more than ten (10) days Landlord's written demand to Tenant that Tenant surrender possession of the Premises to Landlord, Tenant shall indemnify, defend and hold Landlord harmless from and against all Claims incurred by or asserted against Landlord and arising directly or indirectly from Tenant's failure to timely surrender the Premises, including but not limited to (i) any rent payable by or any loss, cost, or damages, including lost profits, claimed by any prospective tenant of the Premises or any portion thereof, and (ii) Landlord's damages as a result of such prospective tenant rescinding or terminating a lease of the Premises or any portion thereof by reason of such failure to timely surrender the Premises. 21. Subordination and Attornment. a. This Lease is expressly made subject and subordinate to any mortgage, deed of trust, ground lease, underlying lease or like encumbrance affecting any part of the Real Property or any interest of Landlord therein which is now existing or hereafter executed or recorded, any present or future modification, amendment or supplement to any of the foregoing, and to any advances made thereunder (any of the foregoing being a "Superior Interest") without the necessity of any further documentation evidencing such subordination. Notwithstanding the foregoing, Tenant shall, within ten (10) days after Landlord's request, execute and deliver to Landlord a document evidencing the subordination of this Lease to a particular Superior Interest. If the interest of Landlord in the Real Property or the Building is transferred to any person ("Purchaser") pursuant to or in lieu of proceedings for enforcement of any Superior Interest, Tenant shall immediately and automatically attorn to the Purchaser, and this Lease shall continue in full force and effect as a direct lease between the Purchaser and Tenant on the terms and conditions set forth herein. Notwithstanding the foregoing, if a Superior Interest is created following the execution of this Lease, Landlord's delivery to Tenant of a non-disturbance agreement with respect thereto as described in Paragraph 21.b. below and otherwise in such holder's standard institutional form or other reasonable form shall be a condition to the subordination of this Lease thereto, provided that Tenant pays any fees or charges required by such holder in order to obtain such non-disturbance agreement. 21 b. Landlord will request that the holders of any Superior Interests in place as of the date of this Lease execute a written "non-disturbance agreement" on Tenant's behalf providing that, if Tenant is not in default under this Lease beyond any applicable grace period, that such party will recognize this Lease and Tenant's rights hereunder and will not disturb Tenant's possession hereunder, and if this Lease is by operation of law terminated in a foreclosure, that a new lease will be entered into on the same terms as this Lease for the remaining term hereof. The failure of any such holder of a Superior Interest to execute and deliver such a non-disturbance agreement upon Landlord's request shall not constitute a default hereunder by Landlord, it being understood that Landlord's sole obligation is to request in good faith the execution and delivery of such agreement. Further, if in order to obtain such non-disturbance agreement from any such holder of a Superior Interest Landlord is required to expend any sum, Landlord shall so notify Tenant and Tenant shall either pay such sum or be deemed to have released Landlord from any further obligation to obtain such non-disturbance agreement. In no event shall Landlord be required to expend any sums in connection therewith. 22. Financing Condition. If any lender or ground lessor that intends to acquire an interest in, or holds a mortgage, ground lease or deed of trust encumbering any portion of the Real Property should require either the execution by Tenant of an agreement requiring Tenant to send such lender written notice of any default by Landlord under this Lease, giving such lender the right to cure such default within any period afforded to Landlord to cure the same plus an additional ninety (90) days (with such period afforded to such lender or ground lessor to commence from the giving of notice to such lender or ground lessor or, so long as Tenant shall continue to receive all of the material services Landlord is required to provide under this Lease and such lender or ground lessor is diligently pursuing appointment of a receiver, foreclosure proceedings or termination of such ground lease, such period to commence when such lender has obtained the appointment of a receiver for the Real Property or completed foreclosure (whichever shall be first) or such ground lessor has terminated such ground lease), and preventing Tenant from terminating this Lease (to the extent such right is available to Tenant under this Lease) unless such default remains uncured after such period as so extended, and/or any modification of the agreements, covenants, conditions or provisions of this Lease, then Tenant agrees that it shall, within fifteen (15) days after Landlord's request, execute and deliver such agreement and modify this Lease as required by such lender or ground lessor; provided, however, that no such modification shall affect the length of the term or increase the rent payable by Tenant under Paragraphs 5 and 7 or otherwise increase Tenant's obligations (other than notice requirements and other similar ministerial obligations). Tenant acknowledges and agrees that its failure to timely execute any such agreement or modification required by such lender or ground lessor may cause Landlord serious financial damage by causing the failure of a financing transaction and giving Landlord all of its rights and remedies under Paragraph 25 below, including its right to damages caused by the loss of such financing. 23. Entry by Landlord. Landlord may, at any and all reasonable times, and upon reasonable advance notice (provided that no advance notice need be given if an emergency (as determined by Landlord in its reasonable judgment) necessitates an immediate entry or prior to entry to provide routine janitorial services), enter the Premises to (a) inspect the same and to determine whether Tenant is in compliance with its obligations hereunder, (b) supply janitorial and any other service Landlord is required to provide hereunder, (c) show the Premises to prospective lenders, purchasers or tenants, (d) post notices of nonresponsibility, and (e) alter, improve or repair the Premises or any other portion of the Real Property. In connection with any such alteration, improvement or repair, Landlord may erect in the Premises or elsewhere in the Real Property scaffolding and other structures reasonably required for the work to be performed. Except as otherwise expressly provided in this Lease, in no event shall such entry or work entitle Tenant to an abatement of rent, constitute an eviction of Tenant, constructive or otherwise, or impose upon Landlord any liability whatsoever, including but not limited to liability for consequential damages or loss of business or profits by Tenant; provided, however, that Landlord shall use good faith efforts to cause all such work to be done in such a manner as to cause as little interference to Tenant as reasonably possible without incurring additional expense. Landlord shall at all times retain a key with which to unlock all of the doors in the Premises, except Tenant's vaults and safes. If an emergency necessitates immediate access to the Premises, Landlord may use whatever force is necessary to enter the Premises and any such entry to the Premises shall not constitute a forcible or unlawful entry into the Premises, a detainer of the Premises, or an eviction of Tenant from the Premises, or any portion thereof. 24. Insolvency or Bankruptcy. The occurrence of any of the following shall constitute an Event of Default under Paragraph 25 below: 1. Tenant ceases doing business as a going concern, makes an assignment for the benefit of creditors, is adjudicated an insolvent, files a petition (or files an answer admitting the material allegations of such petition) seeking for Tenant any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar arrangement under any state or federal bankruptcy or other law, or Tenant consents to or acquiesces in the appointment, pursuant to any state or federal bankruptcy or other law, of a trustee, receiver or liquidator for the Premises, for Tenant or for all or any substantial part of Tenant's assets; or 2. Tenant fails within sixty (60) days after the commencement of any proceedings against Tenant seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or 22 similar relief under any state or federal bankruptcy or other Legal Requirement, to have such proceedings dismissed, or Tenant fails, within sixty (60) days after an appointment pursuant to any state or federal bankruptcy or other Legal Requirement without Tenant's consent or acquiescence, of any trustee, receiver or liquidator for the Premises, for Tenant or for all or any substantial part of Tenant's assets, to have such appointment vacated; or 3. Tenant is unable, or admits in writing its inability, to pay its debts as they mature; or 4. Tenant gives notice to any governmental body of its insolvency or pending insolvency, or of its suspension or pending suspension of operations. In no event shall this Lease be assigned or assignable by reason of any voluntary or involuntary bankruptcy, insolvency or reorganization proceedings, nor shall any rights or privileges hereunder be an asset of Tenant, the trustee, debtor-in-possession, or the debtor's estate in any bankruptcy, insolvency or reorganization proceedings. 25. Default and Remedies. a. Events of Default. The occurrence of any of the following shall constitute an "Event of Default" by Tenant: 1. Tenant fails to pay when due Monthly Rent, Additional Rent or any other rent due hereunder within five (5) days after written notice from Landlord that such sum is due, except that Landlord shall only be required to give one such notice in any calendar year, and after any such notice is given any failure by Tenant in such calendar year to pay Monthly Rent, Additional Rent or any other rent due hereunder within five (5) days after due shall itself constitute an Event of Default, without the requirement of notice from Landlord of such failure; or 2. Tenant abandons (within the meaning of California Civil Code Section 1951.2) the Premises or any portion thereof; or 3. Tenant fails to deliver any estoppel certificate pursuant to Paragraph 29 below, subordination agreement pursuant to Paragraph 21 above, or document required pursuant to Paragraph 22 above, within the applicable period set forth therein; or 4. Tenant violates the bankruptcy and insolvency provisions of Paragraph 24 above; or 5. Tenant makes or has made or furnishes or has furnished any warranty, representation or statement to Landlord in connection with this Lease, or any other agreement made by Tenant for the benefit of Landlord, which is or was false or misleading in any material respect when made or furnished; or 6. Tenant assigns this Lease or subleases any portion of the Premises in violation of Paragraph 13 above; or 7. Tenant fails to comply with any other provision of this Lease in the manner required pursuant to this Lease within thirty (30) days after written notice from Landlord of such failure (or if the noncompliance cannot by its nature be cured within the 30-day period, if Tenant fails to commence to cure such noncompliance within the 30-day period and thereafter diligently prosecute such cure to completion). b. Remedies. Upon the occurrence of an Event of Default Landlord shall have the following remedies, which shall not be exclusive but shall be cumulative and shall be in addition to any other remedies now or hereafter allowed by law: 1. Landlord may terminate Tenant's right to possession of the Premises at any time by written notice to Tenant. Tenant expressly acknowledges that in the absence of such written notice from Landlord, no other act of Landlord, including, but not limited to, its re-entry into the Premises, its efforts to relet the Premises, its reletting of the Premises for Tenant's account, its storage of Tenant's personal property and trade fixtures, its acceptance of keys to the Premises from Tenant, its appointment of a receiver, or its exercise of any other rights and remedies under this Paragraph 25 or otherwise at law, shall constitute an acceptance of Tenant's surrender of the Premises or constitute a termination of this Lease or of Tenant's right to possession of the Premises. Upon such termination in writing of Tenant's right to possession of the Premises, this Lease shall terminate and Landlord shall be entitled to recover damages from Tenant as provided in California Civil 23 Code Section 1951.2 or any other applicable existing or future Legal Requirement providing for recovery of damages for such breach, including but not limited to the following: (i) The reasonable cost of recovering the Premises; plus (ii) The reasonable cost of removing Tenant's Alterations, trade fixtures and improvements; plus (iii) All unpaid rent due or earned hereunder prior to the date of termination, less the proceeds of any reletting or any rental received from subtenants prior to the date of termination applied as provided in Paragraph 25.b.2. below, together with interest at the Interest Rate, on such sums from the date such rent is due and payable until the date of the award of damages; plus (iv) The amount by which the rent which would be payable by Tenant hereunder, including Additional Rent under Paragraph 7 above, as reasonably estimated by Landlord, from the date of termination until the date of the award of damages, exceeds the amount of such rental loss as Tenant proves could have been reasonably avoided, together with interest at the Interest Rate on such sums from the date such rent is due and payable until the date of the award of damages; plus (v) The amount by which the rent which would be payable by Tenant hereunder, including Additional Rent under Paragraph 7 above, as reasonably estimated by Landlord, for the remainder of the then term, after the date of the award of damages exceeds the amount such rental loss as Tenant proves could have been reasonably avoided, discounted at the discount rate published by the Federal Reserve Bank of San Francisco for member banks at the time of the award plus one percent (1%); plus (vi) Such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law, including without limitation any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. 2. Landlord has the remedy described in California Civil Code Section 1951.4 (a landlord may continue the lease in effect after the tenant's breach and abandonment and recover rent as it becomes due, if the tenant has the right to sublet and assign subject only to reasonable limitations), and may continue this Lease in full force and effect and may enforce all of its rights and remedies under this Lease, including, but not limited to, the right to recover rent as it becomes due. After the occurrence of an Event of Default, Landlord may enter the Premises without terminating this Lease and sublet all or any part of the Premises for Tenant's account to any person, for such term (which may be a period beyond the remaining term of this Lease), at such rents and on such other terms and conditions as Landlord deems advisable. In the event of any such subletting, rents received by Landlord from such subletting shall be applied (i) first, to the payment of the costs of maintaining, preserving, altering and preparing the Premises for subletting, the other costs of subletting, including but not limited to brokers' commissions, attorneys' fees and expenses of removal of Tenant's personal property, trade fixtures and Alterations; (ii) second, to the payment of rent then due and payable hereunder; (iii) third, to the payment of future rent as the same may become due and payable hereunder; (iv) fourth, the balance, if any, shall be paid to Tenant upon (but not before) expiration of the term of this Lease. If the rents received by Landlord from such subletting, after application as provided above, are insufficient in any month to pay the rent due and payable hereunder for such month, Tenant shall pay such deficiency to Landlord monthly upon demand. Notwithstanding any such subletting for Tenant's account without termination, Landlord may at any time thereafter, by written notice to Tenant, elect to terminate this Lease by virtue of a previous Event of Default. During the continuance of an Event of Default, for so long as Landlord does not terminate Tenant's right to possession of the Premises and subject to Paragraph 13, entitled Assignment and Subletting, and the options granted to Landlord thereunder, Landlord shall not unreasonably withhold its consent to an assignment or sublease of Tenant's interest in the Premises or in this Lease. 3. During the continuance of an Event of Default, and after Tenant's abandonment of the Premises (within the meaning of California Civil Code Section 1951.2) or Landlord's eviction of Tenant from the Premises by appropriate legal proceedings, Landlord may enter the Premises without terminating this Lease and remove all Tenant's personal property, Alterations and trade fixtures from the Premises and store them at Tenant's risk and expense. If Landlord removes such property from the Premises and stores it at Tenant's risk and expense, and if Tenant fails to pay the cost of such removal and storage after written demand therefor and/or to pay any rent then due, then after the property has been stored for a period of thirty (30) days or more Landlord may sell such property at public or private sale, in the manner and at such times and places as Landlord deems commercially reasonable following reasonable notice to Tenant of the time and place of such sale. The proceeds of any such sale shall be applied first to the payment of the expenses for removal and storage of the property, the preparation for and the conducting of such sale, and for attorneys' fees and other legal expenses incurred by Landlord in connection therewith, and the balance shall be applied as provided in Paragraph 25.b.2. above. 24 Tenant hereby waives all claims for damages that may be caused by Landlord's reentering and taking possession of the Premises or removing and storing Tenant's personal property pursuant to this Paragraph 25, and Tenant shall indemnify, defend and hold Landlord harmless from and against any and all Claims resulting from any such act. No reentry by Landlord shall constitute or be construed as a forcible entry by Landlord. 4. Landlord may require Tenant to remove any and all Alterations from the Premises or, if Tenant fails to do so within ten (10) days after Landlord's request, Landlord may do so at Tenant's expense. 5. Landlord may cure the Event of Default at Tenant's expense, it being understood that such performance shall not waive or cure the subject Event of Default. If Landlord pays any sum or incurs any expense in curing the Event of Default, Tenant shall reimburse Landlord upon demand for the amount of such payment or expense with interest at the Interest Rate from the date the sum is paid or the expense is incurred until Landlord is reimbursed by Tenant. Any amount due Landlord under this subsection shall constitute additional rent hereunder. c. Waiver of Redemption. Tenant hereby waives, for itself and all persons claiming by and under Tenant, all rights and privileges which it might have under any present or future Legal Requirement to redeem the Premises or to continue this Lease after being dispossessed or ejected from the Premises. 26. Damage or Destruction. If all or a part of the Premises are damaged by fire or other casualty, or if the Building is so damaged that access to or use and occupancy of the Premises is materially impaired, within thirty (30) days of the date of the damage Landlord shall give Tenant notice of Landlord's reasonable estimate of the time required from the date of the damage to repair the damage (the "Damage Estimate"). If the Damage Estimate is one hundred fifty (150) days or less, then Landlord shall repair the damage and this Lease shall remain in full force and effect. If the Damage Estimate is more than one hundred fifty (150) days, Landlord, at its option exercised by written notice to Tenant within sixty (60) days of the date of the damage, shall either (a) repair the damage, in which event this Lease shall continue in full force and effect, or (b) terminate this Lease as of the date specified by Landlord in the notice, which date shall be not less than thirty (30) days nor more than sixty (60) days after the date such notice is given, and this Lease shall terminate on the date specified in the notice. If the Damage Estimate is more than one (1) year, and Landlord does not give notice terminating this Lease, then Tenant may give notice to Landlord, within thirty (30) calendar days after Tenant receives the Damage Estimate, terminating this Lease as of the date specified in Tenant's termination notice, which date shall not be before the date of such notice or more than thirty (30) days after the date of Tenant's termination notice. Notwithstanding anything to contrary contained in this Paragraph 26, if the initial Damage Estimate is more than ninety (90) days, and the date on which Landlord reasonably anticipates the repairs of such damage will be completed is during the last twelve (12) months of the Lease term, Landlord and Tenant shall each have the option to terminate this Lease by giving written notice to the other, in the case of Landlord together with the Damage Estimate, or, in the case of Tenant, within thirty (30) days of Tenant's receipt of the Damage Estimate, and this Lease shall terminate as of the date specified by the party in its termination notice, which date shall not be before the date of such notice or more than thirty (30) days after the date of such notice. Notwithstanding the foregoing, if Landlord shall purport to exercise its termination right pursuant to this paragraph, and within fifteen (15) days thereafter Tenant shall validly exercise any theretofore unexercised renewal option under Paragraph 52 below, Landlord's exercise of such termination right shall be deemed void and of no force and effect, but the remaining provisions of this Paragraph 26 shall fully apply with respect to such fire or other casualty, and any rights of Landlord (but not Tenant) to terminate this Lease pursuant to the first paragraph of this Paragraph 26 on account of such fire or other casualty shall survive and remain exercisable in accordance with the terms of such first paragraph. Notwithstanding anything to the contrary in the Paragraph 26, if damage which would otherwise lead to a right to terminate this Lease results from the willful misconduct of Landlord or Tenant, the party from whose misconduct such damage results shall have no right to terminate this Lease. If the fire or other casualty damages the Premises or the common areas of the Real Property necessary for Tenant's use and occupancy of the Premises, and Tenant ceases to use any portion of the Premises as a result of such damage, then during the period the Premises or portion thereof are rendered unusable by such damage and repair, Tenant's Monthly Rent and Additional Rent under Paragraphs 5 and 7 above shall be proportionately reduced based upon the extent to which the damage and repair prevents Tenant from conducting, and Tenant does not conduct, its business at the Premises; provided, however, if the damage results from the gross negligence or willful misconduct of Tenant or Tenant's agents, employees, contractors, licensees or invitees, then Tenant's Monthly Rent and Additional Rent will not abate unless Tenant reimburses Landlord for the deductible required under Landlord's property damage/rental loss insurance. Landlord shall not be obligated to repair or replace any of Tenant's movable furniture, equipment, trade fixtures, and other personal property, nor any Alterations installed in the Premises by Tenant which are not normal and customary general office improvements, and no damage to any of the foregoing shall entitle Tenant to any 25 abatement, and Tenant shall, at Tenant's sole cost and expense, repair and replace such items. All such repair and replacement of Alterations shall be constructed in accordance with Paragraph 9 above regarding Alterations. Where Landlord is obligated to repair any damage pursuant to this Paragraph 26, Landlord's obligation shall include the obligation to repair (or replace, as applicable) any Alterations installed in the Premises which are normal and customary general office improvements. A total destruction of the Building shall automatically terminate this Lease. In no event shall Tenant be entitled to any compensation or damages from Landlord for loss of use of the whole or any part of the Premises or for any inconvenience occasioned by any such destruction, rebuilding or restoration of the Premises, the Building or access thereto, except for the rent abatement expressly provided above. Tenant hereby waives California Civil Code Sections 1932(2) and 1933(4), providing for termination of hiring upon destruction of the thing hired and Sections 1941 and 1942, providing for repairs to and of premises. 27. Eminent Domain. a. If all or any part of the Premises are taken by any public or quasi-public authority under the power of eminent domain, or any agreement in lieu thereof (a "taking"), this Lease shall terminate as to the portion of the Premises taken effective as of the date of taking. If only a portion of the Premises is taken, Landlord or Tenant may terminate this Lease as to the remainder of the Premises upon written notice to the other party within ninety (90) days after the taking; provided, however, that Tenant's right to terminate this Lease is conditioned upon the remaining portion of the Premises being of such size or configuration that such remaining portion of the Premises is unusable or uneconomical for Tenant's business. Landlord shall be entitled to all compensation, damages, income, rent awards and interest thereon whatsoever which may be paid or made in connection with any taking and Tenant shall have no claim against Landlord or any governmental authority for the value of any unexpired term of this Lease or of any of the improvements or Alterations in the Premises; provided, however, that the foregoing shall not prohibit Tenant from prosecuting a separate claim against the taking authority for an amount separately designated for Tenant's relocation expenses or the interruption of or damage to Tenant's business or as compensation for Tenant's personal property, trade fixtures, Alterations or other improvements paid for by Tenant so long as any award to Tenant will not reduce the award to Landlord. In the event of a partial taking of the Premises which does not result in a termination of this Lease, the Monthly Rent and Additional Rent under Paragraphs 5 and 7 hereunder shall be equitably reduced. If all or any material part of the Real Property other than the Premises is taken, Landlord may terminate this Lease upon written notice to Tenant given within ninety (90) days after the date of taking. If a portion of the Real Property other than the Premises is taken, and such taking renders Tenant without reasonable access to the Premises, Tenant may terminate this Lease upon written notice to Landlord given within thirty (30) days after the date of taking. Any termination pursuant to this paragraph shall be effective as of the date specified by the party in its termination notice, which date shall not be before the date of such notice or more than thirty (30) days after the date of such notice. b. Notwithstanding the foregoing, if all or any portion of the Premises is taken for a period of time not exceeding one (1) year ending prior to the end of the term of this Lease, this Lease shall remain in full force and effect and Tenant shall continue to pay all rent and to perform all of its obligations under this Lease; provided, however, that Tenant shall be entitled to all compensation, damages, income, rent awards and interest thereon that is paid or made in connection with such temporary taking of the Premises (or portion thereof), except that any such compensation in excess of the rent or other amounts payable to Landlord hereunder shall be promptly paid over to Landlord as received. Landlord and Tenant each hereby waive the provisions of California Code of Civil Procedure Section 1265.130 and any other applicable existing or future Legal Requirement providing for, or allowing either party to petition the courts of the state in which the Real Property is located for, a termination of this Lease upon a partial taking of the Premises and/or the Building. 28. Landlord's Liability; Sale of Building. The term "Landlord," as used in this Lease, shall mean only the owner or owners of the Real Property at the time in question. Notwithstanding any other provision of this Lease, the liability of Landlord for its obligations under this Lease is limited solely to Landlord's interest in the Real Property as the same may from time to time be encumbered, and no personal liability shall at any time be asserted or enforceable against any other assets of Landlord or against the constituent shareholders, partners or other owners of Landlord, or the directors, officers, employees and agents of Landlord or such constituent shareholder, partner or other owner, on account of any of Landlord's obligations or actions under this Lease. In addition, in the event of any conveyance of title to the Real Property, then the grantor or transferor shall be relieved of all liability with respect to Landlord's obligations to be performed under this Lease after the date of such conveyance. In no event shall Landlord be deemed to be in default under this Lease unless Landlord fails to perform its obligations under this Lease, Tenant delivers to Landlord written notice specifying the nature of Landlord's alleged default, and Landlord fails to cure such default within thirty (30) days following receipt of such notice (or, if the default cannot reasonably be cured within such period, to commence action within such thirty (30)-day period and proceed diligently thereafter to cure such default). Upon any conveyance of title to the Real Property, the grantee or transferee shall be deemed to have assumed Landlord's obligations to be performed under this Lease from and after the 26 date of such conveyance, subject to the limitations on liability set forth above in this Paragraph 28. If Tenant provides Landlord with any security for Tenant's performance of its obligations hereunder, and Landlord transfers such security to the grantee or transferee of Landlord's interest in the Real Property, Landlord shall be released from any further responsibility or liability for such security. Notwithstanding any other provision of this Lease, but not in limitation of the provisions of Paragraph 14.a. above, Landlord shall not be liable for any consequential damages or interruption or loss of business, income or profits, or claims of constructive eviction, nor shall Landlord be liable for loss of or damage to artwork, currency, jewelry, bullion, unique or valuable documents, securities or other valuables, or for other property not in the nature of ordinary fixtures, furnishings and equipment used in general administrative and executive office activities and functions (all of the foregoing damages, losses and claims described in this sentence, collectively, "Special Claims and Damages"). Wherever in this Lease Tenant (a) releases Landlord from any claim or liability, (b) waives or limits any right of Tenant to assert any claim against Landlord or to seek recourse against any property of Landlord or (c) agrees to indemnify Landlord against any matters, the relevant release, waiver, limitation or indemnity shall run in favor of and apply to Landlord, the constituent shareholders, partners or other owners of Landlord, and the directors, officers, employees and agents of Landlord and each such constituent shareholder, partner or other owner. 29. Estoppel Certificates. At any time and from time to time, upon not less than ten (10) Business Days' prior notice from Landlord, Tenant shall execute, acknowledge and deliver to Landlord a statement certifying the commencement date of this Lease, stating that this Lease is unmodified and in full force and effect (or if there have been modifications, that this Lease is in full force and effect as modified and the date and nature of each such modification), that to the best of Tenant's knowledge Landlord is not in default under this Lease (or, if Landlord is in default, specifying the nature of such default), that Tenant is not in default under this Lease (or if Tenant is in default, specifying the nature of such default), the current amounts of and the dates to which the Monthly Rent and Additional Rent has been paid, and setting forth such other matters as may be reasonably requested by Landlord. Any such statement may be conclusively relied upon by a prospective purchaser of the Real Property or by a lender obtaining a lien on the Real Property as security. If Tenant fails to deliver such statement within the time required hereunder, such failure shall be conclusive upon Tenant that (i) this Lease is in full force and effect, without modification except as may be represented by Landlord, (ii) there are no uncured defaults in Landlord's performance of its obligations hereunder, (iii) not more than one month's installment of Monthly Rent has been paid in advance, and (iv) any other statements of fact included by Landlord in such statement are correct. Tenant acknowledges and agrees that its failure to execute such certificate may cause Landlord serious financial damage by causing the failure of a sale or financing transaction and giving Landlord all of its rights and remedies under Paragraph 25 above, including its right to damages caused by the loss of such sale or financing. 30. Right of Landlord to Perform. If Tenant fails to make any payment required hereunder (other than Monthly Rent and Additional Rent) or fails to perform any other of its obligations hereunder, after the expiration of any applicable grace or cure period (unless waiting for such period to expire would jeopardize the health, safety or quiet enjoyment of the Building by its tenants and occupants or cause further damage or loss to Landlord or the Real Property, as reasonably determined by Landlord, or result in any violation (or continuance of any violation) of any Legal Requirement), Landlord may, but shall not be obliged to, and without waiving any default of Tenant or releasing Tenant from any obligations to Landlord hereunder, make any such payment or perform any other such obligation on Tenant's behalf. All sums so paid by Landlord and all necessary incidental costs in connection with the performance by Landlord of an obligation of Tenant (together with interest thereon from the date of such payment by Landlord until paid at the Interest Rate) shall be payable by Tenant to Landlord upon demand, and Tenant's failure to make such payment upon demand shall entitle Landlord to the same rights and remedies provided Landlord in the event of non-payment of rent. 31. Late Charge. Tenant acknowledges that late payment of any installment of Monthly Rent or Additional Rent or any other amount required under this Lease will cause Landlord to incur costs not contemplated by this Lease and that the exact amount of such costs would be extremely difficult and impracticable to fix. Such costs include, without limitation, processing and accounting charges, late charges that may be imposed on Landlord by the terms of any encumbrance or note secured by the Real Property and the loss of the use of the delinquent funds. Therefore, if any installment of Monthly Rent or Additional Rent or any other amount due from Tenant is not received within five (5) days after due, Tenant shall pay to Landlord on demand, on account of the delinquent payment, an additional sum equal to the greater of (i) five percent (5%) of the overdue amount, or (ii) $100.00, which additional sum represents a fair and reasonable estimate of the costs that Landlord will incur by reason of late payment by Tenant. Notwithstanding the foregoing, Landlord shall give Tenant notice of non-payment of any amounts required of Tenant under this Lease and five (5) days after delivery of such notice to cure such non-payment once in each calendar year before assessing the late charge in such calendar year pursuant to this Paragraph 31. Acceptance of any late charge shall not constitute a waiver of Tenant's default with respect to the overdue amount, nor prevent Landlord from exercising its right to collect interest as provided above, rent, or any other damages, or from exercising any of the other rights and remedies available to Landlord. 32. Attorneys' Fees; Waiver of Jury Trial. In the event of any action or proceeding between Landlord and Tenant (including an action or proceeding between Landlord and the trustee or debtor in 27 possession while Tenant is a debtor in a proceeding under any bankruptcy law) to enforce any provision of this Lease, the losing party shall pay to the prevailing party all costs and expenses, including, without limitation, reasonable attorneys' fees and expenses, incurred in such action and in any appeal in connection therewith by such prevailing party. The "prevailing party" will be determined by the court before whom the action or proceeding was brought based upon an assessment of which party's major arguments or positions taken in the suit or proceeding could fairly be said to have prevailed over the other party's major arguments or positions on major disputed issues in the court's decision. Notwithstanding the foregoing, however, Landlord shall be deemed the prevailing party in any unlawful detainer or other action or proceeding instituted by Landlord based upon any default or alleged default of Tenant hereunder if (i) judgment is entered in favor of Landlord, or (ii) prior to trial or judgment Tenant pays all or any portion of the rent claimed by Landlord, vacates the Premises, or otherwise cures the default claimed by Landlord. If Landlord becomes involved in any litigation or dispute, threatened or actual, by or against anyone not a party to this Lease, but arising by reason of or related to any act or omission of Tenant or any Tenant Party, Tenant agrees to pay Landlord's reasonable attorneys' fees and other costs incurred in connection with the litigation or dispute, regardless of whether a lawsuit is actually filed. IF ANY ACTION OR PROCEEDING BETWEEN LANDLORD AND TENANT TO ENFORCE THE PROVISIONS OF THIS LEASE (INCLUDING AN ACTION OR PROCEEDING BETWEEN LANDLORD AND THE TRUSTEE OR DEBTOR IN POSSESSION WHILE TENANT IS A DEBTOR IN A PROCEEDING UNDER ANY BANKRUPTCY LAW) PROCEEDS TO TRIAL, LANDLORD AND TENANT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY IN SUCH TRIAL. Landlord and Tenant agree that this paragraph constitutes a written consent to waiver of trial by jury within the meaning of California Code of Civil Procedure Section 631(a)(2), and Tenant does hereby authorize and empower Landlord to file this paragraph and/or this Lease, as required, with the clerk or judge of any court of competent jurisdiction as a written consent to waiver of jury trial. 33. Waiver. No provisions of this Lease shall be deemed waived by Landlord or Tenant unless such waiver is in a writing signed by the party giving such waiver. The waiver by either party of any breach of any provision of this Lease by the other party shall not be deemed a waiver of any subsequent breach of the same or any other provision of this Lease. No delay or omission in the exercise of any right or remedy of Landlord upon any default by Tenant, or of Tenant upon any default of Landlord, shall impair such right or remedy or be construed as a waiver. Landlord's acceptance of any payments of rent due under this Lease shall not be deemed a waiver of any default by Tenant under this Lease (including Tenant's recurrent failure to timely pay rent) other than Tenant's nonpayment of the accepted sums, and no endorsement or statement on any check or accompanying any check or payment shall be deemed an accord and satisfaction. Tenant's payment of rent due and Tenant's continuance in possession shall not constitute a waiver by Tenant of any default of Landlord. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. 34. Notices. All notices and demands which may or are required to be given by either party to the other hereunder shall be in writing. All notices and demands by Landlord to Tenant shall be delivered personally or sent by United States mail, postage prepaid, or by any reputable overnight or same-day courier, addressed to Tenant at the Premises, Attention: General Counsel, or to such other place as Tenant may from time to time designate by notice to Landlord hereunder, except that prior to the date Tenant shall commence the conduct of business from the Premises, they shall be addressed to Tenant at 532 Folsom Street, San Francisco, California 94105, Attention: General Counsel. All notices and demands by Tenant to Landlord shall be sent by United States mail, postage prepaid, or by any reputable overnight or same-day courier, addressed to Landlord in care of Shorenstein Company, L.P., 555 California Street, 49th floor, San Francisco, California 94104, or to such other place as Landlord may from time to time designate by notice to Tenant hereunder. Notices delivered personally or sent same-day courier will be effective immediately upon delivery to the addressee at the designated address; notices sent by overnight courier will be effective one (1) Business Day after acceptance by the service for delivery; notices sent by mail will be effective two (2) Business Days after mailing. In the event Tenant requests multiple notices hereunder, Tenant will be bound by such notice from the earlier of the effective times of the multiple notices. 35. Deleted. 36. Defined Terms and Marginal Headings. When required by the context of this Lease, the singular includes the plural. If more than one person or entity signs this Lease as Tenant, the obligations hereunder imposed upon Tenant shall be joint and several, and the act of, written notice to or from, refund to, or signature of, any Tenant signatory to this Lease (including without limitation modifications of this Lease made by fewer than all such Tenant signatories) shall bind every other Tenant signatory as though every other Tenant signatory had so acted, or received or given the written notice or refund, or signed. The headings and titles to the paragraphs of this Lease are for convenience only and are not to be used to interpret or construe this Lease. Wherever the term "including" or "includes" is used in this Lease it shall be construed as if followed by the phrase "without limitation." The language in all parts of this Lease shall in all cases be 28 construed as a whole and in accordance with its fair meaning and not construed for or against any party simply because one party was the drafter thereof. 37. Time and Applicable Law. Time is of the essence of this Lease and of each and all of its provisions. This Lease shall be governed by and construed in accordance with the laws of the State of California, and the venue of any action or proceeding under this Lease shall be the City and County of San Francisco, California. 38. Successors. Subject to the provisions of Paragraphs 13 and 28 above, the covenants and conditions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors, executors, administrators and assigns. 39. Entire Agreement; Modifications. This Lease (including any exhibit, rider or attachment hereto) constitutes the entire agreement between Landlord and Tenant with respect to Tenant's lease of the Premises. No provision of this Lease may be amended or otherwise modified except by an agreement in writing signed by the parties hereto. Neither Landlord nor Landlord's agents have made any representations or warranties with respect to the Premises, the Building, the Real Property or this Lease except as expressly set forth herein, including without limitation any representations or warranties as to the suitability or fitness of the Premises for the conduct of Tenant's business or for any other purpose, nor has Landlord or its agents agreed to undertake any alterations or construct any improvements to the Premises except those, if any, expressly provided in this Lease, and no rights, easements or licenses shall be acquired by Tenant by implication or otherwise unless expressly set forth herein. Neither this Lease nor any memorandum hereof shall be recorded by Tenant. 40. Light and Air. Tenant agrees that no diminution of light, air or view by any structure which may hereafter be erected (whether or not by Landlord) shall entitle Tenant to any reduction of rent hereunder, result in any liability of Landlord to Tenant, or in any other way affect this Lease. 41. Name of Building. Tenant shall not use the name of the Building for any purpose other than as the address of the business conducted by Tenant in the Premises without the written consent of Landlord. Landlord reserves the right to change the name of the Building at any time in its sole discretion by written notice to Tenant and Landlord shall not be liable to Tenant for any loss, cost or expense on account of any such change of name. 42. Severability. If any provision of this Lease or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Lease and the application of such provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 43. Authority. If Tenant is a corporation, partnership, trust, association or other entity, Tenant and each person executing this Lease on behalf of Tenant, hereby covenants and warrants that (a) Tenant is duly incorporated or otherwise established or formed and validly existing under the laws of its state of incorporation, establishment or formation, (b) Tenant has and is duly qualified to do business in the state in which the Real Property is located, (c) Tenant has full corporate, partnership, trust, association or other appropriate power and authority to enter into this Lease and to perform all Tenant's obligations hereunder, and (d) each person (and all of the persons if more than one signs) signing this Lease on behalf of Tenant is duly and validly authorized to do so. 44. No Offer. Submission of this instrument for examination and signature by Tenant does not constitute an offer to lease or a reservation of or option for lease, and is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. 45. Real Estate Brokers. Tenant represents and warrants that it has negotiated this Lease directly with the real estate broker(s) identified in Paragraph 2 and has not authorized or employed, or acted by implication to authorize or to employ, any other real estate broker or salesman to act for Tenant in connection with this Lease. Tenant shall indemnify, defend and hold Landlord harmless from and against any and all Claims by any real estate broker or salesman other than the real estate broker(s) identified in Paragraph 2 for a commission, finder's fee or other compensation as a result of Tenant's entering into this Lease. Landlord shall pay any commission owing to the Real Estate Brokers identified in Paragraph 2 above pursuant to a separate agreement, and shall indemnify, defend and hold Tenant harmless from and against any and all Claims by such real estate brokers. 46. Consents and Approvals. Wherever the consent, approval, judgment or determination of Landlord is required or permitted under this Lease, Landlord may exercise its sole discretion in granting or withholding such consent or approval or in making such judgment or determination without reference to any extrinsic standard of reasonableness, unless the provision providing for such consent, approval, judgment or determination specifies that Landlord's consent or approval is not to be unreasonably withheld, or that the standard for such consent, approval, judgment or determination is to be reasonable, or otherwise specifies the standards under which Landlord may withhold its consent. Whenever Tenant requests Landlord to take any 29 action or give any consent or approval, Tenant shall reimburse Landlord for all of Landlord's reasonable costs incurred in reviewing the proposed action or consent (whether or not Landlord consents to any such proposed action), including without limitation reasonable attorneys' or consultants' fees and expenses, within thirty (30) days after Landlord's delivery to Tenant of a statement of such costs. The review and/or approval by Landlord of any item shall not impose upon Landlord any liability for accuracy or sufficiency of any such item or the quality or suitability of such item for its intended use. Any such review or approval is for the sole purpose of protecting Landlord's interest in the Real Property, and neither Tenant nor any Tenant Party nor any person or entity claiming by, through or under Tenant, nor any other third party shall have any rights hereunder by virtue of such review and/or approval by Landlord. 47. Reserved Rights. Landlord retains and shall have the rights set forth below, exercisable without notice and without liability to Tenant for damage or injury to property, person or business and without effecting an eviction, constructive or actual, or disturbance of Tenant's use or possession of the Premises or giving rise to any claim for rent abatement (except as set forth in clause (b) below): (a) To grant to anyone the exclusive right to conduct any business or render any service in or to the Building and its tenants, provided that such exclusive right shall not operate to require Tenant to use or patronize such business or service or to exclude Tenant from its use of the Premises expressly permitted herein. (b) Subject to the rent abatement provisions of Paragraph 17.e. above, to perform, or cause or permit to be performed, at any time and from time to time, including during Business Hours, construction in the common areas and facilities or other leased areas in the Real Property. Landlord shall use its good faith efforts to minimize disruption to Tenant's business caused by any such work, and, without limitation, Landlord shall perform any extraordinarily noisy or disruptive work after Business Hours or on weekends to the extent such procedures would be generally followed by managers of other first class high rise office buildings in the San Francisco financial district (except to the extent an emergency and/or Legal Requirements require otherwise, as reasonably determined by Landlord). (c) To reduce, increase, enclose or otherwise change at any time and from time to time the size, number, location, lay-out and nature of the common areas and facilities and other tenancies and premises in the Real Property and to create additional rentable areas through use or enclosure of common areas, but in no event shall Tenant's parking rights pursuant to Paragraph 53 below be diminished thereby. 48. Financial Statements. Within thirty (30) days after Landlord's request therefor, but not more frequently than three (3) times each calendar year, Tenant shall furnish to Landlord, and to any lender, prospective lender, purchaser or prospective purchaser designated by Landlord, copies of Tenant's most recent audited financial statements reflecting Tenant's financial situation (including without limitation balance sheets, statements of profit and loss, and changes in financial condition), and in addition shall cause to be furnished to Landlord similar financial statements for any guarantor(s) of this Lease. So long as Tenant or such guarantor shall be a publicly traded entity, it may satisfy the requirements of this Paragraph 48 by delivery of its most recent publicly available financial statements. Landlord shall use its good faith efforts to keep any financial statements delivered to it pursuant to this Paragraph 48 (other than publicly available financial statements) confidential, and shall inform any party to whom it delivers such non-public financial statements of the confidential nature of the same. Landlord shall not deliver any such non-public financial statements to any party which does not have a legitimate interest in receiving the same by reason of such party's interest or prospective interest in Landlord or the Real Property. 49. Signage. a. Entrances; Building Directory. Tenant may, at Tenant's expense, install a sign identifying Tenant's business in the elevator lobby on each full floor of the Premises leased by Tenant, provided that the size, location and installation requirements of the sign shall be subject to Landlord's prior reasonable approval and all applicable Legal Requirements. Any change to such signage shall also be subject to such approval by Landlord and shall be made at Tenant's sole cost and expense. In addition, Tenant shall be entitled, at no cost to Tenant, to have the name of Tenant's company listed on (i) the Building directory situated in the lobby of the Building and (ii) the Tenant directory in the lobby of each multi-tenant floor on which any portion of the Premises is located. If, subsequent to the time Tenant's name is initially listed on the directories, Tenant requests a change in Tenant's name as printed thereon, Tenant shall pay Landlord's standard charge as in effect from time to time for any such change. b. Building Lobby Signage. Tenant may, at Tenant's expense, and upon at least thirty (30) days' prior written notice to Landlord, install a sign displaying only the name of the Tenant originally named under this Lease, as such name exists as of the date of this Lease, on the south wall of the main lobby of the Embarcadero entrance to the Building and a second such sign on the south wall of the plaza entrance to the main lobby of the Embarcadero entrance to the Building (collectively, "Tenant's Lobby Signage"). 30 The size, design, color, material, content, location, installation requirements and appropriateness for a first-class office building, and conformity with the overall design and ambiance of the Real Property of such signage, shall be subject to Landlord's prior written approval, which approval may be withheld in Landlord's good faith discretion, and to the other requirements of Paragraph 9 above; except that the parties agree that each such sign shall fit proportionately within two existing adjacent horizontally placed wood panels on such walls. Prior to installation of such signage, Tenant shall obtain all governmental approvals and permits required in connection therewith, and Tenant shall otherwise comply with all Legal Requirements applicable to such signage. Upon the expiration or earlier termination of this Lease, or within thirty (30) days after the earlier termination of Tenant's signage rights pursuant to the following provisions of this Paragraph 49, Tenant shall, at its expense, remove Tenant's Lobby Signage and repair and restore the affected areas of the Building to their original condition prior to the installation of Tenant's signage. Tenant acknowledges that its signage rights pursuant to this Paragraph 49 are non-exclusive. Notwithstanding anything in this Paragraph 49 to the contrary, Tenant's Lobby Signage rights shall forever terminate upon the date on which the Tenant originally named under this Lease and/or such Tenant's Affiliates are not in occupancy of an aggregate of at least forty-five thousand (45,000) rentable square feet of space in the Building pursuant to this Lease (i.e. such Tenant has assigned this Lease, or has sublet such portion of the Premises, to other than its Affiliates, such that such occupancy requirement is not met). In no event shall Tenant's Lobby Signage rights extend to Tenant's Affiliates, notwithstanding that such Affiliates' occupancy pursuant to subleases from Tenant may be taken into account in determining whether Tenant has met the aforesaid occupancy requirement for Tenant's Lobby Signage rights. So long as Tenant's Lobby Signage rights shall remain in effect pursuant to this Paragraph 49, Landlord shall not allow more than four (4) tenants or other parties, in addition to Tenant, to place identification signage in the main lobby of the Embarcadero entrance to the Building or in the plaza entrance to such main lobby, it being acknowledged, however, that Landlord may grant each of such four (4) tenants or other parties the right to place a total of two (2) signs in such areas (i.e. one (1) sign in the main lobby of the Embarcadero entrance to the Building and one (1) sign in the plaza entrance to such main lobby). Nothing contained in this Paragraph 49 shall preclude any identification signage of the owner of the Building or the Project, or any affiliate thereof, and any such signage shall not be taken into account for purposes of determining the number of signs allowed pursuant to the immediately preceding paragraph, regardless of whether such owner or affiliate shall also be a tenant of the Building or Project. c. Street Address Signage. At Landlord's sole cost and expense and subject to applicable Legal Requirements, to the extent not already present Landlord shall install (and thereafter shall maintain in place) street address identification signage on or about the Embarcadero entrance to the Building. Such identification shall be of such size, design, color, material and location as Landlord shall determine. Landlord shall consult with Tenant as to such identification and take Tenant's concerns and suggestions with respect thereto into account, but Tenant shall not have any approval rights with respect to such street address identification signage. 50. Nondisclosure of Lease Terms. Tenant agrees that the terms of this Lease are confidential and constitute proprietary information of Landlord, and that disclosure of the terms hereof could adversely affect the ability of Landlord to negotiate with other tenants. Tenant hereby agrees that Tenant shall use its commercially reasonable efforts to preclude Tenant and its partners, officers, directors, employees, agents, real estate brokers and sales persons and attorneys from disclosing the terms of this Lease to any other person without Landlord's prior written consent, except to any accountants of Tenant in connection with the preparation of Tenant's financial statements or tax returns, to an assignee of this Lease or sublessee of the Premises, or to an entity or person (including Tenant's attorneys and other advisors) to whom disclosure is required by applicable law or in connection with any action brought to enforce this Lease or to assist Tenant in the interpretation of any provisions hereof or the determination of Tenant's rights hereunder. 51. Hazardous Substance Disclosure. California law requires landlords to disclose to tenants the existence of certain hazardous substances. Accordingly, the existence of gasoline and other automotive fluids, maintenance fluids, copying fluids and other office supplies and equipment, certain construction and finish materials, tobacco smoke, cosmetics and other personal items must be disclosed. Gasoline and other automotive fluids are found in the garage area of the Building. Cleaning, lubricating and hydraulic fluids used in the operation and maintenance of the Building are found in the utility areas of the Building not generally accessible to Building occupants or the public. Many Building occupants use copy machines and printers with associated fluids and toners, and pens, markers, inks, and office equipment that may contain hazardous substances. Certain adhesives, paints and other construction materials and finishes used in portions of the Building may contain hazardous substances. Although smoking is prohibited in the public areas of the Building, these areas may, from time to time, be exposed to tobacco smoke. Building occupants and other persons entering the Building from time-to-time may use or carry prescription and non-prescription drugs, perfumes, cosmetics and other toiletries, and foods and beverages, some of which may contain hazardous substances. Landlord has made no special investigation of the Premises with respect to any hazardous substances. 31 52. Option to Renew. a. Option to Renew. Tenant shall have the option to renew this Lease for one (1) additional term of five (5) years, commencing upon the expiration of the initial term of this Lease. Such renewal option must be exercised, if at all, by written notice given by Tenant to Landlord not later than fifteen (15) months prior to the expiration of the initial term of this Lease. Notwithstanding the foregoing, at Landlord's option this renewal option shall be null and void and Tenant shall have no right to renew this Lease if (i) as of the date immediately preceding the commencement of the renewal period Tenant and/or any Affiliate of Tenant is not in occupancy of at least sixty-seven percent (67%) of the rentable square footage of the Premises demised pursuant to this Lease or Tenant and/or any Affiliate of Tenant does not intend to continue to remain in such occupancy (but intends to assign this Lease or sublet the space in whole or in part such that such occupancy requirement will not be met), or (ii) on the date Tenant exercises the option or on the date immediately preceding the commencement date of the renewal period an Event of Default (or breach or default which subsequently matures into an Event of Default) shall have occurred and be continuing under this Lease. b. Terms and Conditions. If Tenant exercises a renewal option, then during the applicable renewal period all of the terms and conditions set forth in this Lease as applicable to the Premises during the initial term shall apply during the renewal term, except that (i) Tenant shall have no further right to renew this Lease, (ii) Tenant shall take the Premises in their then "as-is" state and condition for the applicable renewal period, (iii) the Base Year for the Premises shall be the calendar year in which the renewal term commences and the Base Tax Year for the Premises shall be the fiscal tax year in which the renewal term commences, and (iv) the Monthly Rent payable by Tenant for the Premises shall be the then-fair market rent for the Premises based upon the terms of this Lease, as renewed. Fair market rent shall include the periodic rental increases, if any, that would be included for space leased for the period the space will be covered by the Lease. For purposes of this Paragraph 52, the term "fair market rent" shall mean the rental rate that would be applicable for a lease term commencing on the commencement date of the renewal term and that would be payable in any arms length negotiations for the Premises in their then as-is condition, for the renewal term, which rental rate may be established by reference to rental terms actually negotiated for comparable space under primary lease (and not sublease), taking into consideration the Base Year and Base Tax Year with respect to the Premises as set forth above, the quality, prestige and location of the Building and such amenities as existing improvements, view, floors on which the Premises are situated and the like, situated in first class, reputable, established high-rise office buildings in the San Francisco Financial District, in sound physical and economic condition, engaged in then-prevailing ordinary rental market practices with respect to tenant concessions (if any) (e.g. not offering extraordinary rental, promotional deals and other concessions to tenants which deviate from then prevailing ordinary practices in an effort to alleviate cash flow problems, difficulties in meeting loan obligations or other financial distress, or in response to a greater than average vacancy rate or to entice an anchor tenant into a newly constructed building). The fair market rent shall be mutually agreed upon by Landlord and Tenant in writing within the thirty (30) calendar day period commencing six (6) months prior to commencement of the renewal period. If Landlord and Tenant are unable to agree upon the fair market monthly rent within such thirty (30)-day period, then the fair market rent shall be established by the appraisal procedures set forth in Paragraph 52.c. below. c. Appraisal. Within thirty (30) days after the expiration of the thirty (30)-day period provided in Paragraph 52.b. above for the mutual agreement of Landlord and Tenant as to the fair market rent, each party hereto, at its cost, shall engage a California licensed real estate broker to act on its behalf in determining the fair market monthly rent. The brokers each shall have at least ten (10) years' experience with leases in first-class high-rise office buildings in the San Francisco Financial District. If a party does not appoint a broker within such thirty (30)-day period but a broker is appointed by the other respective party, the single broker appointed shall be the sole broker and shall set the fair market rent. If the two brokers are appointed by the parties as stated in this paragraph, such brokers shall meet promptly and attempt to set the fair market rent taking into account all of the parameters set forth in Paragraph 52.b. above. If such brokers are unable to agree within thirty (30) days after appointment of the second broker, the brokers shall inform Landlord and Tenant in writing of their respective determinations of the fair market rent (each an "Initial Fair Market Rent Determination"), and shall elect a third broker meeting the qualifications stated in this paragraph within ten (10) days after the last date the two brokers are given to set the fair market rent. If the two appraisers are unable to agree on a third appraiser, the third appraiser shall be selected by the office of JAMS/ENDISPUTE located in San Francisco, California or by such other procedure as the two appraisers shall agree. Each of the parties hereto shall bear one-half (1/2) the cost of appointing the third broker and of the third broker's fee. The third broker shall be a person who has not previously acted in any capacity for either party. Neither Landlord nor Tenant shall advise the third broker of the fair market rent determinations delivered by the first two brokers, and Landlord and Tenant shall instruct the first two brokers not to advise the third broker of such determinations. The third broker shall make his own determination of the fair market rent within thirty (30) days of his appointment, and shall be instructed not to advise either party or the other two brokers of his determination except as follows: When the third broker has made his determination, he shall so advise Landlord and Tenant and shall establish a date, at least five (5) days after the giving of notice by the third broker to Landlord and Tenant, on which he shall meet with the parties to 32 disclose his determination of the fair market rent. Such meeting shall take place in the third broker's office unless otherwise agreed by the parties. If the fair market rent determined by the third broker is the average of the determinations of the fair market rent delivered by Landlord's broker and Tenant's broker, the third broker's determination of fair market rent shall be the fair market rent. If such is not the case, fair market rent shall be whichever of the Initial Fair Market Rent Determinations is closest to the determination of fair market rent by the third broker. d. Minimum Rental. Notwithstanding the foregoing, in no event shall the Monthly Rent during the renewal period be less than the aggregate of the amounts of Monthly Rent and Additional Rent payable by Tenant (for all of the Premises leased hereunder) under Paragraphs 2.b., 5 and 7 hereof for the calendar month immediately preceding the commencement of the renewal period (disregarding, for such purpose, any temporary rental abatements or reductions then in effect). 53. Parking. Landlord shall provide Tenant with parking for thirty (30) automobiles in the garage of the Building, and Tenant shall pay for such parking at Landlord's regular rate or charge from time to time in effect to tenants of the Building for parking in the Building. Such parking is currently on an unreserved self-park basis, but Landlord reserves the right to change such parking to a valet basis or a reserved self-park basis, and/or return to an unreserved self-park basis, as Landlord shall determine from time to time. Tenant shall provide Landlord with written notice of the names of each party to whom Tenant from time to time distributes Tenant's parking rights hereunder (all of whom must be employees, partners, members and/or shareholders, as applicable, of Tenant), and shall cause each such party to execute Landlord's standard contract and waiver form for garage users. If the parking charge is not paid when due, and such failure continues for five (5) days after notice thereof to Tenant, then Landlord may terminate Tenant's rights under this Paragraph 53 as to the number of spaces as to which the parking charge has not been paid in full. The parking rights set forth in this Paragraph 53 are personal to the Tenant originally named in this Lease, any assignee of Tenant's interests under this Lease, and any subtenant which is an Affiliate of the Tenant originally named in this Lease, and shall not inure to the benefit of any other party, except that Tenant may allow approved subtenants of the Premises or any portion thereof to use Tenant's parking rights for up to an aggregate of fifteen (15) automobiles. Further, if at any time during the term hereof, Tenant releases to Landlord any parking space provided for in this paragraph, then Tenant's right under this paragraph to use such released parking space shall forever terminate. 54. First Rights Contingency. Tenant acknowledges that Landlord's ability to enter into this Lease is subject to the contingencies that (i) certain rights of first offer and first refusal in favor of another tenant of the Project are not exercised, and (ii) Landlord's lender with respect to the Project approves this Lease. Promptly after the execution hereof, Landlord shall send such notices and other documentation (which may include a copy of this Lease) to such tenant and lender as shall be required to trigger the time period during which such tenant and lender must exercise or waive its respective rights. If such tenant shall exercise any such rights, or such lender shall not approve this Lease, Landlord shall give Tenant prompt notice thereof ("Landlord's Termination Notice") and this Lease shall thereupon be deemed terminated and of no force or effect. If such Tenant shall waive (or be deemed to have waived) all such rights, and such lender shall approve (or be deemed to have approved) this Lease, Landlord shall give Tenant prompt notice thereof ("Landlord's Ratification Notice") and this Lease shall continue in full force and effect. Landlord's Termination Notice shall be given, if at all, within fifteen (15) Business Days after the date of this Lease, and if not so given, regardless of whether Landlord shall have delivered Landlord's Ratification Notice, this Lease shall continue in full force and effect and Landlord shall have no right to terminate this Lease pursuant to this Paragraph 54. The earlier to occur of the date on which Landlord shall deliver Landlord's Ratification Notice to Tenant, or the expiration of the aforesaid fifteen (15) Business Day period without Landlord having delivered Landlord's Termination Notice to Tenant, is referred to in this Lease as the "First Rights Contingency Satisfaction Date." 55. Canine Access. Notwithstanding anything to the contrary contained in this Lease (including the Rules and Regulations), so long as the Tenant hereunder shall remain the Tenant originally named in this Lease, or any Affiliate of such Tenant, and such Tenant or its Affiliates shall remain in occupancy of at least forty-five thousand (45,000) rentable square feet of space in the Building pursuant to this Lease, Tenant shall have the right to maintain in the Premises the Golden Retriever dog named "Blaze", owned by Mr. David Hayden on the date hereof, the Black Labrador dog named "Scout", owned by Shireen Piramoon on the date hereof, and a third adult dog designated by Tenant of good temperament and training, subject to the following terms, covenants and conditions. Tenant shall be solely responsible for such dogs, and without limitation, Tenant's indemnification and insurance obligations set forth in Paragraphs 14 and 15 below shall apply with respect to such dogs and any Claims in connection therewith, and Tenant's right to maintain such dogs in the Premises shall be subject to the provisions of the second paragraph of Paragraph 8.a. above. In no event shall any such dog be left unattended and without direct and responsible human supervision. Tenant shall ensure that any dog waste in or about the Building or Project is promptly picked-up and properly disposed of as reasonably required by Landlord, all at Tenant's sole cost and expense. In the event that any dogs permitted in the Premises pursuant to the foregoing are determined by Landlord, in good faith, to present a risk of personal injury or property damage to the Building or the Project, or if Landlord's lender, insurance carriers or other tenants reasonably require that any such dogs be removed from the 33 Premises or the Project, Landlord may revoke Tenant's rights pursuant to this Paragraph 55 and Tenant shall immediately and permanently remove the offending dog or dogs from the Premises and the Project. THIS LEASE IS EXECUTED by Landlord and Tenant as of the date set forth at the top of page 1 hereof. Landlord: Tenant: SRI HILLS PLAZA VENTURE, LLC, CRITICAL PATH, INC., a Delaware limited liability company a California corporation By: /s/ Douglas Shorenstein By: /s/ William McGlashan ------------------------------- --------------------------------- Douglas W. Shorenstein Chairman and Chief Executive Name:_______________________________ Officer Title:______________________________ By: /s/ Laureen DeBuono --------------------------------- Name:_______________________________ Title:______________________________ 34 EXHIBIT B RULES AND REGULATIONS HILLS PLAZA 1. No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or to any part of the outside or inside of the Building or any part of the Premises visible from the exterior of the Premises without the prior written consent of Landlord, which consent may be withheld in Landlord's sole discretion. Landlord shall have the right to remove, at Tenant's expense and without notice to Tenant, any such sign, placard, picture, advertisement, name or notice that has not been approved by Landlord. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved of by Landlord. If Landlord notifies Tenant in writing that Landlord objects to any curtains, blinds, shades or screens attached to or hung in or used in connection with any window or door of the Premises, such use of such curtains, blinds, shades or screens shall be removed immediately by Tenant. No awning shall be permitted on any part of the Premises. 2. No ice, drinking water, towel, barbering or bootblacking, shoeshining or repair services, or other similar services shall be provided to the Premises, except from persons authorized by Landlord and at the hours and under regulations fixed by Landlord. 3. The bulletin board or directory of the Building will be provided exclusively for the display of the name and location of tenants and permitted subtenants only and Landlord reserves the right to exclude any other names therefrom. 4. The sidewalks, halls, passages, exits, entrances, elevators and stairways shall not be obstructed by any of the Tenant Parties or used by Tenant for any purpose other than for ingress to and egress from its Premises. The halls, passages, exits, entrances, elevators, stairways, balconies and roof are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence in the judgment of Landlord shall be prejudicial to the safety, character, reputation and interests of the Building and its tenants, except that the foregoing shall not diminish any rights of Tenant to use any such areas which are contained within and are part of the Premises, as shown on Exhibit A to the Lease. No tenant and no employees or invitees of any tenant shall go upon the roof of the Building. 5. Tenant shall not alter any lock or install any new or additional locks or any bolts on any interior or exterior door of the Premises without the prior written consent of Landlord. 6. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein and the expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused it. 7. Tenant shall not overload the floor of the Premises or mark, drive nails, screw or drill into the partitions, woodwork or plaster or in any way deface the Premises or any part thereof. 8. No furniture, freight or equipment of any kind shall be brought into the Building without the consent of Landlord and all moving of the same into or out of the Building shall be done at such time and in such manner as Landlord shall designate. Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy equipment brought into the Building and also the times and manner of moving the same in and out of the Building. Safes or other heavy objects shall, if considered necessary by Landlord, stand on a platform of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such safe or property from any cause, and all damage done to the Building by moving or maintaining any such safe or other property shall be repaired at the expense of Tenant. The elevator designated for freight by Landlord shall be available for use by all tenants in the Building during the hours and pursuant to such procedures as Landlord may determine from time to time. The persons employed to move Tenant's equipment, material, furniture or other property in or out of the Building must be acceptable to Landlord. The moving company must be a locally recognized professional mover, whose primary business is the performing of relocation services, and must be bonded and fully insured. In no event shall Tenant employ any person or company whose presence may give rise to a labor or other disturbance in the Real Property. A certificate or other verification of such insurance must be received and approved by Landlord prior to the start of any moving operations. Insurance must be sufficient in Landlord's sole opinion, to cover all personal liability, theft or damage to the Project, including, but not limited to, floor coverings, doors, walls, elevators, stairs, foliage and landscaping. Special care must be taken to prevent damage to foliage and landscaping during adverse weather. All moving operations shall be 1 conducted at such times and in such a manner as Landlord shall direct, and all moving shall take place during non-business hours unless Landlord agrees in writing otherwise. 9. Tenant shall not employ any person or persons other than the janitor of Landlord for the purpose of cleaning the Premises, unless otherwise agreed to by Landlord. Except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be permitted to enter the Building for the purpose of cleaning the Building or the Premises. Tenant shall not cause any unnecessary labor by reason of Tenant's carelessness or indifference in the preservation of good order and cleanliness. 10. Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business therein, nor, except as mandated by applicable law, shall any animals or birds be brought in or kept in or about the Premises or the Building. In no event shall Tenant keep, use, or permit to be used in the Premises or the Building any guns, firearm, explosive devices or ammunition. Notwithstanding the foregoing, Landlord acknowledges that Tenant may desire to employ, at its sole cost and expense, a licensed and reputable security service to supply security services within the Premises, and that Tenant may desire that such security personnel carry firearms. Landlord will consider any request by Tenant to allow firearms in the Premises for such purpose, but in no event shall firearms be allowed in the Premises without Landlord's prior written consent, which may be withheld in Landlord's good faith discretion and which may be conditioned, without limitation, upon Tenant's delivery of such further insurance coverages and indemnifications as Landlord shall require. 11. No cooking shall be done or permitted by Tenant in the Premises, nor shall the Premises be used for the storage of merchandise, for washing clothes, for lodging, or for any improper, objectionable or immoral purposes. Notwithstanding the foregoing, Tenant may maintain and use in the Premises a food preparation area with a refrigerator, microwave oven, toaster, coffee maker and other small appliances; provided that Tenant shall (i) prevent the emission of any food or cooking odor from leaving the Premises, (ii) be solely responsible for cleaning the appliances and food preparation surfaces and removing food-related waste from the Premises and the Building, or shall pay Landlord's standard rate for such service as an addition to cleaning services ordinarily provided, (iii) maintain and use such areas solely for Tenant's employees and business invitees, not as public facilities, and (iv) keep the Premises free of vermin and other pest infestation and shall exterminate, as needed, in a manner and through contractors reasonably approved by Landlord, preventing any emission of odors, due to extermination, from leaving the Premises. Notwithstanding clause (ii) above, Landlord shall, without special charge, on Business Days, empty and remove the contents of one (i) 15 gallon (or smaller) waste container from the food preparation area so long as such container is fully lined with, and the contents can be removed in, a waterproof plastic liner or bag, supplied by Tenant, which will prevent any leakage of food related waste or odors; provided, however, that if at any time Landlord must pay a premium or special charge to Landlord's cleaning or scavenger contractors for the handling of food-related or so-called "wet" refuse, Landlord's obligation to provide such removal, without special charge, shall cease. 12. Tenant shall not use or keep in the Premises or the Building any kerosene, gasoline, or inflammable or combustible fluid or material, or use any method of heating or air conditioning other than that supplied by Landlord. 13. Landlord will direct electricians as to where and how telephone and telegraph wires are to be introduced into the Premises and the Building. No boring or cutting for wires will be allowed without the prior consent of Landlord. The location of telephones, call boxes and other office equipment affixed to the Premises shall be subject to the prior approval of Landlord. 14. Upon the expiration or earlier termination of the Lease, Tenant shall deliver to Landlord the keys of offices, rooms and toilet rooms which have been furnished by Landlord to Tenant and any copies of such keys which Tenant has made. In the event Tenant has lost any keys furnished by Landlord, Tenant shall pay Landlord for such keys. 15. Tenant shall not lay linoleum, tile, carpet or other similar floor covering so that the same shall be affixed to the floor of the Premises, except to the extent and in the manner approved in advance by Landlord. The expense of repairing any damage resulting from a violation of this rule or removal of any floor covering shall be borne by the tenant by whom, or by whose contractors, employees or invitees, the damage shall have been caused. 16. No furniture, packages, supplies, equipment or merchandise will be received in the Building or carried up or down in the elevators, except between such hours and in such elevators as shall be designated by Landlord, which elevator usage shall be subject to the Building's customary charge therefor as established from time to time by Landlord. 2 17. On Saturdays, Sundays and legal holidays, and on other days between the hours of 6:00 P.M. and 8:00 A.M., access to the Building, or to the halls, corridors, elevators or stairways in the Building, or to the Premises may be refused unless the person seeking access is known to the person or employee of the Building in charge and has a pass or is properly identified. Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In case of invasion, mob, riot, public excitement, or other commotion, Landlord reserves the right to prevent access to the Building during the continuance of the same by closing the doors or otherwise, for the safety of the tenants and protection of property in the Building. 18. Tenant shall be responsible for insuring that the doors of the Premises are closed and securely locked before leaving the Building and must observe strict care and caution that all water faucets or water apparatus are entirely shut off before Tenant or Tenant's employees leave the Building, and that all electricity, gas or air shall likewise be carefully shut off, so as to prevent waste or damage, and for any default or carelessness Tenant shall make good all injuries sustained by other tenants or occupants of the Building or Landlord. Landlord shall not be responsible to Tenant for loss of property on the Premises, however occurring, or for any damage to the property of Tenant caused by the employees or independent contractors of Landlord or by any other person. 19. Landlord reserves the right to exclude or expel from the Building any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of the rules and regulations of the Building. 20. The requirements of any tenant will be attended to only upon application at the office of the Building. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee will admit any person (tenant or otherwise) to any office without specific instructions from Landlord. 21. No vending machine or machines of any description shall be installed, maintained or operated upon the Premises without the prior written consent of Landlord. 22. Subject to Tenant's right of access to the Premises in accordance with Building security procedures, Landlord reserves the right to close and keep locked all entrance and exit doors of the Building on Saturdays, Sundays and legal holidays and on other days between the hours of 6:00 P.M. and 8:00 A.M., and during such further hours as Landlord may deem advisable for the adequate protection of the Building and the property of its tenants. 3 EXHIBIT C FORM OF LETTER OF CREDIT [Date] SRI HILLS PLAZA VENTURE, LLC ("Beneficiary") c/o SHORENSTEIN COMPANY, L.P. 555 California Street, 49th Floor San Francisco, CA 94104 Attn: Legal Department IRREVOCABLE STANDBY LETTER OF CREDIT NO.________ We hereby establish our Irrevocable Letter of Credit in your favor available by your drafts drawn on [BANK], at sight, for any sum or sum(s) not exceeding ______________ Dollars ($__________), for account of [TENANT] ("Applicant"). Draft(s) must be accompanied by supporting documents as described below: A written statement to [BANK] stating that "The principal amount [or the portion requested] of this Letter of Credit is due and payable in accordance with the provisions of that certain Office Lease dated _______________________ , between Beneficiary and Applicant." The written statement shall be accompanied by this Letter of Credit for surrender; provided, however, that if less than the balance of the Letter of Credit is drawn, this Letter of Credit need not be surrendered and shall continue in full force and effect with respect to the unused balance of this Letter of Credit unless and until we issue to you a replacement Letter of Credit for such unused balance, the terms of which replacement Letter of Credit shall be identical to those set forth in this Letter of Credit. We are not required to inquire as to the accuracy of the matters recited in the written statement or as to the authority of the person signing the written statement and may take the act of signing as conclusive evidence of such accuracy and his or her authority to do so. The obligation of [BANK] under this Letter of Credit is the individual obligation of [BANK], and is in no way contingent upon reimbursement with respect thereto. Each draft must bear upon its face the clause "Drawn under Letter of Credit No. _____________ , dated ______________, of [BANK]." This Letter of Credit shall be automatically extended for an additional period of one year from the present or each future expiration date unless we have notified you in writing delivered via U.S. registered mail, return receipt requested, to your address stated above, or to such other address as you shall have furnished to us for such purpose, not less than sixty (60) days before such expiration date, that we elect not to renew this Letter of Credit. Upon your receipt of such notification, you may draw your sight draft on us prior to the then applicable expiration date for the unused balance of the Letter of Credit, which shall be accompanied by your signed written statement that you received notification of our election not to extend. Except so far as otherwise expressly stated herein, this Letter of Credit is subject to the "Uniform Customs and Practices for Documentary Credits (1993 Revision), International Chamber of Commerce - Publication No. 500." If this Letter of Credit expires during an interruption of business as described in article 17 of Publication 500, we hereby specifically agree to effect payment if this Letter of Credit is drawn against within 30 days after the resumption of business. We hereby agree with you that drafts drawn under and in compliance with the terms of this Letter of Credit will be duly honored if presented to the above-mentioned drawee at our offices at [ADDRESS IN SAN FRANCISCO BAY AREA] on or before ______________ PM [Time Zone] Time on [Initial Expiration Date], or such later expiration date to which this Letter of Credit is extended pursuant to the terms hereof. If at any time Beneficiary or its authorized transferee is not in possession of the original of this letter of credit (together with all amendments, if any) because such original has been delivered to us as required hereunder for a draw thereon or transfer thereof, our obligations as set forth in this letter of credit shall continue in full force and effect as if Beneficiary or such authorized transferee still held such original, and any previous delivery to us, without return by us, of such original shall be deemed to have satisfied any requirement that such original be delivered to us for a subsequent draw hereunder or transfer hereof. This Letter of Credit may be, without charge and without recourse, assigned to, and shall inure to the benefit of, any successor in interest to [LANDLORD] under the [TITLE OF DOCUMENT], provided that you deliver to [BANK] your written request for transfer in form and substance reasonably satisfactory to [BANK]. Transfer charges, if any, are for the account of the applicant. Sincerely, [BANK] EX-10.9 11 f80193ex10-9.txt EXHIBIT 10.9 EXHIBIT 10.9 CRITICAL PATH, INC. AMENDED AND RESTATED 1998 STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT Critical Path, Inc., a California corporation (the "Company"), granted an Option on November 8, 2001 to purchase shares of its common stock (the "Shares") to the Optionee named below. The terms and conditions of that Option grant, as amended and restated, are set forth in this cover sheet, the attachment, the Company's 1998 Stock Option Plan (the "Plan") and in the Optionee's employment agreement with the Company dated August 13, 2001 as may be amended and in effect from time to time. Date of Option Grant: November 8, 2001 ------------------- Name of Optionee: David Hayden ---------------------- Optionee's Social Security Number: Number of Shares Covered by Option: 2,710,000 ----------------- Exercise Price per Share: $1.13 ------- Vesting Start Date: November 8, 2001 ----------------- BY SIGNING THIS COVER SHEET, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED IN THE ATTACHED AGREEMENT AND IN THE PLAN, A COPY OF WHICH IS ALSO ENCLOSED. Optionee: /s/ David Hayden --------------------------- (Signature) Company: /s/ William McGlashan --------------------------- (Signature) Title: Interim Chief Executive Officer ------------------------------------------ Attachment CRITICAL PATH, INC. AMENDED AND RESTATED 1998 STOCK PLAN NONSTATUTORY STOCK OPTION AGREEMENT NONSTATUTORY STOCK OPTION This option is not intended to be an incentive stock option under section 422 of the Internal Revenue Code and will be interpreted accordingly. VESTING The Shares under this option will vest in accordance with the vesting schedule indicated below: NUMBER OF OPTIONS VESTING EVENT (i) 1,084,000 Vested upon date of option grant. (ii) 542,000 Monthly vesting on a pro-rata basis between January 1, 2001 and December 31, 2004 with earlier full vesting if the daily closing sale price of the Company (as reported by NASDAQ) exceeds an average of $5.00 per share (or as adjusted for any future stock splits, stock dividends, recapitalization, or similar events) for at least 22 consecutive trading days provided this goal is completely achieved by July 1, 2002. (iii) 542,000 Monthly vesting on a pro-rata basis between January 1, 2001 and December 31, 2004 with earlier full vesting upon the retention of six (6) months employment of the new CEO (as CEO) who was hired by you pursuant to Section 3(a) in your employment agreement with the Company. (iv) 542,000 Vested on December 31, 2004 with earlier full vesting upon the Company's attainment of positive Earnings Before Interest Taxes Depreciation and Amortization ("EBITDA") for any fiscal quarter provided such positive EBITDA occurs for a fiscal quarter in or before the end of the second fiscal quarter of 2002. EBITDA will be determined by the Company's independent public accountants using the Company's financial statements as reported in filings with the Securities and Exchange Commission ("SEC"). Earnings, for EBITDA determination purposes, will include revenue from only normal business operations and will not include any extraordinary or nonrecurring income or revenue items. Your option vesting will cease in the event that your employment and service as a Company director both terminate for any reason. Your option vesting will also cease upon your voluntary resignation of employment without Good Reason or upon a termination for Cause (as such terms are defined in your employment agreement with the Company). A leave of absence, regardless of the reason, shall be deemed to constitute the cessation of your employment unless such leave is authorized by the Company, and you return within the time specified in such authorization. The above performance-based acceleration triggers will cease to be applicable upon your prior cessation of employment for any reason. The Compensation Committee of the Board of Directors must certify in writing that the performance goals have been satisfied before any Option vesting will be accelerated pursuant to attainment of performance goals. In the event of a Change in Control of the Company, 50% of your then-unvested Options (meaning 50% of your unvested Options that are otherwise scheduled to vest under (ii), (iii) and (iv) above on each vesting date had a Change in Control not occurred) shall become vested provided that you are employed by the Company on the date the negotiations or communications began (as determined by the Board in good faith) which lead to the Change in Control provided, however, that all of your then-unvested Options shall become vested if the Change in Control consideration received by Company shareholders is at least $10.00 per share (with such share price adjusted for any future stock splits, stock dividends, recapitalization, or similar events). TERM Your option will expire in any event at the close of business at Company headquarters on the day before the 10th anniversary of the Date of Grant, as shown on the cover sheet. It will expire earlier if your employment and your service as a Company director terminate, as described below. REGULAR TERMINATION If your employment and your service as a Company director terminate for any reason except Cause, death or Disability, then your option will expire at the close of business at Company headquarters on the 90th day after your termination date. CAUSE If your employment or service as a Company director terminates on CAUSE account of Cause, then your option will expire immediately. DEATH In the event of your death during the period of your employment or service as a Company director, your option will expire at the close of business at Company headquarters on the date six months after the date of death. During that six-month period, your estate or heirs may exercise your option. DISABILITY If your employment and service as a Company director terminate because of your Disability, then your option will expire at the close of business at Company headquarters on the date six months after your termination date. "Disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment. LEAVES OF ABSENCE For purposes of this option, your employment does not terminate when you go on a bona fide leave of absence, that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. Your employment terminates in any event when the approved leave ends if you fail or refuse to return to active service. Consistent with the terms of this Agreement and your Employment Agreement, the Company determines which leaves count for this purpose, and when your employment terminates for all purposes under the Plan. RESTRICTIONS ON EXERCISE The Company will not permit you to exercise this option if the issuance of Shares at that time would violate any law or regulation. NOTICE OF EXERCISE When you wish to exercise this option, you must notify the Company by filing the proper "Notice of Exercise" form at the address given on the form. Your notice must specify how many Shares you wish to purchase. Your notice must also specify how your Shares should be registered (in your name only or in your and your spouse's names as community property or as joint tenants with right of survivorship). The notice will be effective when received by the Company. If someone else wants to exercise this option after your death, that person must prove to the Company's satisfaction that he or she is entitled to do so. FORM OF PAYMENT When you submit your notice of exercise, you must include payment of the option price for the Shares you are purchasing. Payment may be made in one (or a combination) of the following forms: - Your personal check, a cashier's check or a money order. - By delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price. - Payment may be made all or in part with a full recourse promissory note executed by you. The interest rate and other terms and conditions of such note shall be determined in your employment agreement with the Company. The Company will require that you pledge your Shares to the Company for the purpose of securing the payment of such note. WITHHOLDING TAXES You will not be allowed to exercise this option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the option exercise or the sale of the Shares acquired upon exercise of this option. RESTRICTIONS ON RESALE By signing this Agreement, you agree not to sell any option Shares at a time when applicable laws or regulations or Company or underwriter trading policies prohibit a sale. You represent and agree that the Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof. In the event that the sale of Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, you shall represent and agree at the time of exercise to make such representations as are deemed necessary or appropriate by the Company and its counsel. Prior to any Change in Control of the Company, the shares acquired under this option can be sold or transferred only pursuant to an SEC Rule 10b5-1 trading plan that is pre-approved by the Board of Director's Compensation Committee. TRANSFER OF OPTION Prior to your death, only you may exercise this option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your spouse or former spouse, nor is the Company obligated to recognize such individual's interest in your option in any other way. NO RETENTION RIGHTS Your option or this Agreement do not give you the right to be retained by the Company (or any subsidiaries) in any capacity. The Company (and any subsidiaries) reserves the right to terminate your Service at any time and for any reason. SHAREHOLDER RIGHTS You, or your estate or heirs, have no rights as a shareholder of the Company until a certificate for your option Shares has been issued. No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued, except as described in the Plan. ADJUSTMENTS In the event of a stock split, a stock dividend or a similar change in the Company stock, the number of Shares covered by this option and the exercise price per share may be adjusted pursuant to the Plan. Your option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity, except to the extent the foregoing conflict with or are in any way inconsistent with Section 8 of your employment agreement. FORFEITURE If, at any time within one year after termination of employment, you engage in either of the following: (i) your commission of a felony, an act involving moral turpitude, or an act constituting common law fraud, in each case having a material adverse effect on the business or affairs of the Company or its affiliates or stockholders; or (ii) your willful or intentional breach of Company confidential information obligations, in each case having a material adverse effect on the business or affairs of the Company or its affiliates or stockholders; or (iii) your unreasonable refusal to comply with lawful requests for cooperation made by the Board of Directors, then (1) this option shall terminate and be forfeited effective the date on which you enter into such activity, unless terminated or forfeited sooner by operation of another term or condition of this option or the Plan, (2) any stock acquired by you pursuant to the exercise of this option during the Forfeiture Period (as defined below) shall be forfeited, and (3) any gain realized by you from the sale of stock acquired through the exercise of this option during the Forfeiture Period shall be paid by you to the Company. The "Forfeiture Period" shall mean the period commencing six months prior to your termination of employment and ending one year from your termination of employment. RIGHT OF SET OFF By accepting this Agreement, you consent to a deduction from any amounts the Company owes you from time to time, to the extent of the amounts you owe the Company under the paragraph above. If the Company does not recover by means of set-off the full amount you owe it, calculated as set forth above, you agree to pay immediately the unpaid balance to the Company upon the Company's demand. LEGENDS All certificates representing the Shares issued upon exercise of this option shall have endorsed thereon the applicable legends. APPLICABLE LAW This Agreement will be interpreted and enforced under the laws of the State of California. THE PLAN AND OTHER AGREEMENTS The text of the Plan and your employment agreement are incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan or your employment agreement. This Agreement, the Plan and your employment agreement with the Company dated August 1, 2001, as may be amended and in effect from time to time, constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN, EXCEPT TO THE EXTENT MODIFIED BY YOUR EMPLOYMENT AGREEMENT. EX-10.11 12 f80193ex10-11.txt EXHIBIT 10.11 EXHIBIT 10.11 CRITICAL PATH, INC. 1999 NONSTATUTORY STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT Critical Path, Inc., a California corporation (the "Company"), granted an Option on August 1, 2001 to purchase shares of its common stock (the "Shares") to the Optionee named below. The terms and conditions of that Option grant, as amended and restated, are set forth in this cover sheet, the attachment, the Company's 1999 Nonstatutory Stock Option Plan (the "Plan") and in the Optionee's employment agreement with the Company dated August 1, 2001 as may be amended and in effect from time to time. Date of Option Grant: August 1, 2001 ------------------ Name of Optionee: William McGlashan, Jr. ----------------------- Optionee's Social Security Number: Number of Shares Covered by Option: 1,500,000 ----------------- Exercise Price per Share: $.40 ------ Vesting Start Date: August 1, 2001 --------------- BY SIGNING THIS COVER SHEET, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED IN THE ATTACHED AGREEMENT AND IN THE PLAN, A COPY OF WHICH IS ALSO ENCLOSED. Optionee: /S/ William McGlashan -------------------------------------------------- (Signature) Company: /S/ David Hayden -------------------------------------------------- (Signature) Title: ----------------------------------- Attachment CRITICAL PATH, INC. 1999 NONSTATUTORY STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT NONSTATUTORY STOCK OPTION This option is not intended to be an incentive stock option under section 422 of the Internal Revenue Code and will be interpreted accordingly. VESTING The Shares under this option will vest in accordance with the vesting schedule indicated below: NUMBER OF OPTIONS VESTING EVENT (i) 500,000 Vested upon date of option grant. (ii) 500,000 Vested on the date twelve (12) months from the date of option grant. (iii) 500,000 Vested on December 31, 2004 with earlier full vesting upon the Company's attainment of positive Earnings Before Interest Taxes Depreciation and Amortization ("EBITDA") for any fiscal quarter provided such positive EBITDA occurs for a fiscal quarter in or before the end of the second fiscal quarter of 2002. EBITDA will be determined by the Company's independent public accountants using the Company's financial statements as reported in filings with the Securities and Exchange Commission ("SEC"). Earnings, for EBITDA determination purposes, will include revenue from only normal business operations and will not include any extraordinary or nonrecurring income or revenue items. 1 Your option vesting will cease in the event that your employment and service as a Company director both terminate for any reason. Your option vesting will also cease upon your voluntary resignation of employment or upon a termination for Cause (as such terms are defined in your employment agreement with the Company). A leave of absence, regardless of the reason, shall be deemed to constitute the cessation of your employment unless the Company authorizes such leave, and you return within the time specified in such authorization. The above performance-based acceleration triggers will cease to be applicable upon your prior cessation of employment for any reason. The Compensation Committee of the Board of Directors must certify in writing that the performance goals have been satisfied before any Option vesting will be accelerated pursuant to attainment of performance goals. In the event of a Change in Control of the Company, 100% of your then-unvested Options (meaning 100% of your unvested Options that are otherwise scheduled to vest under (ii), and (iii) above on each vesting date had a Change in Control not occurred) shall become vested provided that you are employed by the Company on the date the negotiations or communications began (as determined by the Board in good faith) which lead to the Change in Control. For purposes of this Agreement, a "Change in Control" of the Company shall be defined as the occurrence of any one of the following: (i) the consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entity's securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not shareholders of the Company immediately prior to such merger, consolidation or other reorganization; (ii) the sale, transfer or other disposition of all or substantially all of the Company's assets; (iii) the dissolution, liquidation or winding up of the Company; (iv) any transaction as a result of which any person is the "beneficial owner" (as defined in Rule 13d-3 under the 2 Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing at least 20% of the total voting power represented by the Company's then outstanding voting securities. For purposes of this section, the term "person" shall have the same meaning as when used in sections 13(d) and 14(d) of the Securities Exchange Act but shall exclude: (A) trustee or other fiduciary holding securities under an employee benefit plan of the Company or a subsidiary of the Company; (B) A corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of the common stock of the Company; and (C) the Company. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transactions. TERM Your option will expire in any event at the close of business at Company headquarters on the day before the 10th anniversary of the Date of Grant, as shown on the cover sheet. It will expire earlier if your employment and your service as a Company director terminate, as described below. REGULAR TERMINATION If your employment and your service as a Company director terminate for any reason except Cause, death or Disability, then your option will expire at the close of business at Company headquarters on the 90th day after your termination date. CAUSE If your employment or service as a Company director terminates on account of Cause, then your option will expire immediately. DEATH In the event of your death during the period of your employment or service as a Company director, your option will expire at the close of business at Company headquarters on the date six months after the date of death. During that six-month period, your estate or heirs may exercise your option. 3 DISABILITY If your employment and service as a Company director terminate because of your Disability, then your option will expire at the close of business at Company headquarters on the date six months after your termination date. "Disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment. LEAVES OF ABSENCE For purposes of this option, your employment does not terminate when you go on a bona fide leave of absence, that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. Your employment terminates in any event when the approved leave ends if you fail or refuse to return to active service. Consistent with the terms of this Agreement and your Employment Agreement, the Company determines which leaves count for this purpose, and when your employment terminates for all purposes under the Plan. RESTRICTIONS ON EXERCISE The Company will not permit you to exercise this option if the issuance of Shares at that time would violate any law or regulation. NOTICE OF EXERCISE When you wish to exercise this option, you must notify the Company by filing the proper "Notice of Exercise" form at the address given on the form. Your notice must specify how many Shares you wish to purchase. Your notice must also specify how your Shares should be registered (in your name only or in your and your spouse's names as community property or as joint tenants with right of survivorship). The notice will be effective when received by the Company. If someone else wants to exercise this option after your death, that person must prove to the Company's satisfaction that he or she is entitled to do so. FORM OF PAYMENT When you submit your notice of exercise, you must include payment of the option price for the Shares you are purchasing. Payment may be made in one (or a combination) of the following forms: - Your personal check, a cashier's check or a money order. - By delivery (on a form prescribed by the Committee) of an 4 irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price. WITHHOLDING TAXES You will not be allowed to exercise this option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the option exercise or the sale of the Shares acquired upon exercise of this option. RESTRICTIONS ON RESALE By signing this Agreement, you agree not to sell any option Shares at a time when applicable laws or regulations or Company or underwriter trading policies prohibit a sale. You represent and agree that the Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof. In the event that the sale of Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, you shall represent and agree at the time of exercise to make such representations as are deemed necessary or appropriate by the Company and its counsel. Prior to any Change in Control of the Company, the shares acquired under this option can be sold or transferred only pursuant to an SEC Rule 10b5-1 trading plan that is pre-approved by the Board of Director's Compensation Committee. TRANSFER OF OPTION Prior to your death, only you may exercise this option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your spouse or former spouse, nor is the Company obligated to recognize such individual's interest in your option in any other way. NO RETENTION RIGHTS Your option or this Agreement does not give you the right to be retained by the Company (or any subsidiaries) in any capacity. The Company (and any subsidiaries) reserves the right to terminate your Service at any time and for any reason. 5 SHAREHOLDER RIGHTS You, or your estate or heirs, have no rights as a shareholder of the Company until a certificate for your option Shares has been issued. No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued, except as described in the Plan. ADJUSTMENTS In the event of a stock split, a stock dividend or a similar change in the Company stock, the number of Shares covered by this option and the exercise price per share may be adjusted pursuant to the Plan. Your option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity, except to the extent the foregoing conflict with or are in any way inconsistent with Section 8 of your employment agreement. FORFEITURE If, at any time within one year after termination of employment, you engage in either of the following: (i) your commission of a felony or an act constituting common law fraud, in each case having a material adverse effect on the business or affairs of the Company or its affiliates or stockholders; or (ii) your willful or intentional breach of Company confidential information obligations, in each case having a material adverse effect on the business or affairs of the Company or its affiliates or stockholders; then (1) this option shall terminate and be forfeited effective the date on which you enter into such activity, unless terminated or forfeited sooner by operation of another term or condition of this option or the Plan, (2) any stock acquired by you pursuant to the exercise of this option during the Forfeiture Period (as defined below) shall be forfeited, and (3) any gain realized by you from the sale of stock acquired through the exercise of this option during the Forfeiture Period shall be paid by you to the Company. The "Forfeiture Period" shall mean the period commencing six months prior to your termination of employment and ending one year from your termination of employment. RIGHT OF SET OFF By accepting this Agreement, you consent to a deduction from any amounts the Company owes you from time to time; to the extent of the amounts you owe the Company under the paragraph above. If the Company does not recover by means of set-off the full amount you owe it, calculated as set forth above, you agree to pay immediately the unpaid balance to the Company upon the Company's demand. LEGENDS All certificates representing the Shares issued upon exercise of this option shall have endorsed thereon the applicable legends. 6 APPLICABLE LAW This Agreement will be interpreted and enforced under the laws of the State of California. THE PLAN AND OTHER AGREEMENTS The text of the Plan and your employment agreement are incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan or your employment agreement. This Agreement, the Plan and your employment agreement with the Company dated August 1, 2001, as may be amended and in effect from time to time, constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN, EXCEPT TO THE EXTENT MODIFIED BY YOUR EMPLOYMENT AGREEMENT AND THIS AGREEMENT. 7 EX-10.12 13 f80193ex10-12.txt EXHIBIT 10.12 EXHIBIT 10.12 CRITICAL PATH, INC. AMENDED AND RESTATED 1998 STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT Critical Path, Inc., a California corporation (the "Company"), granted an Option on November 8, 2001 to purchase shares of its common stock (the "Shares") to the Optionee named below. The terms and conditions of that Option grant, as amended and restated, are set forth in this cover sheet, the attachment, the Company's 1998 Stock Option Plan (the "Plan") and in the Optionee's employment agreement with the Company dated August 1, 2001 as may be amended and in effect from time to time. Date of Option Grant: November 8, 2001 ------------------- Name of Optionee: William McGlashan, Jr. ------------------------ Optionee's Social Security Number: Number of Shares Covered by Option: 813,000 --------------- Exercise Price per Share: $1.13 ------- Vesting Start Date: November 8, 2001 ----------------- BY SIGNING THIS COVER SHEET, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED IN THE ATTACHED AGREEMENT AND IN THE PLAN, A COPY OF WHICH IS ALSO ENCLOSED. Optionee: /s/ William McGlashan ------------------------------------------------- (Signature) Company: /s/ David Hayden ------------------------------------------------- (Signature) Title: ---------------------------------- Attachment CRITICAL PATH, INC. AMENDED AND RESTATED 1998 STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT NONSTATUTORY STOCK OPTION This option is not intended to be an incentive stock option under section 422 of the Internal Revenue Code and will be interpreted accordingly. VESTING The Shares under this option will vest in accordance with the vesting schedule indicated below: NUMBER OF OPTIONS VESTING EVENT (i) 271,000 Vested upon date of option grant. (ii) 271,000 Vested on August 1, 2002. (iii) 271,000 Vested on December 31, 2004 with earlier full vesting upon the Company's attainment of positive Earnings Before Interest Taxes Depreciation and Amortization ("EBITDA") for any fiscal quarter provided such positive EBITDA occurs for a fiscal quarter in or before the end of the second fiscal quarter of 2002. EBITDA will be determined by the Company's independent public accountants using the Company's financial statements as reported in filings with the Securities and Exchange Commission ("SEC"). Earnings, for EBITDA determination purposes, will include revenue from only normal business operations and will not include any extraordinary or nonrecurring income or revenue items. 1 Your option vesting will cease in the event that your employment and service as a Company director both terminate for any reason. Your option vesting will also cease upon your voluntary resignation of employment or upon a termination for Cause (as such terms are defined in your employment agreement with the Company). A leave of absence, regardless of the reason, shall be deemed to constitute the cessation of your employment unless the Company authorizes such leave, and you return within the time specified in such authorization. The above performance-based acceleration triggers will cease to be applicable upon your prior cessation of employment for any reason. The Compensation Committee of the Board of Directors must certify in writing that the performance goals have been satisfied before any Option vesting will be accelerated pursuant to attainment of performance goals. In the event of a Change in Control of the Company, 100% of your then-unvested Options (meaning 100% of your unvested Options that are otherwise scheduled to vest under (ii), and (iii) above on each vesting date had a Change in Control not occurred) shall become vested provided that you are employed by the Company on the date the negotiations or communications began (as determined by the Board in good faith) which lead to the Change in Control. For purposes of this Agreement, a "Change in Control" of the Company shall be defined as the occurrence of any one of the following: (i) the consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entity's securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not shareholders of the Company immediately prior to such merger, consolidation or other reorganization; (ii) the sale, transfer or other disposition of all or substantially all of the Company's assets; (iii) the dissolution, liquidation or winding up of the Company; (iv) any transaction as a result of which any person is the "beneficial owner" (as defined in Rule 13d-3 under the 2 Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing at least 20% of the total voting power represented by the Company's then outstanding voting securities. For purposes of this section, the term "person" shall have the same meaning as when used in sections 13(d) and 14(d) of the Securities Exchange Act but shall exclude: (A) trustee or other fiduciary holding securities under an employee benefit plan of the Company or a subsidiary of the Company; (B) A corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of the common stock of the Company; and (C) the Company. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transactions. TERM Your option will expire in any event at the close of business at Company headquarters on the day before the 10th anniversary of the Date of Grant, as shown on the cover sheet. It will expire earlier if your employment and your service as a Company director terminate, as described below. REGULAR TERMINATION If your employment and your service as a Company director terminate for any reason except Cause, death or Disability, then your option will expire at the close of business at Company headquarters on the 90th day after your termination date. CAUSE If your employment or service as a Company director terminates on account of Cause, then your option will expire immediately. DEATH In the event of your death during the period of your employment or service as a Company director, your option will expire at the close of business at Company headquarters on the date six months after the date of death. During that six-month period, your estate or heirs may exercise your option. 3 DISABILITY If your employment and service as a Company director terminate because of your Disability, then your option will expire at the close of business at Company headquarters on the date six months after your termination date. "Disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment. LEAVES OF ABSENCE For purposes of this option, your employment does not terminate when you go on a bona fide leave of absence, that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. Your employment terminates in any event when the approved leave ends if you fail or refuse to return to active service. Consistent with the terms of this Agreement and your Employment Agreement, the Company determines which leaves count for this purpose, and when your employment terminates for all purposes under the Plan. RESTRICTIONS ON EXERCISE The Company will not permit you to exercise this option if the issuance of Shares at that time would violate any law or regulation. NOTICE OF EXERCISE When you wish to exercise this option, you must notify the Company by filing the proper "Notice of Exercise" form at the address given on the form. Your notice must specify how many Shares you wish to purchase. Your notice must also specify how your Shares should be registered (in your name only or in your and your spouse's names as community property or as joint tenants with right of survivorship). The notice will be effective when received by the Company. If someone else wants to exercise this option after your death, that person must prove to the Company's satisfaction that he or she is entitled to do so. FORM OF PAYMENT When you submit your notice of exercise, you must include payment of the option price for the Shares you are purchasing. Payment may be made in one (or a combination) of the following forms: - Your personal check, a cashier's check or a money order. - By delivery (on a form prescribed by the Committee) of an 4 irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price. WITHHOLDING TAXES You will not be allowed to exercise this option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the option exercise or the sale of the Shares acquired upon exercise of this option. RESTRICTIONS ON RESALE By signing this Agreement, you agree not to sell any option Shares at a time when applicable laws or regulations or Company or underwriter trading policies prohibit a sale. You represent and agree that the Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof. In the event that the sale of Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, you shall represent and agree at the time of exercise to make such representations as are deemed necessary or appropriate by the Company and its counsel. Prior to any Change in Control of the Company, the shares acquired under this option can be sold or transferred only pursuant to an SEC Rule 10b5-1 trading plan that is pre-approved by the Board of Director's Compensation Committee. TRANSFER OF OPTION Prior to your death, only you may exercise this option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your spouse or former spouse, nor is the Company obligated to recognize such individual's interest in your option in any other way. NO RETENTION RIGHTS Your option or this Agreement does not give you the right to be retained by the Company (or any subsidiaries) in any capacity. The Company (and any subsidiaries) reserves the right to terminate your Service at any time and for any reason. 5 SHAREHOLDER RIGHTS You, or your estate or heirs, have no rights as a shareholder of the Company until a certificate for your option Shares has been issued. No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued, except as described in the Plan. ADJUSTMENTS In the event of a stock split, a stock dividend or a similar change in the Company stock, the number of Shares covered by this option and the exercise price per share may be adjusted pursuant to the Plan. Your option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity, except to the extent the foregoing conflict with or are in any way inconsistent with Section 8 of your employment agreement. FORFEITURE If, at any time within one year after termination of employment, you engage in any of the following: (i) your commission of a felony or an act constituting common law fraud, in each case having a material adverse effect on the business or affairs of the Company or its affiliates or stockholders; (ii) your willful or intentional breach of Company confidential information obligations, in each case having a material adverse effect on the business or affairs of the Company or its affiliates or stockholders; then (1) this option shall terminate and be forfeited effective the date on which you enter into such activity, unless terminated or forfeited sooner by operation of another term or condition of this option or the Plan, (2) any stock acquired by you pursuant to the exercise of this option during the Forfeiture Period (as defined below) shall be forfeited, and (3) any gain realized by you from the sale of stock acquired through the exercise of this option during the Forfeiture Period shall be paid by you to the Company. The "Forfeiture Period" shall mean the period commencing six months prior to your termination of employment and ending one year from your termination of employment. RIGHT OF SET OFF By accepting this Agreement, you consent to a deduction from any amounts the Company owes you from time to time; to the extent of the amounts you owe the Company under the paragraph above. If the Company does not recover by means of set-off the full amount you owe it, calculated as set forth above, you agree to pay immediately the unpaid balance to the Company upon the Company's demand. LEGENDS All certificates representing the Shares issued upon exercise of this option shall have endorsed thereon the applicable legends. 6 APPLICABLE LAW This Agreement will be interpreted and enforced under the laws of the State of California. THE PLAN AND OTHER AGREEMENTS The text of the Plan and your employment agreement are incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan or your employment agreement. This Agreement, the Plan and your employment agreement with the Company dated August 1, 2001 constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN, EXCEPT TO THE EXTENT MODIFIED BY YOUR EMPLOYMENT AGREEMENT AND THIS AGREEMENT. 7 EX-10.13 14 f80193ex10-13.txt EXHIBIT 10.13 EXHIBIT 10.13 FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT This First Amended and Restated Employment Agreement (the "Agreement") is entered into effective as of January 7, 2002 between Critical Path ("Critical Path" or the "Company") and William McGlashan ("McGlashan") (or collectively referred to as the "Parties") and supersedes and replaces in all respects all of the terms of that certain Employment Agreement entered into between the parties as of August 1, 2001 (the "Former Agreement"). The Company desires to appoint McGlashan to the position of Chief Executive Officer for an indeterminate term and to have the benefits of his expertise and knowledge. McGlashan, in turn, desires to be employed by the Company as its Chief Executive Officer. The Parties, therefore, enter into this Agreement to establish the terms and conditions of McGlashan's employment as Chief Executive Officer of the Company. In consideration of the mutual covenants and representations contained in this Agreement, the Company and McGlashan agree as follows: 1. EMPLOYMENT OF MCGLASHAN; DUTIES. The Company agrees to employ McGlashan, and McGlashan agrees to be employed by the Company, as the Chief Executive Officer ("CEO") of the Company and the President of the Company's subsidiary to be formed, Critical Path International ("CPI"). In his role as CEO of the Company, McGlashan shall report to the Board of Directors. As the CEO of the Company and the President of CPI, McGlashan's key duties will include the normal and customary duties of such positions and such other duties as the Company shall determine from time to time. McGlashan will use his specialized expertise, independent judgment and discretion in executing his job duties. McGlashan shall devote all of his time, interest and efforts reasonably necessary to the fulfillment of his duties and responsibilities under this Agreement. Consistent with the office of Chief Executive Officer and the duties typically attendant thereto, the Company reserves the right to change McGlashan's job duties and responsibilities in its sole discretion at any time upon reasonable notice, based on the needs of the Company and McGlashan's expertise and skills, subject to Section 12.4 below. 2. EMPLOYMENT PERIOD. McGlashan shall serve as CEO of the Company until discharged by the Board of Directors of the Company or his employment is otherwise terminated pursuant to Section 12 below. 3. PLACE OF EMPLOYMENT. McGlashan and the Company agree that during the Employment Period, his services will be performed at the Company's principal offices in San Francisco, California, subject to any necessary travel requirements of his position and duties hereunder. 4. BASE SALARY. During the Employment Period, the Company shall pay McGlashan at the rate of Four Hundred Fifty Thousand Dollars ($450,000.00) per year, to be paid twice per month, subject to applicable withholding. 5. BONUS COMPENSATION. McGlashan acknowledges prior receipt of $500,000 as a bonus paid as an inducement to enter into this Agreement. In addition, so long as McGlashan has not been terminated for Cause, as defined in Section 12.3 below, McGlashan will be eligible for bonus compensation, payable immediately following completion of the Company's audited financial statements for each full fiscal year, commencing with the 2002 fiscal year, subject to the following terms and conditions: Eligible for annual bonus of 100% of base salary upon achieving 120% of financial metrics ("Plan"), to be determined by the Board of Directors of the Company. Such bonus will also be payable on a sliding scale at between 100% and 120% of Plan, as determined by the Board. Achieving substantially in excess of 120% of agreed-upon financial metrics shall result in additional bonus accelerators as agreed between McGlashan and the Board of Directors up to a potential bonus of 200% of base salary. 6. EQUITY COMPENSATION. McGlashan shall be granted an option to purchase 1.7 million shares of the Company's Common Stock at an exercise price of fair market value as of the date of grant, pursuant to the Critical Path Amended and Restated 1998 Stock Plan. Subject to McGlashan's continued employment by the Company at each vesting date, such option shall vest in equal monthly installments from the date of this Agreement over a three (3) year period. Other than the vesting schedule, such option shall be granted pursuant to the same terms and conditions as contained in McGlashan's prior option agreement(s), including provisions for 100% acceleration of vesting of such option on a change of control. 7. EMPLOYEE LOAN. The Company shall provide a full recourse loan to McGlashan for the purchase of a principal residence in an amount not to exceed $4 Million (the "Loan"). The Loan will be funded upon, or just prior to, the close of escrow on the purchase of such principal residence so long as McGlashan has not voluntarily resigned or been terminated by the Company for cause as defined in Section 12.3 below. The Loan shall be evidenced by a Promissory Note and a Loan Agreement, in the form attached hereto as Exhibits A and B, respectively. The Loan shall be a full recourse 10 year term loan. The Loan shall at all times be secured by Mr. McGlashan's principal residence (but not necessarily in first mortgage position) and to the extent necessary shall also be secured by that percentage of McGlashan's personal shareholdings in the Company such that at all times all outstanding principal plus accrued interest is at least 120% secured. The Company may obtain an annual appraisal of the property at its expense to ensure the Loan is secured as provided herein. If necessary following such appraisal, McGlashan shall exercise any vested options and pledge to the Company the number of shares necessary to bring the Company's security to at least 120% of the Loan amount plus accrued interest. McGlashan shall pledge such shares to the Company and execute an Assignment Separate from Certificate in connection with such pledge. Interest on the Loan shall be at the long term applicable federal rate (AFR) and shall be deferred until principal is due. The Loan Agreement shall provide (i) that the Loan will be entirely forgiven in the event of a Change of Control (as defined in the Loan Agreement) in the event that total consideration received by the Company in connection with such Change of Control is greater than $10 per share; (ii) in the event McGlashan's employment is terminated by (a) Mr. McGlashan's voluntary resignation or (b) by the Company for Cause (as defined in Section 11), then the Loan will become due and payable, with interest, in full no later than twelve (12) -2- months following such termination; (iii) in the event McGlashan's employment is terminated other than for Cause (including his Constructive Termination), the Loan will remain in effect for the remainder of its term. 8. EMPLOYEE BENEFITS. a. For so long as McGlashan is employed by the Company, McGlashan will be entitled to participate in the same employee benefits plans generally available to the Company's other executive and managerial employees, subject to the terms of the applicable plans, including: (i) all health insurance benefits provided to the Company's exempt employees; (ii) paid vacation in accordance with the Company's policies and procedures in effect with respect to the Company's other senior officers (for which the days selected for McGlashan's vacation shall be scheduled at a mutually agreeable time for the Company and McGlashan); and (iii) eligibility to participate in any profit sharing or other retirement plan maintained by the Company for its executive employees. Company also agrees to pay all fees and expenses in connection with his membership and participation in the Young Presidents' Organization. b. The Company shall obtain coverage for McGlashan under a director and officer insurance policy during the term of his employment that is equal to or comparable to the same coverage provided to the Company's other executive officers. 9. INDEMNIFICATION BY THE COMPANY. To the fullest extent required by law, the Company agrees to indemnify and hold McGlashan harmless for any actions made in good faith while performing his duties as President and Chief Operating Officer of the Company and President of CPI. 10. NON-DISCLOSURE OF CONFIDENTIAL AND PROPRIETARY INFORMATION. McGlashan acknowledges and agrees that during his employment with the Company, he will have access to, or become acquainted with the Company's "Confidential and Proprietary Information." "Confidential and Proprietary Information" includes, but is not limited to: a. The Company's trade secrets; b. Information developed by or on behalf of the Company such as financial information, billing information, marketing strategies, price lists, research, pending products and proposals, and proprietary materials; or c. Information of or concerning third parties including customers, suppliers and business partners, customer lists, supplier lists, as well as financial and billing information, and information about employees of the Company, including salaries and personnel data. McGlashan agrees that at all times during his employment and after his employment ends, he will protect the confidentiality of Confidential and Proprietary Information and will not directly use or disclose any Confidential and Proprietary Information except as may be necessary in connection with the services McGlashan provides to the Company. McGlashan further agrees that all the Company property and documents provided to him, including Confidential and Proprietary Information produced by him or others in -3- connection with his employment with the Company, including copies thereof, shall remain the sole property of the Company and shall be returned promptly to the Company upon request or when he leaves the employment of the Company, including but not limited to, internal, proprietary, financial, technical, employee, sales, and marketing information. 11. DEVELOPED INFORMATION. McGlashan agrees to promptly disclose and assign to the Company, the rights to all ideas, improvements, inventions, programs, surveys, trade secrets, know-how and data, whether or not patentable or registrable under copyright or similar statutes that McGlashan makes, conceives, reduces to practice or learn during McGlashan's employment which (a) are within the scope of his employment and are related to or useful in the business of the Company or its actual or demonstrably anticipated activities, or (b) result from tasks assigned to McGlashan by the Company, or (c) are funded by the Company, or (d) result from use of premises owned, leased or contracted for by the Company (hereinafter "Developed Information"). Such disclosure shall continue for one (1) year after termination of McGlashan's employment with respect to anything that would be Developed Information if made, conceived, reduced to practice or learned during the term of this Agreement. This Agreement does not require assignment of any invention which qualifies fully for protection under California Labor Code section 2870 (hereinafter "Section 2870"). McGlashan understand that he bears the full burden of proving to the Company that Developed Information qualifies fully under Section 2870. 12. TERMINATION. 12.1 AT-WILL EMPLOYMENT. McGlashan's employment pursuant to this Agreement is "at-will." As such, either the Company or McGlashan shall have right to terminate McGlashan's employment under this Agreement at any time, for any reason, with or without notice. 12.2 SEVERANCE. If McGlashan's employment is terminated other than for "Cause" or if he resigns as a result of a "Constructive Termination," then McGlashan shall be offered, in exchange for a release of all claims, a lump sum severance payment equal to twelve (12) months salary under this Agreement plus 50% of his prior year's bonus. In addition, benefits under this Agreement shall be continued for a period of one (1) year, and McGlashan will receive one (1) year of accelerated vesting of the options granted to him by the Company as of the date of termination. 12.3 For purposes of this Agreement, "Cause" means: a. Commission of a felony, an act involving moral turpitude, or an act constituting common law fraud, and which has a material adverse effect on the business or affairs of the Company or its affiliates or stockholders; b. Intentional or willful misconduct or refusal to follow the lawful instructions of the Board of Directors; or -4- c. Intentional breach of company confidential information obligations which has an adverse effect on the Company or its affiliates or stockholders. For these purposes, no act or failure to act shall be considered "intentional or willful" unless it is done, or omitted to be done, in bad faith without a reasonable belief that the action or omission is in the best interests of the Company. 12.4 RESIGNATION DUE TO "CONSTRUCTIVE TERMINATION". For purposes of this agreement, resignation as a result of "Constructive Termination" means that any of the following is undertaken without McGlashan's express written consent: a. A substantial diminution in McGlashan's title, duties, or compensation; b. A substantial increase in McGlashan's duties without a mutually agreeable increase in compensation; c. Any change in ownership or corporate structure which results in McGlashan no longer being CEO of a stand-alone publicly traded company through no fault of McGlashan; d. Failure of the Company to maintain coverage for McGlashan under an appropriate director and officer insurance policy; e. A relocation of the Company's business office to a location more than fifty (50) miles from San Francisco, except for reasonably required travel by McGlashan on the Company's business. f. The Company's material breach of this Agreement that remains uncured for thirty (30) days following McGlashan's written notice of such breach to the Company's Board of Directors. 12.5 CONTINUED AFFILIATION WITH THE COMPANY. McGlashan's stock options granted pursuant to this Agreement shall continue to vest for so long as McGlashan is affiliated with the Company as an employee or Board member. 12.6 EFFECT OF TERMINATION FOR "CAUSE." Upon any termination of this Agreement for Cause, the Company will have no further obligation to make any payment to McGlashan, under this Agreement or otherwise, except for the monthly base salary and vacation accrued as of the date of termination. In addition, McGlashan's entitlement to participate in any Company benefit plans shall immediately cease as of the date of termination, except as otherwise required by law. 12.7 COOPERATION WITH COMPANY AT TERMINATION OF EMPLOYMENT. Upon termination of this Agreement by either party, McGlashan shall cooperate fully with Company in providing an orderly transition of all McGlashan's pending work. Upon the mutual agreement of the Parties, McGlashan also may provide such full-time or part-time services as Company may reasonably require during all or any part of the period following any notice of termination given by either party. -5- 12.8 RETURN OF COMPANY PROPERTY UPON TERMINATION. Upon termination of McGlashan's employment, McGlashan shall return all originals and copies of the Company's property in McGlashan's possession or control, including equipment, devices, vehicles, keys, computers, and including materials, memoranda, records, reports, recordings, customer lists or other documents, and specifically including any documents or computer disks or records containing confidential information, trade secrets or other proprietary information 13. NATURE OF EMPLOYMENT. McGlashan represents to the Company that he has no other outstanding commitments inconsistent with any of the terms of this Agreement or the services to be provided in accordance with this Agreement. In addition, while employed with the Company, McGlashan shall not, whether for compensation or otherwise, directly or indirectly perform any services or acts for any person or entity who is in competition with any business, services or products being offered for sale or produced by the Company. McGlashan shall not own an interest in, participate in or be connected as an officer, employee, agent, independent contractor, partner, shareholder or principal, of any corporation, partnership, proprietorship, firm, association, person, or other entity that directly or indirectly compete with the services and business of Company. 14. NONSOLICITATION UPON TERMINATION OF EMPLOYMENT. 14.1 NONSOLICITATION OF CLIENTS. McGlashan agrees all customers or clients of the Company for which McGlashan provides services during McGlashan's employment are solely the clients of the Company and not of McGlashan. McGlashan agrees that both while employed and for a period of one (1) year after the termination of this Agreement for any reason, McGlashan shall not, either directly or indirectly, solicit business, as to products or services competitive with those of the Company, from any of the Company's clients or prospective clients. 14.2 NONSOLICITATION OF EMPLOYEES. McGlashan agrees the Company has invested substantial time and effort and resources in assembling, training and managing its present staff of personnel, which constitutes a significant asset of the Company. Accordingly, McGlashan agrees that both while employed and for a period of one (1) year after the termination of this Agreement for any reason, McGlashan will not directly or indirectly induce or solicit or encourage any of the Company's employees to leave their employment with the Company. 15. NOTICES. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to McGlashan at the last address he has filed in writing with the Company or, in the case of the Company, to the General Counsel at the Company's principal executive offices. 16. BINDING AGREEMENT. This Agreement shall be binding upon McGlashan and the Company on and after the date of this Agreement. The rights and obligations of the Company under this Agreement shall inure to the benefit of the Company and any successor of the Company. -6- 17. INTEGRATION. This Agreement, the Promissory Note and Loan Agreement attached hereto as Exhibits A and B, and the Nonstatutory Stock Option Agreement entered into pursuant to Section 6 above constitute the entire understanding of McGlashan and the Company with respect to the subject matter herein and supersedes and voids any and all prior agreements or understandings, written or oral, regarding the subject matter hereof. To the extent any of the referenced agreements are inconsistent with this Employment Agreement, the terms of the Employment Agreement shall control. This Agreement may not be changed, modified, or discharged orally, but only by an instrument in writing signed by the Parties. 18. CONSTRUCTION. Each party has reviewed this Agreement. Therefore the normal rule of construction that any ambiguity or uncertainty in any writing shall be interpreted against the party drafting the writing shall not apply to any action on this Agreement. 19. GOVERNING LAW. This Agreement shall be governed by the laws of the State of California, and the invalidity or unenforceability of any provisions hereof shall in no way affect the validity or enforceability of any other provision. 20. SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable by any court of competent jurisdiction will immediately become null and void, leaving the remainder of this Agreement in full force and effect. Any such prohibition or unenforceability in any court of competent jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 21. MANDATORY ARBITRATION. The Parties agree that any future controversy, claim or dispute arising out of or related to McGlashan's employment or the termination of his employment shall be resolved by binding arbitration, except where the law specifically forbids the use of arbitration as a final and binding remedy, or where Section 21(e) below specifically allows a different remedy. a. The Parties agree that the dispute shall be resolved by binding arbitration in San Francisco, California. If the Parties are unable to jointly select an arbitrator, they will obtain a list from the Federal Mediation and Conciliation Service and select an arbitrator by striking names from that list. b. The arbitrator shall have the authority to determine whether the conduct complained of violates the complainant's rights and, if so, to grant any relief authorized by law; subject to the exclusions of Section 21(e) below. The arbitrator shall not have the authority to modify, change, or refuse to enforce the terms of this Employment Agreement. c. The Company shall bear the costs of the arbitration, except that McGlashan may be required to pay costs not to exceed the amount of the then-current filing fee for a civil action filed in the court of general jurisdiction in the State of California. The arbitrator shall award the prevailing party in the arbitration its attorneys' fees. d. Arbitration shall be the exclusive final remedy for any dispute between the Parties including but not limited to any disputes or claims for discrimination or harassment (such as claims under the Fair Employment and Housing Act, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, or the Age Discrimination in Employment Act), wrongful -7- termination, breach of contract, breach of public policy, physical or mental harm or distress, or any other disputes. e. Notwithstanding the arbitration provisions set forth herein, the Parties reserve their right to seek an injunction or other equitable relief from a court with applicable authority. McGlashan acknowledges that in the event of any breach of any provision of Sections 10, 11, or 14 of this Agreement, the Company would be irreparably and immediately harmed and could not be made whole by monetary damages. It is accordingly agreed that the Company shall be entitled to seek an injunction to prevent breach of this Agreement and to compel specific performance of this Agreement, in addition to any other remedy to which it may be entitled in law or equity. To the extent any portion of Sections 10, 11 or 14 of this Agreement is deemed by the court to be overly restrictive as to time, scope or geographical area, the Parties agree that the court shall have the authority to reform the unlawful provision to be in conformance with the law, with the Parties' agreement that Sections 10, 11 and 14 are to be given the fullest force and effect permissible by law. f. The arbitrator shall issue a written arbitration decision stating the arbitrator's essential findings and conclusions upon which any award is based. A party's right to review of the decision is limited to the grounds provided under applicable law. The Parties agree that the arbitration award shall be enforceable in any court having jurisdiction to enforce this Agreement. IN WITNESS WHEREOF, the Parties have executed and delivered this Agreement as of the date first above written. CRITICAL PATH, INC. Dated: 3/18/02 By: /s/ David Hayden ----------------------- -------------------------------- DAVID HAYDEN, Executive Chairman Dated: 3/18/02 By: /s/ William McGlashan ----------------------- -------------------------------- William McGlashan, Personally -8- 1/31/02 -- cb 2/26/02 - cb 02/27/02 -- cl -9- EX-10.14 15 f80193ex10-14.txt EXHIBIT 10.14 EXHIBIT 10.14 CRITICAL PATH, INC. AMENDED AND RESTATED 1998 STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT Critical Path, Inc., a California corporation (the "Company"), granted an Option on December 21, 2001 to purchase shares of its common stock (the "Shares") to the Optionee named below. The terms and conditions of that Option grant, as amended and restated, are set forth in this cover sheet, the attachment, the Company's 1998 Stock Option Plan (the "Plan") and in the Optionee's employment agreement with the Company dated August 1, 2001 as may be amended and in effect from time to time. Date of Option Grant: December 21, 2001 -------------------- Name of Optionee: William McGlashan, Jr. ----------------------- Optionee's Social Security Number: Number of Shares Covered by Option: 1,700,000 ----------------- Exercise Price per Share: $2.56 ------- Vesting Start Date: December 21, 2001 ------------------ BY SIGNING THIS COVER SHEET, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED IN THE ATTACHED AGREEMENT AND IN THE PLAN, A COPY OF WHICH IS ALSO ENCLOSED. Optionee: /s/ William McGlashan ----------------------------------------------- (Signature) Company: /s/ David Hayden ----------------------------------------------- (Signature) Title: --------------------------------- Attachment CRITICAL PATH, INC. AMENDED AND RESTATED 1998 STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT NONSTATUTORY STOCK OPTION This option is not intended to be an incentive stock option under section 422 of the Internal Revenue Code and will be interpreted accordingly. VESTING The Shares under this option will vest in accordance with the vesting schedule indicated below: NUMBER OF OPTIONS VESTING EVENT 1,700,000 Vesting in equal monthly installments from Vesting Start Date listed on the cover sheet to this Agreement, for a period of three (3) years from such Vesting Start Date subject to continued employment with the Company during that period and all other terms and conditions as described herein. 1 Your option vesting will cease in the event that your employment and service as a Company director both terminate for any reason. Your option vesting will also cease upon your voluntary resignation of employment or upon a termination for Cause (as such terms are defined in your employment agreement with the Company). A leave of absence, regardless of the reason, shall be deemed to constitute the cessation of your employment unless the Company authorizes such leave, and you return within the time specified in such authorization. The above performance-based acceleration triggers will cease to be applicable upon your prior cessation of employment for any reason. The Compensation Committee of the Board of Directors must certify in writing that the performance goals have been satisfied before any Option vesting will be accelerated pursuant to attainment of performance goals. In the event of a Change in Control of the Company, 100% of your then-unvested Options (meaning 100% of your unvested Options that are otherwise scheduled to vest under (ii), and (iii) above on each vesting date had a Change in Control not occurred) shall become vested provided that you are employed by the Company on the date the negotiations or communications began (as determined by the Board in good faith) which lead to the Change in Control. For purposes of this Agreement, a "Change in Control" of the Company shall be defined as the occurrence of any one of the following: (i) the consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entity's securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not shareholders of the Company immediately prior to such merger, consolidation or other reorganization; (ii) the sale, transfer or other disposition of all or substantially all of the Company's assets; (iii) the dissolution, liquidation or winding up of the Company; (iv) any transaction as a result of which any person is the "beneficial owner" (as defined in Rule 13d-3 under the 2 Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing at least 20% of the total voting power represented by the Company's then outstanding voting securities. For purposes of this section, the term "person" shall have the same meaning as when used in sections 13(d) and 14(d) of the Securities Exchange Act but shall exclude: (A) trustee or other fiduciary holding securities under an employee benefit plan of the Company or a subsidiary of the Company; (B) A corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of the common stock of the Company; and (C) the Company. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transactions. TERM Your option will expire in any event at the close of business at Company headquarters on the day before the 10th anniversary of the Date of Grant, as shown on the cover sheet. It will expire earlier if your employment and your service as a Company director terminate, as described below. REGULAR TERMINATION If your employment and your service as a Company director terminate for any reason except Cause, death or Disability, then your option will expire at the close of business at Company headquarters on the 90th day after your termination date. CAUSE If your employment or service as a Company director terminates on account of Cause, then your option will expire immediately. DEATH In the event of your death during the period of your employment or service as a Company director, your option will expire at the close of business at Company headquarters on the date six months after the date of death. During that six-month period, your estate or heirs may exercise your option. 3 DISABILITY If your employment and service as a Company director terminate because of your Disability, then your option will expire at the close of business at Company headquarters on the date six months after your termination date. "Disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment. LEAVES OF ABSENCE For purposes of this option, your employment does not terminate when you go on a bona fide leave of absence, that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. Your employment terminates in any event when the approved leave ends if you fail or refuse to return to active service. Consistent with the terms of this Agreement and your Employment Agreement, the Company determines which leaves count for this purpose, and when your employment terminates for all purposes under the Plan. RESTRICTIONS ON EXERCISE The Company will not permit you to exercise this option if the issuance of Shares at that time would violate any law or regulation. NOTICE OF EXERCISE When you wish to exercise this option, you must notify the Company by filing the proper "Notice of Exercise" form at the address given on the form. Your notice must specify how many Shares you wish to purchase. Your notice must also specify how your Shares should be registered (in your name only or in your and your spouse's names as community property or as joint tenants with right of survivorship). The notice will be effective when received by the Company. If someone else wants to exercise this option after your death, that person must prove to the Company's satisfaction that he or she is entitled to do so. FORM OF PAYMENT When you submit your notice of exercise, you must include payment of the option price for the Shares you are purchasing. Payment may be made in one (or a combination) of the following forms: - Your personal check, a cashier's check or a money order. - By delivery (on a form prescribed by the Committee) of an 4 irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price. WITHHOLDING TAXES You will not be allowed to exercise this option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the option exercise or the sale of the Shares acquired upon exercise of this option. RESTRICTIONS ON RESALE By signing this Agreement, you agree not to sell any option Shares at a time when applicable laws or regulations or Company or underwriter trading policies prohibit a sale. You represent and agree that the Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof. In the event that the sale of Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, you shall represent and agree at the time of exercise to make such representations as are deemed necessary or appropriate by the Company and its counsel. Prior to any Change in Control of the Company, the shares acquired under this option can be sold or transferred only pursuant to an SEC Rule 10b5-1 trading plan that is pre-approved by the Board of Director's Compensation Committee. TRANSFER OF OPTION Prior to your death, only you may exercise this option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your spouse or former spouse, nor is the Company obligated to recognize such individual's interest in your option in any other way. NO RETENTION RIGHTS Your option or this Agreement does not give you the right to be retained by the Company (or any subsidiaries) in any capacity. The Company (and any subsidiaries) reserves the right to terminate your Service at any time and for any reason. 5 SHAREHOLDER RIGHTS You, or your estate or heirs, have no rights as a shareholder of the Company until a certificate for your option Shares has been issued. No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued, except as described in the Plan. ADJUSTMENTS In the event of a stock split, a stock dividend or a similar change in the Company stock, the number of Shares covered by this option and the exercise price per share may be adjusted pursuant to the Plan. Your option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity, except to the extent the foregoing conflict with or are in any way inconsistent with Section 8 of your employment agreement. FORFEITURE If, at any time within one year after termination of employment, you engage in either of the following: (i) your commission of a felony or an act constituting common law fraud, in each case having a material adverse effect on the business or affairs of the Company or its affiliates or stockholders; or (ii) your willful or intentional breach of Company confidential information obligations, in each case having a material adverse effect on the business or affairs of the Company or its affiliates or stockholders; then (1) this option shall terminate and be forfeited effective the date on which you enter into such activity, unless terminated or forfeited sooner by operation of another term or condition of this option or the Plan, (2) any stock acquired by you pursuant to the exercise of this option during the Forfeiture Period (as defined below) shall be forfeited, and (3) any gain realized by you from the sale of stock acquired through the exercise of this option during the Forfeiture Period shall be paid by you to the Company. The "Forfeiture Period" shall mean the period commencing six months prior to your termination of employment and ending one year from your termination of employment. RIGHT OF SET OFF By accepting this Agreement, you consent to a deduction from any amounts the Company owes you from time to time, to the extent of the amounts you owe the Company under the paragraph above. If the Company does not recover by means of set-off the full amount you owe it, calculated as set forth above, you agree to pay immediately the unpaid balance to the Company upon the Company's demand. LEGENDS All certificates representing the Shares issued upon exercise of this option shall have endorsed thereon the applicable legends. 6 APPLICABLE LAW This Agreement will be interpreted and enforced under the laws of the State of California. THE PLAN AND OTHER AGREEMENTS The text of the Plan and your employment agreement are incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan or your employment agreement. This Agreement, the Plan and your employment agreement with the Company dated August 1, 2001, as may be amended and in effect from time to time, constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN, EXCEPT TO THE EXTENT MODIFIED BY YOUR EMPLOYMENT AGREEMENT AND THIS AGREEMENT. 7 EX-10.16 16 f80193ex10-16.txt EXHIBIT 10.16 EXHIBIT 10.16 CRITICAL PATH, INC. 1999 NONSTATUTORY STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT Critical Path, Inc., a California corporation (the "Company"), granted an Option on October 8, 2001 to purchase shares of its common stock (the "Shares") to the Optionee named below. The terms and conditions of that Option grant, as amended and restated, are set forth in this cover sheet, the attachment, the Company's 1999 Nonstatutory Stock Option Plan (the "Plan") and in the Optionee's employment agreement with the Company dated October 8, 2001. Date of Option Grant: October 8, 2001 --------------- Name of Optionee: Pierre Van Beneden ------------------ Optionee's Social Security Number or Taxpayer ID Number: -------------------- Number of Shares Covered by Option: 2,000,000 ----------------- Exercise Price per Share: $1.13 ----------------- Vesting Start Date: October 8, 2001 ---------------- BY SIGNING THIS COVER SHEET, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED IN THE ATTACHED AGREEMENT AND IN THE PLAN, A COPY OF WHICH IS ALSO ENCLOSED. Optionee: /s/ Pierre Van Beneden ----------------------------------- (Signature) Company: /s/ William McGlashan ----------------------------------- (Signature) Title: Interim Chief Executive Officer --------------------------- Attachment CRITICAL PATH, INC. 1999 NONSTATUTORY STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT NONSTATUTORY STOCK OPTION This option is not intended to be an incentive stock option under section 422 of the Internal Revenue Code and will be interpreted accordingly. VESTING COMMENCEMENT DATE The Vesting Commencement Date on this option shall be October 9, 2001. Shares under this option will vest in accordance with the vesting schedule indicated below: NUMBER OF OPTIONS VESTING EVENT 2,000,000 Monthly vesting beginning on the Vesting Commencement Date indicated above and continue all shares subject to this option shall be vested over the three (3) years following the issuance of this option. In the event your employment is terminated without cause by the Company prior to the one year anniversary of employment, or in the event you have not been offered the position of Chief Executive Officer. Your option vesting will cease in the event that your employment and service as a Company director both terminate for any reason. Your option vesting will also cease upon your voluntary resignation of employment upon a termination for Cause (as such terms are defined in your employment agreement with the Company). A leave of absence, regardless of the reason, shall be deemed to constitute the cessation of your employment unless such leave is authorized by the Company, and you return within the time specified in such authorization. The Compensation Committee of the Board of Directors must certify in writing that the performance goals have been satisfied before any Option vesting will be accelerated pursuant to attainment of performance goals. In the event of a Change in Control of the Company, 50% of your then-unvested Options (meaning 50% of your unvested Options that are otherwise scheduled to vest under (ii), (iii) and (iv) above on each vesting date had a Change in Control not occurred) shall become vested provided that you are employed by the Company on the date the negotiations or communications began (as determined by the Board in good faith) which lead to the Change in Control provided, however, that all of your then-unvested Options shall become vested if the Change in Control consideration received by Company shareholders is at least $10.00 per share (with such share price adjusted for any future stock splits, stock dividends, recapitalization, or similar events). TERM Your option will expire in any event at the close of business at Company headquarters on the day before the 10th anniversary of the Date of Grant, as shown on the cover sheet. It will expire earlier if your employment and your service as a Company director terminate, as described below. REGULAR TERMINATION If your employment and your service as a Company director terminate for any reason except Cause, death or Disability, then your option will expire at the close of business at Company headquarters on the 90th day after your termination date. CAUSE If your employment or service as a Company director terminates on account of Cause, then your option will expire immediately. DEATH In the event of your death during the period of your employment or service as a Company director, your option will expire at the close of business at Company headquarters on the date six months after the date of death. During that six-month period, your estate or heirs may exercise your option. DISABILITY If your employment and service as a Company director terminate because of your Disability, then your option will expire at the close of business at Company headquarters on the date six months after your termination date. "Disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment. LEAVES OF ABSENCE For purposes of this option, your employment does not terminate when you go on a bona fide leave of absence, that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. Your employment terminates in any event when the approved leave ends if you fail or refuse to return to active service. Consistent with the terms of this Agreement and your Employment Agreement, the Company determines which leaves count for this purpose, and when your employment terminates for all purposes under the Plan. RESTRICTIONS ON EXERCISE The Company will not permit you to exercise this option if the issuance of Shares at that time would violate any law or regulation. NOTICE OF EXERCISE When you wish to exercise this option, you must notify the Company by filing the proper "Notice of Exercise" form at the address given on the form. Your notice must specify how many Shares you wish to purchase. Your notice must also specify how your Shares should be registered (in your name only or in your and your spouse's names as community property or as joint tenants with right of survivorship). The notice will be effective when received by the Company. If someone else wants to exercise this option after your death, that person must prove to the Company's satisfaction that he or she is entitled to do so. FORM OF PAYMENT When you submit your notice of exercise, you must include payment of the option price for the Shares you are purchasing. Payment may be made in one (or a combination) of the following forms: - Your personal check, a cashier's check or a money order. - By delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price. - Payment may be made all or in part with a full recourse promissory note executed by you. The interest rate and other terms and conditions of such note shall be determined in your employment agreement with the Company. The Company will require that you pledge your Shares to the Company for the purpose of securing the payment of such note. WITHHOLDING TAXES You will not be allowed to exercise this option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the option exercise or the sale of the Shares acquired upon exercise of this option. RESTRICTIONS ON RESALE By signing this Agreement, you agree not to sell any option Shares at a time when applicable laws or regulations or Company or underwriter trading policies prohibit a sale. You represent and agree that the Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof. In the event that the sale of Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, you shall represent and agree at the time of exercise to make such representations as are deemed necessary or appropriate by the Company and its counsel. Prior to any Change in Control of the Company, the shares acquired under this option can be sold or transferred only pursuant to an SEC Rule 10b5-1 trading plan that is pre-approved by the Board of Director's Compensation Committee. TRANSFER OF OPTION Prior to your death, only you may exercise this option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your spouse or former spouse, nor is the Company obligated to recognize such individual's interest in your option in any other way. NO RETENTION RIGHTS Your option or this Agreement do not give you the right to be retained by the Company (or any subsidiaries) in any capacity. The Company (and any subsidiaries) reserves the right to terminate your Service at any time and for any reason. SHAREHOLDER RIGHTS You, or your estate or heirs, have no rights as a shareholder of the Company until a certificate for your option Shares has been issued. No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued, except as described in the Plan. ADJUSTMENTS In the event of a stock split, a stock dividend or a similar change in the Company stock, the number of Shares covered by this option and the exercise price per share may be adjusted pursuant to the Plan. Your option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity, except to the extent the foregoing conflict with or are in any way inconsistent with Section 8 of your employment agreement. FORFEITURE If, at any time within one year after termination of employment, you engage in any of the following: (i) your commission of a felony, an act involving moral turpitude, or an act constituting common law fraud, in each case having a material adverse effect on the business or affairs of the Company or its affiliates or stockholders; (ii) your willful or intentional breach of Company confidential information obligations, in each case having a material adverse effect on the business or affairs of the Company or its affiliates or stockholders; or (iii) your unreasonable refusal to comply with lawful requests for cooperation made by the Board of Directors, then (1) this option shall terminate and be forfeited effective the date on which you enter into such activity, unless terminated or forfeited sooner by operation of another term or condition of this option or the Plan, (2) any stock acquired by you pursuant to the exercise of this option during the Forfeiture Period (as defined below) shall be forfeited, and (3) any gain realized by you from the sale of stock acquired through the exercise of this option during the Forfeiture Period shall be paid by you to the Company. The "Forfeiture Period" shall mean the period commencing six months prior to your termination of employment and ending one year from your termination of employment. RIGHT OF SET OFF By accepting this Agreement, you consent to a deduction from any amounts the Company owes you from time to time, to the extent of the amounts you owe the Company under the paragraph above. If the Company does not recover by means of set-off the full amount you owe it, calculated as set forth above, you agree to pay immediately the unpaid balance to the Company upon the Company's demand. LEGENDS All certificates representing the Shares issued upon exercise of this option shall have endorsed thereon the applicable legends. APPLICABLE LAW This Agreement will be interpreted and enforced under the laws of the State of California. THE PLAN AND OTHER AGREEMENTS The text of the Plan and your employment agreement are incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan or your employment agreement. This Agreement, the Plan and your employment agreement with the Company dated October 8, 2001 constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN, EXCEPT TO THE EXTENT MODIFIED BY YOUR EMPLOYMENT AGREEMENT WITH THE COMPANY. EX-10.17 17 f80193ex10-17.txt EXHIBIT 10.17 EXHIBIT 10.17 - -------------------------------------------------------------------------------- NOTICE OF GRANT OF STOCK OPTIONS CRITICAL PATH, INC. AND OPTION AGREEMENT ID: 91-1788-300 532 Folsom Street San Francisco, CA 94105 - -------------------------------------------------------------------------------- PIERRE VAN BENEDEN OPTION NUMBER: 003438 532 FOLSOM ST. PLAN: 1998 SAN FRANCISCO, CA USA 94105 ID: - -------------------------------------------------------------------------------- Effective 11/09/2001, you have been granted a(n) Non-Qualified Stock Option to buy 500,000 shares of Critical Path, Inc. (the Company) stock at $1.1300 per share. The total option price of the shares granted is $565,000.00. Shares in each period will become fully vested on the date shown. Shares Vest Type Full Vest Expiration ------ --------- --------- ---------- 500,000 Monthly 11/09/2004 11/09/2011 - -------------------------------------------------------------------------------- By your signature and the Company's signature below, you and the Company agree that these options are granted under and governed by the terms and conditions of the Company's Stock Option Plan, as amended and in effect, and the Option Agreement applicable to such Plan, each of which is attached and made a part of this document. This option grant may also be governed by the terms and conditions of any written agreement between you and the Company. - -------------------------------------------------------------------------------- /s/ David Hayden - ----------------------------------- -------------------------------- Critical Path, Inc. Date /s/ Pierre Van Beneden - ----------------------------------- -------------------------------- PIERRE VAN BENEDEN Date EX-10.18 18 f80193ex10-18.txt EXHIBIT 10.18 EXHIBIT 10.18 CONSULTING AGREEMENT This Agreement is made as of August 16, 2001, by and between Laureen DeBuono, an individual, located at __________, San Francisco, California ____ ("Consultant") and Critical Path, Inc., a company located at 532 Folsom Street, San Francisco, CA 94105 ("Critical Path"). 1. Engagement of Consultant; Consulting Tasks. Critical Path hereby engages Consultant, and Consultant hereby agrees, to advise Critical Path on the following matters, achieve the following objective or deliver the following work product ("consulting tasks"): To lead the Critical Path Finance organization, on an interim basis, as "Interim CFO", which includes responsibility for financial accounting and reporting, financial planning, budgeting and analysis, investor relations, treasury and tax, risk management, travel and facilities. Consultant shall report directly to the CEO or Interim COO if the former has not been hired, and shall also have direct and unfettered access to the Board of Directors and its Audit Committee. Consultant shall be an interim member of the executive management team, attend executive staff meetings, and participate in the selection of the new CEO of Critical Path. Consultant shall also lead an assessment of the Finance team and shall make staffing/hiring decisions appropriate to the needs of the organization. Critical Path understands that the manner and means used by Consultant to accomplish the consulting tasks is in the sole discretion and control of Consultant. However, Consultant will utilize the highest degree of skill and expertise in order to professionally accomplish the consulting tasks in a timely fashion. It is also noted and agreed to by Critical Path that Consultant is rendering no legal advice in the performance of her tasks hereunder. 2. Term. Consultant shall commence work under this Agreement on September 5, 2001. The term of this Agreement shall be for a period of six (6) months through February 29, 2002, unless terminated under the provisions of Section 9, or extended upon mutual agreement of the parties. 3. Time Commitment. Except where the nature of the consulting tasks requires that they be performed at specific times, Consultant is free to choose the specific times at which work will be performed. However, Consultant and Critical Path agree that the work performed shall be on a four (4) day per week basis (Monday through Thursday) through October 1, 2001, and thereafter on a five (5) day per week basis through February 29, 2002. The work shall be performed at the Critical Path facilities in San Francisco, with travel on behalf of Critical Path when needed. Critical Path acknowledges that Consultant is finishing tasks for other clients during the month of September and, as such, understands that Consultant will be unavailable to work on Critical Path projects from Friday through Sunday during this period, including September 24 through 26. Consultant agrees that she shall not take on any new consulting assignments during the Term of this Agreement. Critical Path also acknowledges that Consultant shall be unavailable November 20 through 25, 2001, December 24 through January 3, 2002, and February 15 through 24, 2002. 4. Fees and Expenses. Consultant shall be paid $310,000 for the six (6) month period ("Term"), which equates to $52,000 per month payable on the 1st of each month, with the first such payment due on September 5, 2001. Consultant shall also be reimbursed for business and business-related travel expenses through the submission of itemized expense reports, and such expenses will be payable within seven (7) days of submission of such reports. In addition, Consultant shall be granted, on September 5, 2001, at the market price on that date, an option to purchase 200,000 shares of Critical Path stock, of which 33,333 options shall fully vest on a monthly basis, beginning on September 5, 2001 and thereafter on the 1st of each month. In addition, during the Term of the Agreement, in the event other executive officers receive stock options as a result of a financing, stock split, annual option grant program or other similar event, then Consultant will receive additional stock options on a "proportional basis". During the Term of the Agreement, Consultant will be subject to all of the restrictions imposed on executive officers with regard to trading in Critical Path stock. After the Term of the Agreement, there will be no such restrictions imposed on Consultant. 5. Travel. Upon reasonable request by Critical Path, Consultant shall travel to appropriate locations to perform the consulting tasks (where the nature of such tasks so requires) within the Time Commitment noted in Point 3 above. Travel time shall count as time spent on the consulting tasks. 6. No Conflicts. Consultant represents and warrants that: (a) Consultant is not bound by, and will not enter into, any oral or written agreement with another party that conflicts in any way with Consultant's obligations under 1 this Agreement or any agreement made or to be made in connection herewith and (b) Consultant's agreements and performance under this Agreement and such related agreements do not require consent or approval of any person that has not already been obtained. 7. Confidentiality of Protected Information. (a) Definition. "Protected Information" consists of: (i) information that Critical Path considers to be proprietary and/or confidential and which was previously or is hereafter disclosed or made available to Consultant by Critical Path including information relating to Critical Path or its business that becomes available to Consultant due to Consultant's access to Critical Path's property or products; and (ii) information that has been or is created, developed, conceived, reduced to practice or discovered by Consultant (alone or jointly with others) using any Protected Information or any property or materials supplied to Consultant by Critical Path; and (iii) information that was or is created, conceived, reduced to practice, discovered, developed by, or made known to, Consultant (either alone or jointly with others) during the period that Consultant is retained as a Consultant by Critical Path and which is within the scope of the consulting tasks. By way of illustration but not limitation, Protected Information includes: inventions, discoveries, developments, improvements, trade secrets, know-how, ideas, techniques, designs, processes, formulae, data and software (collectively, "Inventions"); plans for research, development, new products, marketing and selling; budgeting and financial information; production and sales information including prices, costs, quantities and information about suppliers and customers; information about business relationships; and information about skills and compensation of Critical Path employees and consultants. (b) Non-Disclosure; Restricted Use. At all times during and after Consultant's engagement by Critical Path, Consultant shall: hold Protected Information in strictest confidence; not disclose Protected Information to any third party without written consent of a Critical Path officer; take all reasonable steps to safeguard Protected Information; and not use Protected Information for any purpose other than performing work for Critical Path. (c) Exclusions. This Section 7 shall impose no restrictions on use and disclosure of any information which Consultant can establish by legally sufficient evidence: (i) was otherwise known to Consultant at the time of disclosure; or (ii) becomes known or available to Consultant without restriction from a third party without violation of any confidentiality obligation to Critical Path; or (iii) is or becomes part of the public domain without violation of this Agreement by Consultant. (d) Third Party Information. The use and disclosure restrictions in this Section 7 shall also apply to proprietary or confidential information of a third party received by Critical Path and disclosed to Consultant. (e) Ownership. Critical Path shall be the sole owner of all Protected Information. Consultant hereby assigns to Critical Path any rights it may have or acquire in any Protected Information, all patents issuing therefrom, and all copyrights or any other rights existing therein. 8. Consultant Not to Disclose Confidential Information of Consultant or Others. Consultant shall not disclose any information to Critical Path which it believes to be confidential or proprietary to itself or a third party. 2 9. Termination. This Agreement may be terminated by either party on twenty (20) days' written notice to the other, regardless of whether or not the consulting tasks have yet been completed. However, in the event Critical Path terminates this Agreement prior to the end of the Term, for any reason whatsoever, other than for a fraud or embezzlement perpetrated upon Critical Path, then Critical Path shall provide to Consultant a "termination payment" equal to two (2) months of consulting income, or $104,000, payable on the date of termination. The obligation of Critical Path to pay fully on this Agreement for consulting services rendered will not terminate and, as such, all amounts owing to Consultant hereunder, including reimbursement of business and business-related travel expenses, shall be paid to Consultant immediately upon termination. On termination, Consultant shall deliver to Critical Path any supplies or equipment provided by Critical Path for use in performing the consulting tasks, and all physical property and documents or other media (including copies) that contain Protected Information. 10. Independent Contractor; No Employee Benefits. Consultant shall at all times act as an independent contractor and not as an employee of Critical Path. Accordingly, Consultant understands that Critical Path will not pay or withhold from payments to Consultant under this Agreement any FICA (social security), state unemployment or disability insurance premiums, state or federal income taxes, or other taxes and that Consultant is responsible for paying his or her own federal self-employment tax (in lieu of FICA), state and federal income taxes (including estimated tax payments) and other applicable taxes. Consultant also understands that he or she will receive no employee benefits of any kind including, for example, health insurance. 11. Miscellaneous. Neither party has any authority to bind the other in any way. This Agreement and the Indemnification Agreement dated August 16, 2001 ("Indemnification Agreement") by and between the parties hereto (by which Critical Path fully indemnifies Consultant for any actions and expenses that may arise from the action taken or advice rendered by the Consultant in the performance of her duties hereunder), constitute the entire agreement between the parties relating to the subject matter hereof. Except as expressly provided herein, this Agreement and the Indemnification Agreement shall not be amended except by written agreement between the parties. No oral waiver, amendment or modification shall be effective under any circumstances. If any term, covenant or condition of this Agreement shall for any reason be held unenforceable by a court of competent jurisdiction, the rest of this Agreement shall remain in full force and shall in no way be affected or impaired. The representations and warranties herein shall survive termination or expiration of this Agreement. This Agreement shall be governed and construed under California law, excluding choice of law rules. In addition, Critical Path agrees to add Consultant's name as a "named insured" on the current Critical Path D&O Policy (and any future Critical Path D&O policies that may cover the Term of this Agreement), effective September 5, 2001. 12. Taxpayer Identification Number. The information in this Section is provided in lieu of IRS Form W-9. Consultant's taxpayer identification number is: (a) Social Security Number: _________________ (For individuals or sole proprietorships). OR (b) Employer I.D. Number: __ __ - __ __ __ __ __ __ __ (For all other entities). IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date set forth above. CRITICAL PATH, INC. LAUREEN DEBUONO By: /s/ William McGlashan By: /s/ Laureen DeBuono --------------------------- -------------------------------- Laureen DeBuono 3 EX-10.19 19 f80193ex10-19.txt EXHIBIT 10.19 EXHIBIT 10.19 - -------------------------------------------------------------------------------- NOTICE OF GRANT OF STOCK OPTIONS CRITICAL PATH, INC. AND OPTION AGREEMENT ID: 91-1788-300 532 Folsom Street San Francisco, CA 94105 - -------------------------------------------------------------------------------- LAUREEN DEBUONO OPTION NUMBER: 004250 PLAN: 1998 ID: - -------------------------------------------------------------------------------- Effective 9/5/2001, you have been granted a(n) Non-Qualified Stock Option to buy 200,000 shares of Critical Path, Inc. (the Company) stock at $0.3400 per share. The total option price of the shares granted is $68,000.00. Shares in each period will become fully vested on the date shown. Shares Vest Type Full Vest Expiration ------ --------- --------- ---------- 33,332 On Vest Date 9/5/2001 9/5/2011 166,668 Monthly 2/4/2002 9/5/2011 - -------------------------------------------------------------------------------- By your signature and the Company's signature below, you and the Company agree that these options are granted under and governed by the terms and conditions of the Company's Stock Option Plan as amended and the Option Agreement, all of which are attached and made a part of this document. - -------------------------------------------------------------------------------- /s/ David Hayden - ----------------------------------- -------------------------------- Critical Path, Inc. Date /s/ Laureen DeBuono - ----------------------------------- -------------------------------- Laureen DeBuono Date EX-10.20 20 f80193ex10-20.txt EXHIBIT 10.20 EXHIBIT 10.20 ADDENDUM TO CONSULTING AGREEMENT BETWEEN LAUREEN DEBUONO AND CRITICAL PATH, INC. DATED AUGUST 16, 2001 This Addendum ("Addendum") is made as of October 31, 2001 by and between Laureen DeBuono, an individual, located at __________ ("Consultant") and Critical Path, Inc., a company located at 532 Folsom Street, San Francisco, CA 94105 ("Critical Path"), to the original Consulting Agreement dated August 21, 2001 ("Consulting Agreement"), between the parties to this Addendum. The following are changes to the Consulting Agreement; all other terms in the Consulting Agreement remain the same, apply to the new Term, defined below, and are in full force and effect: Section 2 "Term". The Term of the consulting agreement shall be extended through September 30, 2002, unless terminated under the provisions of Section 9 of the Consulting Agreement, or extended upon mutual agreement of the parties. Section 4 "Fees and Expenses". Consultant shall continue to be paid $52,000 per month payable on the first of each month through September 2002. In addition, Consultant shall be granted, on October 31, 2001, at the market price on that date, a fully vested option to purchase 233,333 shares of Critical Path stock. In addition, as stated in the Consulting Agreement, in the event other executive officers receive stock options as a result of a financing, stock split, annual option grant program or other similar event, then the Consultant will receive additional stock options on a "proportional basis". During the Term of the Agreement, Consultant will be subject to all the restrictions imposed on executive officers with regard to trading in Critical Path stock. After the Term of the Agreement, there will be no such restrictions imposed on Consultant. Section 9 "Termination". The provisions of this section extend to the Term through September 30, 2002. Lastly, the parties agree that Consultant shall have a flexible work schedule that permits Consultant to work from home on an occasional basis. BY: /s/ LAUREEN DEBUONO --------------------------------- Laureen DeBuono "Consultant" BY: /s/ BILL MCGLASHAN --------------------------------- Bill McGlashan CEO Critical Path, Inc. EX-10.21 21 f80193ex10-21.txt EXHIBIT 10.21 EXHIBIT 10.21 - -------------------------------------------------------------------------------- NOTICE OF GRANT OF STOCK OPTIONS CRITICAL PATH, INC. AND OPTION AGREEMENT ID: 91-1788-300 532 Folsom Street San Francisco, CA 94105 - -------------------------------------------------------------------------------- LAUREEN DEBUONO OPTION NUMBER: 003374 PLAN: 1998 ID: - -------------------------------------------------------------------------------- Effective 11/1/2001, you have been granted a(n) Non-Qualified Stock Option to buy 233,333 shares of Critical Path, Inc. (the Company) stock at $0.9100 per share. The total option price of the shares granted is $212,333.03. Shares in each period will become fully vested on the date shown. Shares Vest Type Full Vest Expiration ------ --------- --------- ---------- 233,333 On Vest Date 11/1/2001 11/1/2011 - -------------------------------------------------------------------------------- By your signature and the Company's signature below, you and the Company agree that these options are granted under and governed by the terms and conditions of the Company's Stock Option Plan as amended and the Option Agreement, all of which are attached and made a part of this document. - -------------------------------------------------------------------------------- - ----------------------------------- -------------------------------- Critical Path, Inc. Date - ----------------------------------- -------------------------------- Laureen DeBuono Date EX-10.22 22 f80193ex10-22.txt EXHIBIT 10.22 EXHIBIT 10.22 - -------------------------------------------------------------------------------- NOTICE OF GRANT OF STOCK OPTIONS CRITICAL PATH, INC. AND OPTION AGREEMENT ID: 91-1788-300 532 Folsom Street San Francisco, CA 94105 - -------------------------------------------------------------------------------- LAUREEN DEBUONO OPTION NUMBER: 003432 PLAN: 1998 ID: - -------------------------------------------------------------------------------- Effective 11/9/2001, you have been granted a(n) Non-Qualified Stock Option to buy 234,686 shares of Critical Path, Inc. (the Company) stock at $1.1300 per share. The total option price of the shares granted is $265,195.18. Shares in each period will become fully vested on the date shown. Shares Vest Type Full Vest Expiration ------ --------- --------- ---------- 234,686 On Vest Date 11/9/2001 11/9/2011 - -------------------------------------------------------------------------------- By your signature and the Company's signature below, you and the Company agree that these options are granted under and governed by the terms and conditions of the Company's Stock Option Plan as amended and the Option Agreement, all of which are attached and made a part of this document. - -------------------------------------------------------------------------------- /s/ David Hayden - ----------------------------------- -------------------------------- Critical Path, Inc. Date /s/ Laureen DeBuono - ----------------------------------- -------------------------------- Laureen DeBuono Date EX-10.23 23 f80193ex10-23.txt EXHIBIT 10.23 EXHIBIT 10.23 January 14, 2002 Mr. Bernard Harguindeguy Dear Bernard: On behalf of Critical Path, Inc. (the "Company"), I am pleased to offer you the position of Executive Vice President, Chief Marketing Officer. The terms of your new position with the Company are as set forth below: 1. POSITION. a. You will be Executive Vice President, Chief Marketing Officer, reporting to William E. McGlashan, Jr., Vice Chairman and Chief Executive Officer. Mr. McGlashan will be responsible for your annual review and compensation. You will have a matrix reporting relationship with Pierre Van Beneden, President, relative to certain Marketing initiatives that will require your expertise. You will be working out of the Company's offices in San Francisco, CA. b. You agree to the best of your ability and experience that you will at all times loyally and conscientiously perform all of the duties and obligations required of and from you pursuant to the express and implicit terms hereof, and to the reasonable satisfaction of the Company. During the term of your employment, you further agree that you will devote all of your business time and attention to the business of the Company. 2. START DATE. Subject to fulfillment of any conditions imposed by this letter agreement, you will commence this new position with the Company on Tuesday, January 22, 2002. On your first day, your orientation will take place at 9:15 am at 532 Folsom Street in San Francisco. Please bring your employment eligibility documents with you. 3. PROOF OF RIGHT TO WORK. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. A list of acceptable documents is available for your reference. 4. COMPENSATION. a. BASE SALARY. You will be paid a monthly salary of $25,000.00, which is equivalent to $300,000.00 on an annualized basis. Your salary will be payable in two equal payments per month pursuant to the Company's regular payroll. b. ADDITIONAL COMPENSATION. You will be eligible to participate in the Company's Executive Incentive Compensation Program. Your incentive earnings will be based 50% on EBITDA attainment and 50% on MBO's to be mutually agreed upon between yourself and Mr. McGlashan. The amount of incentive earnings is $300,000.00 annually. c. SIGNING BONUS. Upon signing your employment agreement, the Company will provide you with a signing bonus in the amount of $100,000.00. PRIVATE & CONFIDENTIAL CRITICAL PATH, INC. d. SEVERANCE PERIOD. In the event your employment is terminated without cause, you will receive one year compensation in the amount of $300,000.00 as severance pay. e. COMMUTING EXPENSE REIMBURSEMENT. The Company will reimburse you for car lease expenses, mileage and parking expenses associated with your commute to/from your home and the San Francisco office. f. REVIEW. Your base salary generally will be reviewed annually every January as part of the Company's salary review process. However, nothing in this provision changes the at-will nature of the employment relationship. g. PAID TIME OFF. You will receive 18 paid days off per year for the first five years of service. This Paid Time Off will accrue at the rate of 12 hours per month. 5. STOCK OPTIONS. In connection with the commencement of your employment, the Company will recommend that the Board of Directors grant you an option to purchase 1,250,000 shares of the Company's Common Stock ("Shares") with an exercise price equal to the fair market value on the date of the grant. These option shares will vest over four years, with 25% vesting on your one year anniversary with Critical Path. Vesting will, of course, depend on your continued employment with the Company. The option will be subject to the terms of the applicable Company Stock Option Plan and the Stock Option Agreement between you and the Company. Your stock option agreement will provide for acceleration of your options upon the following circumstance: If you are terminated without cause or by constructive discharge following a change of control, 100% of your then unvested shares will automatically vest. If you resign or are terminated for any reason before your one year anniversary, the Company will accelerate vesting on 25% of the above mentioned options. Additionally, the Company will recommend that the Board of Directors grant you an option to purchase 250,000 options if you meet specific first year objectives which will be mutually agreed upon between Mr. McGlashan and you. 6. BENEFITS. The Company will provide you and your eligible dependents with generous Medical, Dental, and Vision benefits. You will also receive Short-term Disability, Long-term Disability, and Life Insurance. In addition, the Company offers employees the opportunity to participate in its Flexible Spending Account, Employee Assistance Program, 401(k), and Employee Stock Purchase Plans. A complete overview of benefits will be presented to you on your start date. 7. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Your acceptance of this offer and commencement of employment with the Company is contingent upon the execution and submission of the Company's Proprietary Information and Inventions Agreement ("Proprietary Agreement"), a copy of which has been provided to you with this offer letter. 8. AT-WILL EMPLOYMENT. Notwithstanding the Company's obligation described herein, your employment with the Company will be on an "at-will" basis, meaning that either you or the Company may terminate your employment at any time for any reason or no reason, without further obligation or liability. 9. DISPUTE RESOLUTION PROCEDURE. You and the Company ("the parties") agree that any dispute arising out of or related to the employment relationship between them, including the termination of that relationship and any allegations of unfair or discriminatory treatment arising under state or federal law or otherwise, that cannot be resolved through the Company's informal grievance procedure, shall be resolved by final and binding arbitration, except where the law specifically forbids the use of arbitration as a final and binding remedy. The following dispute resolution shall apply: (a) The complainant shall provide the other party with a written statement of the claim identifying any supporting witnesses or documents and the requested relief. (b) The respondent shall furnish a statement of the relief, if any, that it is willing to provide, and identify supporting witnesses or documents. If the matter is not resolved, the parties shall submit the dispute to nonbinding mediation, paid for by the Company, before a mediator to be selected by the parties. (c) If the matter is not resolved through mediation, the parties agree that the dispute shall be resolved by binding arbitration. If the parties are unable to jointly select an arbitrator, they will obtain a list of arbitrators from the Federal Mediation and Conciliation Service and select an arbitrator by striking names from that list. 2 PRIVATE & CONFIDENTIAL CRITICAL PATH, INC. (d) The arbitrator shall have the authority to determine whether the conduct complained of in section (a) of this section violates the complainant's rights and, if so, to grant any relief authorized by law; subject the exclusions of section (g) below. The arbitrator shall not have the authority to modify, change or refuse to enforce the terms of any employment agreement between the parties, or change any lawful policy or benefit plan. (e) Critical Path, Inc. shall bear the costs of the arbitration if you prevail. If Critical Path, Inc. prevails, you will pay half the cost of the arbitration or $500, whichever is less. Each party shall pay its own attorneys fees, unless the arbitrator orders otherwise pursuant to applicable law. (f) ARBITRATION SHALL BE THE EXCLUSIVE FINAL REMEDY FOR ANY DISPUTE BETWEEN THE PARTIES, SUCH AS DISPUTES INVOLVING CLAIMS FOR DISCRIMINATION OR HARASSMENT (SUCH AS CLAIMS UNDER THE FAIR EMPLOYMENT AND HOUSING ACT, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE AMERICANS WITH DISABILITIES ACT, OR THE AGE DISCRIMINATION IN EMPLOYMENT ACT), WRONGFUL TERMINATION, BREACH OF CONTRACT, BREACH OF PUBLIC POLICY, PHYSICAL OR MENTAL HARM OR DISTRESS OR ANY OTHER DISPUTES, AND THE PARTIES AGREE THAT NO DISPUTE SHALL BE SUBMITTED TO ARBITRATION WHERE THE COMPLAINANT HAS NOT COMPLIED WITH THE PRELIMINARY STEPS PROVIDED FOR IN SECTIONS (a) AND (b) ABOVE. (g) The parties agree that the arbitration award shall be enforceable in any court having jurisdiction to enforce this Agreement, so long as the arbitrator's findings of fact are supported by substantial evidence on the whole and the arbitrator has not made errors of law; however, either party may bring an action in a court of competent jurisdiction regarding or related to inventions that you may claim to have developed prior to joining the company, pursuant to California Labor Code Section 2870 ("Disputes Related to Inventions"). The parties further agree that for Disputes Related to Inventions which the parties have elected to submit to arbitration, each party retains the right to seek preliminary injunctive relief in court in order to preserve the status quo or prevent irreparable injury before the matter can be heard in arbitration. 10. OFFER CONDITIONS. This offer is null and void if not accepted or declined by January 16, 2002. This offer is also contingent upon receiving the successful results of our independent verification of your application. We are delighted to be able to extend you this offer and look forward to working with you. To indicate your acceptance of the Company's offer, please sign and date this letter in the space provided below and FAX IT TO HR AT (415) 808-8797, along with a signed and dated copy of the Proprietary Agreement. This letter, together with the Proprietary Agreement constitutes the full, complete and exclusive agreement between you and the company regarding the matters herein and supersedes any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by a written agreement, signed by the Company and by you. ACCEPTED AND AGREED: CRITICAL PATH, INC. Name: By: /s/ William McGlashan --------------------------------- --------------------------------- William E. McGlashan, Jr. /s/ Bernard Harguindeguy Vice Chairman and CEO - -------------------------------------- Signature Date 3 EX-23.1 24 f80193ex23-1.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS ------------------------------------ We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-63080, 333-51504, 333-44418, 333-40476, 333-36228, 333-95933, 333-95279, 333-87553) and on From S-3 (Nos. 333-39958, 333-38006, 333-38000, 333-36382) of Critical Path, Inc. of our report dated February 5, 2002 relating to the financial statements and financial statement schedule, which appears on this Form 10-K. San Jose, CA March 29, 2002 ~~-----END PRIVACY-ENHANCED MESSAGE-----~~


	Critical Path’s PIM solution provides users with a personal calendar, personal address book, task lists and notes. Users can access these services via the Web and wireless devices and also use them offline with Personal Digital Assistant and PIM clients. With Critical Path’s PIM solution, service providers can easily offer value-added services in addition to email.


	Critical Path helps service providers capitalize on this very large market with a Unified Communications solution that offers centralized access to voice, fax and email messages. Our Core Messaging solution provides the central message store, while partner technologies are readily integrated to enable voice and fax capabilities.


	Critical Path’s directory and meta-directory technology is combined with strategic partner solutions to provide centralized access management, Web single sign-on, policy-based delegated administration and user self-service.


	•	Support for 24 hour, 7 day a week high-availability environments.

	•	Scalability designed to adjust from just a few thousand users to tens of millions of users.

	•	Standards-based technology, enabling rapid deployment of communications services.

	•	The industry rated lowest total cost of ownership.


	The CP SMS Access Server provides a network-independent, feature-rich gateway between SMS (Short Message Service) and the Internet mail protocol, SMTP (Simple Mail Transfer Protocol), bridging the gap between numerous applications and wireless technologies.


	CP^TM Digital Certification Services provide the added security and functionality of client-side digital signatures, encryption and digital receipts to messages and documents transferred through the CP Messaging Server and CP Registered Mail Server.


	At the core of the Services layer is the CP Messaging Server — a scalable and robust messaging solution, enabling standards-based email (Web, SMTP, POP3 and IMAP4). The CP Messaging Server offers high levels of performance, reliability and scalability.


	The CP Calendar Server is a powerful Web-based solution that fully integrates personal and group calendaring. Ease of use and a diverse range of features make the CP Calendar Server a valuable solution for both corporations and service providers who want to offer value-added calendaring services to generate more revenue per user.


	The CP Registered Mail Server enables users to efficiently send and receive documents through the Internet without compromising security. End-to-end encryption and real-time tracking information protect messages and file deliveries.


	The CP Directory Server provides a central repository for user profile information and other data shared by multiple systems and applications. This state-of-the-art LDAP directory is currently deployed in primarily mission-critical environments, including corporate intranets/ extranets, online banking services, Internet postal services and government services.


	•	Corporate Enterprises. Communications infrastructure products and services are an increasingly important concern for businesses. Enterprises need to control costs of messaging in the face of tightening budgets and expanding message volume. With the globalization of the workforce, enterprises have become increasingly reliant upon digital communication. With such globalization, critical business information is leveraged across an enterprise in eBusiness applications and the need for reliable messaging and security access controls expands significantly. Additionally, such enterprises require identity management solutions to ensure security and to enable portals, extranets and Web-based services.

	•	Wireless and Telecommunications Providers. Wireless users require access to the Internet and the ability to send and receive messages through chosen platforms and devices. Wireless and telecommunications providers are challenged with meeting ever evolving customer needs, decreasing voice revenues and heightened global competition. We provide the necessary access and messaging capability to provide wireless service providers with a low total cost of ownership, increased scalability, improved reliability and an open, easily integrated standards based platform. Additionally, to increase the value of their own service, and to grow the value of and retain their customers, telecommunications providers often add our advanced Internet messaging solutions to their connectivity and data management offerings.

	•	Broadband and Service Providers. Broadband providers, such as cable, ISDN and DSL operators, face increasing messaging and identity management complexity as their businesses grow and evolve. Large bandwidth providers offer increased multimedia capabilities and services. These services require highly scalable and reliable infrastructure to handle the increasing user numbers and message volume for both individual message size and message quantity. Critical Path provides reliable and scalable messaging infrastructure to handle this growth. Additionally, broadband service providers’ (XSPs) basic connection services have become increasingly commoditized. XSPs are aggressively expanding value-added services, including wireless messaging, unified messaging and mobile commerce. Application service providers (ASPs) offer application hosting services and custom application development for corporate customers. Many ASPs offer email messaging as one of their core applications and can


		take advantage of our outsourced offering and “brand-behind-the-brand” strategy to reduce costs and provide high-quality service.

	•	Governments and Postal Authorities. Governments and postal authorities are increasingly entering into digital services. Their challenges are to provide services at a national level that can support large volume, very large scale and complex applications. Postal authorities worldwide use our email solutions to provide country-wide “email for life” and our directory and meta-directory products to serve as central repositories of user profile information that provide security and access control over trusted third party services for hundreds of millions of postal customers. Government agencies use our directories to help identify users and the services they should be allowed to access. By leveraging our highly scalable directory products, countries are able to build eBusiness infrastructures that enable such authorities to reduce business costs, create new revenue streams, and deliver the trackability, security, and reliability needed for information exchange with national agencies.


	•	Telecommunications, Internet and Wireless Infrastructure Service Providers. Our technology supports one-way and two-way messaging services to millions of wireless devices and we are one of only a few companies able to provide end-users with the means to send and receive messages to and from mobile phones, pagers and other wireless devices. We have relationships with leading telecommunications and Internet infrastructure providers as a means to develop the growing market for messaging. We believe these relationships provide vital, value-added services that enable our strategic partners to retain customers, grow into new business areas, and increase revenue from their installed customer bases. Strategic partners include: Mediagate, Nokia Networks OY and Logica UK Limited, among others.

	•	Internet Security and Privilege Management Infrastructure Partners. Critical Path has established relationships with major public key infrastructure and Internet security vendors. Our InJoin Directory Server is included in several of our customers’ security solutions. Additionally, our InJoin Meta-Directory plays a growing role in large corporations’ efforts to develop comprehensive privilege management systems. By working with leading public key infrastructure, secure relationship management, and provisioning vendors as well as systems integrators that specialize in this area, we are expanding our channel of large corporations and enterprises. Strategic partners include Netegrity, Inc., EDS and Entrust Technologies Limited, among others.


	•	Breadth of platform features and functionality;

	•	Ease of integration into customers’ existing systems;

	•	Scalability, reliability, performance and 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; and

	•	Total cost of ownership and operation.


1.	On July 20, 2001 and December 7, 2001, respectively, we issued an aggregate of 9,000 shares and 15,000 shares of common stock in connection with the settlement of two separate lawsuits against the Company by former employees alleging wrongful termination. The shares of common stock were issued at fair market value, as determined by the closing price listed on the Nasdaq National Market, on the date of issuance which was the settlement date as indicated. These securities were issued in reliance on the exemption from the registration requirements of the Securities Act provided in Section 4(2) thereof.

2.	On November 8, 2001, we issued 4,000,000 shares of Series D Cumulative Redeemable Convertible Participating Preferred Stock and warrants to purchase common stock of the Company, to a group of investors that included General Atlantic Partners LLC and its affiliates, Cheung Kong Limited and affiliates, Hutchison Whampoa Limited and affiliates and Vectis Group LLC and its affiliated entities. The Preferred Stock will accrue and cumulate dividends at eight percent (8%) and is convertible into shares of the Company’s common stock at the option of the holder. The warrants are exercisable at any time from November 8, 2002 until November 8, 2006. The exercise price of the common stock underlying the warrants is $1.05. The securities were issued in reliance upon the exemption from registration requirements from the Securities Act provided in Section 4(2) thereof.


	relationships. See also Note 16 to the Notes to Consolidated Financial Statements — Impairment of Long-Lived Assets.

(2)	Operating expenses for the year ended December 31, 2001, include a $26.6 million charge related to impairment of certain long lived assets and an $18.3 million charge related to costs incurred as a result of our strategic restructuring. See also Note 4 to the Notes to Consolidated Financial Statements — Strategic Restructuring and Employee Severance and Note 16 to the Notes to Consolidated Financial Statements — Impairment of Long-Lived Assets.

(3)	Extraordinary gains of $179.3 million, net of applicable taxes and write downs of related debt issuance costs, were recorded for the year ended December 31, 2001 related to gains recognized on the retirement of $261.4 million of face value of Critical Path’s convertible subordinated notes. See also Note 10 to the Notes to Consolidated Financial Statements — Convertible Subordinated Notes.


	•	Focusing on core communication solutions;

	•	Workforce reduction; and

	•	Facilities and operations consolidation.


	•	Revenue recognition

	•	Valuation and impairment of long-lived assets and identifiable intangible assets; and

	•	Estimating allowance for doubtful accounts and contingencies.


(1)	Represent the Critical Path 5 3/4% Convertible Subordinated Notes due April 2005.

(2)	Represent certain contractual obligations related to licensed software, maintenance contracts and network infrastructure storage costs.


	•	the demand for outsourced messaging services generally and the use of messaging and directory infrastructure products and services in particular;

	•	the demand for licensed solutions for 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 industry expertise, particularly sales personnel;

	•	the ability to upgrade, develop and maintain our systems and infrastructure and to effectively respond to the rapid technology change of the messaging and directory infrastructure market;

	•	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 quickly handle and alleviate technical difficulties or system outages;

	•	the announcement or introduction of new or enhanced services by competitors; and

	•	general economic and market conditions and their affect on our operations and that of our customers.


	•	breadth of platform features and functionality;

	•	ease of integration into customers’ existing systems;

	•	scalability, reliability and performance, and 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; and

	•	total cost of ownership and operation.


	•	laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies;

	•	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; and

	•	end user license provisions in our contracts that protect us against unauthorized use, copying, transfer and disclosure of the licensed program may be unenforceable.


	•	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;

	•	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.


	•	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.


	(1) On October 15, 2001, we filed a current report on Form 8-K dated October 9, 2001, reporting under Item 5 and Item 7 our balance sheet restructuring by repurchasing approximately $192 million of face value of our outstanding 5 3/4% Convertible Subordinated Notes due April 1, 2005. As part of this report, we filed our Pro Forma Balance Sheet as of June 30, 2001.

	(2) On November 7, 2001, we filed a current report on Form 8-K dated October 23, 2001, reporting under Item 5 the appointment of Pierre Van Beneden as President and William McGlashan, Jr. as Interim Chief Executive Officer.

	(3) On November 13, 2001, we filed a current report on Form 8-K dated November 8, 2001, reporting under Item 5 that we entered into binding memoranda of understanding with respect to the settlement of securities class action and shareholder derivative litigation pending against us in the U.S. District Court for the Northern District of California and that we had announced the closing of a $95 million financing transaction from a group of investors and their affiliate entities.

	(4) On December 17, 2001, we filed a current report on Form 8-K dated December 11, 2001, reporting under Item 5 the appointments of William E. Ford and Raul J. Fernandez to our board of directors and the resignations of Larry Weber and Stephen J. Richards from our board of directors.


	•	Operating assets of the Connect Service business of Fabrik Communications, including the ongoing business operations and customer relationships;

	•	dotOne Corporation, a corporate email messaging service provider;

	•	Amplitude Software Corporation, a provider of business-to-business Internet calendaring and resource scheduling solutions;

	•	Xeti, Inc., a developer of standards-based public key infrastructure solutions;

	•	FaxNet Corporation, a outsource supplier of carrier-class enhanced fax and integrated messaging solutions;

	•	ISOCOR Corporation, a supplier of Internet messaging, directory and meta-directory software solutions;

	•	The docSpace Company, a provider of web-based services for secure file delivery, storage and collaboration;

	•	RemarQ Communities, Inc., a provider of Internet collaboration services for corporations, web portals and Internet service providers;

	•	Netmosphere, Inc., a provider of e-Business solutions for project collaboration and communications;

	•	PeerLogic, Inc., a provider of directory and enterprise application integration software.


(3)	Includes a $14.2 million charge related to impairment of certain long-lived assets and an $8.5 million charge related to costs incurred as a result of our strategic restructuring initiative. See also Note 4 — Strategic Restructuring and Employee Severance and Note 16 — Impairment of Long-Lived Assets.

(4)	Includes a $3.8 million charge related to costs incurred as a result of our strategic restructuring initiative. See also Note 4 — Strategic Restructuring and Employee Severance and Note 16 — Impairment of Long-Lived Assets.

(5)	Includes a $12.4 million charge related to impairment of certain long-lived assets, primarily network infrastructure and equipment, and a $6.0 million charge related to costs incurred as a result of our strategic restructuring initiative. See also Note 4 — Strategic Restructuring and Employee Severance and Note 16 — Impairment of Long-Lived Assets.



	Laureen DeBuono
	Executive Vice President and
	Chief Financial Officer