1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER: 000-25331
CRITICAL PATH, INC.
<Table>
A CALIFORNIA CORPORATION I.R.S. EMPLOYER NO. 91-1788300
</Table>
532 FOLSOM STREET
SAN FRANCISCO, CALIFORNIA 94105
415-808-8800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
As of July 31, 2001, the company had outstanding 75,486,730 shares of
common stock, $0.001 par value per share.
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2
CRITICAL PATH, INC.
INDEX
<Table>
<Caption>
PAGE
----
PART I
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31,
2000 and June 30, 2001...................................... 2
Condensed Consolidated Statement of Operations for the three
and six months ended June 30, 2000 and 2001................. 3
Condensed Consolidated Statement of Cash Flows for the six
months ended June 30, 2000 and 2001......................... 4
Notes to Condensed Consolidated Financial Statements........ 5
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................... 10
Supplemental Pro Forma Financial Data (Unaudited)........... 28
Quantitative and Qualitative Disclosures About Market
Item 3. Risk........................................................ 29
Report of Independent Accountants........................... 30
PART II
Item 1. Legal Proceedings........................................... 31
Item 4. Submission of Matters to a Vote of Security Holders......... 32
Item 6. Exhibits and Reports on Form 8-K............................ 32
</Table>
i
3
The following Condensed Consolidated Financial Statements and Notes thereto
of Critical Path, Inc. and discussions contain forward-looking statements within
the meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, such as statements regarding our plans related to the sale
of certain product lines our plans to exit certain products and services, our
plans to reduce costs through a reduction of personnel and a consolidation of
office space, our anticipated charges and cost savings as a result of those
plans and our belief in our ability to successfully emerge from the
restructuring and refocusing of our operations. The words "anticipate,"
"expect," "intend," "plan," "believe," "seek," and "estimate" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements involve a number of risks and uncertainties that
could cause actual results to differ materially. Factors that might cause future
results to differ materially from those projected in the forward-looking
statements include, but are not limited to, turnover of senior management, board
of directors members and other key personnel, difficulties of forecasting future
results due to our limited operating history, evolving business strategy and the
emerging nature of the market for our products and services, pending litigation
and SEC investigation, difficulties in implementing our strategic plan to exit
certain non-core products and services, difficulties of integrating acquired
businesses, failure to expand our sales and marketing activities, potential
difficulties associated with strategic relationships, investments and
uncollected bills, risks associated with an inability to maintain continued
compliance with NASDAQ National Market listing requirements, risks associated
with our international operations, unplanned system interruptions and capacity
constraints, software defects, and those discussed in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Additional
Factors That May Affect Future Operating Results" and elsewhere in this report.
Readers are cautioned not to place undue reliance on these forward-looking
statements. The forward-looking statements speak only as of the date hereof. We
expressly disclaim any obligation to publicly release the results of any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this filing.
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PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CRITICAL PATH, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<Table>
<Caption>
DECEMBER 31, JUNE 30,
2000 2001
------------ -----------
(UNAUDITED)
Current assets
Cash and cash equivalents................................. $ 216,542 $ 114,278
Short-term investments.................................... -- 18,308
Restricted cash........................................... 215 1,032
Accounts receivable, net.................................. 38,938 29,437
Other current assets...................................... 10,252 6,997
----------- -----------
Total current assets.............................. 265,947 170,052
Long-term investments....................................... 10,610 8,349
Property and equipment, net................................. 85,304 73,000
Intangible assets, net...................................... 77,339 44,298
Other assets................................................ 11,655 11,668
----------- -----------
Total assets...................................... $ 450,855 $ 307,367
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.......................................... $ 43,710 $ 34,059
Accrued expenses.......................................... 10,377 7,645
Deferred revenue.......................................... 15,720 15,593
Capital lease and other obligations, current.............. 9,363 6,899
----------- -----------
Total current liabilities......................... 79,170 64,196
Convertible subordinated notes payable...................... 300,000 295,000
Capital lease and other obligations, long-term.............. 4,687 2,303
----------- -----------
Total liabilities................................. 383,857 361,499
----------- -----------
Commitments and contingencies
Minority interest in consolidated subsidiary................ 649 --
----------- -----------
Shareholders' equity (deficit)
Preferred stock and paid-in-capital, $0.001 par value
Shares authorized: 5,000
Shares issued and outstanding: none.................... -- --
Common stock and paid-in-capital, $0.001 par value
Shares authorized: 150,000 and 500,000, respectively
Shares issued and outstanding: 74,135 and 75,461,
respectively.......................................... 2,130,329 2,140,482
Notes receivable from shareholders........................ (1,205) (1,197)
Unearned compensation..................................... (80,760) (57,476)
Accumulated deficit, including other comprehensive
income................................................. (1,982,015) (2,135,941)
----------- -----------
Total shareholders' equity (deficit).............. 66,349 (54,132)
----------- -----------
Total liabilities and shareholders' equity
(deficit)...................................... $ 450,855 $ 307,367
=========== ===========
</Table>
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
2
5
CRITICAL PATH, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 2001 2000 2001
--------- -------- --------- ---------
(UNAUDITED)
Net revenues
Software license.......................................... $ 13,897 $ 8,913 $ 24,967 $ 14,463
Hosted messaging.......................................... 14,220 11,141 23,315 25,580
Professional service...................................... 3,030 2,900 5,523 6,317
Maintenance and support................................... 2,348 4,131 4,243 7,868
--------- -------- --------- ---------
Total net revenues.................................. 33,495 27,085 58,048 54,228
--------- -------- --------- ---------
Cost of net revenues
Software license.......................................... 737 126 1,744 417
Hosted messaging.......................................... 13,538 17,440 25,418 35,378
Professional service...................................... 1,388 2,594 2,444 5,560
Maintenance and support................................... 1,812 2,414 3,216 5,000
Amortization of purchased technology...................... 4,421 5,672 6,535 11,344
Acquisition-related retention bonuses..................... 390 -- 780 --
Stock-based expense -- Software license................... -- -- -- --
Stock-based expense -- Hosted messaging................... 383 441 876 826
Stock-based expense -- Professional service............... -- 588 -- 1,021
Stock-based expense -- Maintenance and support............ -- 440 -- 925
Impairment of long-lived assets........................... -- 4,207 -- 4,207
--------- -------- --------- ---------
Total cost of net revenues.......................... 22,669 33,922 41,013 64,678
--------- -------- --------- ---------
Gross profit (loss)......................................... 10,826 (6,837) 17,035 (10,450)
--------- -------- --------- ---------
Operating expenses
Sales and marketing....................................... 17,342 15,694 30,947 34,406
Research and development.................................. 9,213 8,333 15,536 18,267
General and administrative................................ 7,332 11,745 14,098 25,038
Amortization of intangible assets......................... 88,986 4,112 136,685 8,245
Acquisition-related retention bonuses..................... 3,693 793 6,372 963
Stock-based expense -- Sales and marketing................ 8,448 6,681 13,697 13,281
Stock-based expense -- Research and development........... 2,325 1,229 2,802 2,326
Stock-based expense -- General and administrative......... 1,169 6,334 2,146 15,067
Restructuring expense..................................... -- 8,481 -- 8,481
Impairment of long-lived assets........................... -- 9,991 -- 9,991
--------- -------- --------- ---------
Total operating expenses............................ 138,508 73,393 222,283 136,065
--------- -------- --------- ---------
Loss from operations........................................ (127,682) (80,230) (205,248) (146,515)
Interest and other income (expense), net.................... 4,697 2,193 5,954 4,618
Interest expense............................................ (5,260) (5,315) (5,533) (10,382)
Minority interest in net income of consolidated
subsidiary................................................ (325) -- (325) --
Equity in net loss of joint venture......................... -- (397) -- (1,173)
--------- -------- --------- ---------
Loss before extraordinary item and income taxes............. (128,570) (83,749) (205,152) (153,452)
Provision for income taxes.................................. (1,439) (1,150) (1,799) (1,493)
--------- -------- --------- ---------
Loss before extraordinary item.............................. $(130,009) $(84,899) $(206,951) $(154,945)
Gain on retirement of convertible subordinated notes........ -- 3,818 -- 3,818
--------- -------- --------- ---------
Net loss.................................................... $(130,009) $(81,081) $(206,951) $(151,127)
========= ======== ========= =========
Net loss per common share -- basic and diluted
Loss before extraordinary item............................ $ (2.22) $ (1.15) $ (3.79) $ (2.12)
Gain on retirement of convertible subordinated notes...... -- 0.05 -- 0.05
--------- -------- --------- ---------
Net loss................................................ $ (2.22) $ (1.10) $ (3.79) $ (2.07)
========= ======== ========= =========
Weighted average common shares outstanding................ 58,592 73,794 54,581 72,966
</Table>
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
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CRITICAL PATH, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
----------------------
JUNE 30, JUNE 30,
2000 2001
--------- ---------
(UNAUDITED)
Operations
Net loss.................................................. $(206,951) $(151,127)
Provision for doubtful accounts........................... 575 3,746
Depreciation and amortization............................. 14,604 24,139
Amortization of intangible assets......................... 143,220 19,588
Amortization of stock-based costs and expenses............ 19,552 33,463
Impairment of long-lived assets........................... -- 14,198
Gain on retirement of convertible debt.................... -- (3,818)
Minority interest in net income of consolidated
subsidiary............................................. 325 --
Equity in net loss of unconsolidated affiliate............ -- 1,173
Accounts receivable....................................... (12,038) 6,333
Other assets.............................................. 3,206 2,384
Accounts payable.......................................... (10,151) (3,570)
Accrued expenses.......................................... 7,686 (2,380)
Deferred revenue.......................................... 965 (14)
--------- ---------
Net cash used in operating activities.................. (39,007) (55,885)
--------- ---------
Investing
Notes receivable from officers............................ (241) 85
Property and equipment purchases.......................... (25,972) (10,733)
Investments in unconsolidated entities, net............... (13,508) --
Payments for acquisitions, net of cash acquired........... (9,494) (9,898)
Promissory note receivable................................ 10,000 --
Short-term investments.................................... -- (18,308)
Restricted cash........................................... -- (817)
--------- ---------
Net cash used in investing activities.................. (39,215) (39,671)
--------- ---------
Financing
Proceeds from issuance of common stock, net............... 7,077 1,599
Proceeds from convertible debt offering, net.............. 289,221 --
Retirement of convertible debt............................ -- (1,182)
Principal payments on lease obligations................... (2,498) (4,864)
Proceeds from payments of shareholder notes receivable.... -- 33
Purchase of common stock.................................. (49) (54)
--------- ---------
Net cash provided by (used in) financing activities.... 293,751 (4,468)
--------- ---------
Net change in cash and cash equivalents..................... 215,529 (100,024)
Effect of exchange rates on cash and cash equivalents....... (152) (2,240)
Cash and cash equivalents at beginning of period............ 75,932 216,542
--------- ---------
Cash and cash equivalents at end of period.................. $ 291,309 $ 114,278
========= =========
</Table>
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
4
7
CRITICAL PATH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Critical Path, Inc. was incorporated in California on February 19, 1997. In
connection with the annual meeting of shareholders held in June 2000, the
shareholders approved the re-incorporation of Critical Path, Inc. in Delaware,
as well as an increase in the authorized shares of Common Stock from 150 million
to 500 million. In January 2001, the Company amended its articles of
incorporation to increase the authorized shares to 505 million; however the
Company has not yet been re-incorporated in Delaware. Critical Path, Inc. along
with its subsidiaries (collectively referred to herein as the "Company")
provides messaging and directory infrastructure solutions for corporate
enterprises and service providers worldwide.
The unaudited Condensed Consolidated Financial Statements ("Financial
Statements") of Critical Path, Inc. and subsidiaries furnished herein have been
reviewed by independent accountants and reflect all adjustments that are, in the
opinion of management, necessary to present fairly the financial position and
results of operations for each interim period presented. All adjustments are
normal recurring adjustments. The Financial Statements should be read in
conjunction with the condensed consolidated financial statements and notes
thereto, together with management's discussion and analysis of financial
condition and results of operations, presented in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000, as amended. The results
of operations for the interim periods presented herein are not necessarily
indicative of the results to be expected for the entire year.
With respect to the unaudited condensed consolidated financial information
of the Company as of June 30, 2001 and for the six-month periods ended June 30,
2000 and 2001 included herein, PricewaterhouseCoopers LLP reported that they
have applied limited procedures in accordance with professional standards for a
review of such information. However, their separate report dated August 2, 2001,
appearing herein, states that they did not audit and they do not express an
opinion on the unaudited condensed consolidated financial information.
PricewaterhouseCoopers LLP is not subject to the liability provisions of Section
11 of the Securities Act of 1933 for their report on the unaudited condensed
consolidated financial information because that report is not a report or a part
of this Form 10-Q prepared or certified by PricewaterhouseCoopers LLP within the
meaning of Sections 7 and 11 of the Act.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly and majority owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Investments
Short-term and long-term investments are accounted for in accordance with
Statement of Financial Accounting Standards No. 115 Accounting for Certain
Investments in Debt and Equity Securities. This statement requires that
securities be classified as "held to maturity," "available-for-sale" or
"trading," and the securities in each classification be accounted for at either
amortized cost or fair market value, depending upon their classification. The
Company currently holds short-term investments of approximately $18.3 million in
low risk government securities and corporate bonds and classifies its
investments as available-for-sale. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses, net of tax, reported as other
comprehensive income, a separate component of stockholders' equity. At the time
of sale, any gains or losses will be recognized as a component of operating
results.
5
8
CRITICAL PATH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Segment and Geographic Information
The Company does not currently manage its business in a manner that
requires it to report financial results on a segment basis. The Company
currently operates in one segment, messaging and directory infrastructure
solutions, and management uses one measure of profitability. Revenue information
on a product basis has been disclosed in our statement of operations. Included
in software license revenue is InScribe Messaging revenue of approximately $4.3
million and $6.9 million for the three- and six-month periods ended June 30,
2001, respectively, and approximately $9.2 million and $17.2 million for the
three- and six-month periods ended June 30, 2000, respectively.
Reclassifications
Certain amounts previously reported have been reclassified to conform to
the current period presentation.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations. This Statement addresses financial accounting and reporting for
business combinations and supersedes Accounting Principles Board ("APB") Opinion
No. 16, Business Combinations, and SFAS No. 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises. All business combinations in the scope
of this Statement are to be accounted for using one method, the purchase method.
The provisions of this Statement apply to all business combinations initiated
after June 30, 2001 and all business combinations accounted for under the
purchase method for which the date of acquisition is July 1, 2001, or later. We
have engaged in significant acquisition activity in the past, including business
combinations. The provisions of this Statement would require all future business
combinations to be accounted for using the purchase method.
In June 2001, the FASB also issued SFAS No. 142, Goodwill and Other
Intangible Assets. This Statement addresses financial accounting and reporting
for intangible assets acquired individually or with a group of other assets (but
not those acquired in a business combination) at acquisition and goodwill and
other intangible assets subsequent to their acquisition. This Statement
supersedes APB Opinion No. 17, Intangible Assets. Under the provisions of this
Statement, if an intangible asset is determined to have an indefinite useful
life, it shall not be amortized until its useful life is determined to be no
longer indefinite. An intangible asset that is not subject to amortization shall
be tested for impairment annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. Goodwill shall not be
amortized. Goodwill shall be tested for impairment on an annual basis and
between annual tests in certain circumstances at a level of reporting referred
to as a reporting unit. This Statement is required to be applied starting with
fiscal years beginning after December 15, 2001. Goodwill and intangible assets
acquired after June 30, 2001 will be subject immediately to the nonamortization
and amortization provisions of this Statement. We anticipate that implementation
of this Statement will not have a material impact on our financial results.
NOTE 2 -- RESTRUCTURING
In April 2001, the Company announced a three part strategic restructuring
plan that involved reorganizing Critical Path's product and service offerings
around a group of core communication solutions. The three elements of the plan
include: (i) focusing on core communication solutions; (ii) headcount reduction;
and (iii) facilities and operations consolidation. Additionally, the Company has
implemented an aggressive expense management plan to further reduce operating
costs while maintaining strong customer service for its core solutions. As a
result of these strategic initiatives, the Company anticipates that it will
realize future annual cost savings of approximately $30.0 to $50.0 million.
Current accounting rules only allow for restructuring charges that have been
incurred or have been estimated in connection with a formal approved
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9
CRITICAL PATH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
exit or restructuring plan. Accordingly, there are certain amounts which have
been included in our estimated one-time restructuring and impairment charges
which have not been recorded as such amounts are part of an exit or
restructuring plan not yet formally approved by management. The non-core
products and services comprised approximately 23.6% and 30.3% of total revenues
in the three- and six-month periods ended June 30, 2001 and approximately 27.5%
and 26.5% of total revenues in the three- and six-month periods ended June 30,
2000. It is expected that these products and services will be an insignificant
part of the Company's revenue stream by the fourth quarter of 2001.
Core Solutions and Services
Core communication solutions are the Company's messaging and directory
infrastructure platform, including mail, calendar, address book, file storage,
secure delivery, directory and meta-directory, and access services supporting
wireline and wireless users. During the quarter, the Company announced that new
sales of products and related services for resource management, project
collaboration, fax messaging, message boards, and data integration products were
being discontinued. The Company is in discussions with outside parties related
to the sale of several product lines, which are expected to close before the end
of the year. During the second quarter, charges related to the exit of these
products aggregated $1.4 million, of which $107,000 has been paid. The Company
does not anticipate any additional charges during the remainder of the year.
Headcount Reduction
The Company announced that it would lay off approximately 450 employees as
part of the restructuring. The reduction is expected to come from both the
discontinuance of non-core products and organizational changes designed to
improve general operational efficiencies. During the second quarter, the Company
laid off approximately 212 employees and anticipates that another 130 employees
will be laid off or will leave the Company as part of the sales of several
product lines before the end of the year. Additionally, during the quarter there
were approximately 40 voluntary resignations, net of newly hired employees. At
June 30, 2001 total headcount was approximately 784. During the second quarter,
severance and related charges were approximately $5.0 million, of which
approximately $4.7 million has been paid. The Company anticipates that severance
and related charges during the remainder of the year will be approximately $3.0
to $5.0 million.
Facilities and Operations Consolidation
The Company announced that it would reduce its 77 worldwide office
facilities by approximately two thirds. During the second quarter, the Company
consolidated 33 facilities into existing or new cost effective offices and it
anticipates that an additional 17 will be consolidated before the end of the
year. During the second quarter, lease terminations and related charges
aggregated approximately $2.1 million, of which approximately $900,000 has been
paid. The Company anticipates additional charges during the remainder of the
year will be approximately $4.0 to $5.0 million.
NOTE 3 -- CONVERTIBLE SUBORDINATED NOTES
On March 30, 2000, the Company issued $300.0 million of five-year, 5.75%
Convertible Subordinated Notes due April 1, 2005 (the "Notes"). In June 2001,
the Company retired $5.0 million face value Notes, which resulted in an
after-tax extraordinary gain of approximately $3.8 million in the second
quarter. Additionally, in July 2001, the Company retired an additional $40.4
million face value Notes, which resulted in a substantial after-tax
extraordinary gain.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
Securities Class Actions. Beginning on February 2, 2001, a number of
securities class action complaints were filed against us, certain of our current
and former officers and directors and our independent accountants
7
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CRITICAL PATH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
in the United States District Court for the Northern District of California. The
complaints have been filed as purported class actions by individuals who allege
that they purchased our common stock during a purported class period; the
alleged class periods vary among the complaints. The complaints have been
consolidated into a single action. The complaints generally allege that, in
differing periods from December 1999 to February 1, 2001, we and other named the
defendants made false or misleading statements of material fact about our
financial statements, including our revenues, revenue recognition policies,
business operations and prospects for the year 2000 and beyond. The complaints
seek an unspecified amount in damages on behalf of persons who purchased
Critical Path stock during certain periods.
Derivative Actions. Beginning on February 5, 2001, we have been named as a
nominal defendant in a number of derivative actions, purportedly brought on our
behalf, filed in the Superior Court of the State of California and in the United
States District Court for the Northern District of California. The derivative
complaints allege that certain of Critical Path's current and former officers
and directors breached their fiduciary duties to us, engaged in abuses of their
control of us, were unjustly enriched by their sales of our common stock,
engaged in insider trading in violation of California law or published false
financial information in violation of California law. The plaintiffs seek
unspecified damages on our behalf from each of the defendants. Because of the
nature of derivative litigation, any recovery in the action would inure to our
benefit.
Securities and Exchange Commission Investigation. In February 2001, the
Securities and Exchange Commission (the "SEC") issued a formal order of
investigation of the Company and certain unidentified individuals associated
with the Company with respect to non-specified accounting matters, financial
reports, other public disclosures and trading activity in the Company's
securities. While the Company does not know the current status of the
investigation or any possible actions that may be taken against the Company as a
result, any SEC action against us could harm the Company's business.
The uncertainty associated with substantial unresolved lawsuits and the SEC
investigation could seriously harm the Company's business and financial
condition. In particular, the lawsuits or the investigation could harm its
relationships with existing customers and its ability to obtain new customers.
The continued defense of the lawsuits and conduct of the investigation could
also result in the diversion of management's time and attention away from
business operations, which could harm the Company's business. Negative
developments with respect to the lawsuits or the investigation could cause the
Company's stock price to decline significantly. In addition, although the
Company is unable to determine the amount, if any, that it may be required to
pay in connection with the resolution of these lawsuits or the investigation by
settlement or otherwise, the size of any such payment could seriously harm the
Company's financial condition.
NOTE 5 -- IMPAIRMENT OF LONG-LIVED ASSETS
In connection with the Company's restructuring plan (Note
2 -- Restructuring), an impairment assessment of certain of its long-lived
assets was performed. The assessment was performed as a result of the
determination by the Company to exit certain products and services that have
been determined to be non-core to the Company's business strategy. The Company
has reviewed the intangible assets related to these non-core products and
services and, as a result of its assessment, has recorded a $14.2 million
impairment charge to reduce these intangible assets to their estimated fair
values or eliminate them, as appropriate.
NOTE 6 -- SHAREHOLDERS' EQUITY
WARRANTS
Vectis Group, LLC
In March 2001, the Company entered into certain agreements with Vectis
Group, LLC ("Vectis Group") to engage Vectis Group to act as an advisor to the
Company with respect to various strategic
8
11
CRITICAL PATH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
alternatives the Company is currently exploring and assist with other management
related services. As part of the agreement, Vectis Group agreed to provide
consulting services to the Company in exchange for a monthly retainer fee and
warrants to purchase 500,000 shares of the Company's Common Stock with an
exercise price of $2.00 per share, issuable upon execution of the agreement.
Using the Black-Scholes option-pricing model and assuming a term of three years,
the term of the agreement, and expected volatility of 215%, the initial and
final fair value of the warrant on the effective date of the agreement
approximated $732,000, which was recognized upon the execution of the agreement
in March 2001, as the relationship is terminable at any time.
NOTE 7 -- OTHER COMPREHENSIVE LOSS
The components of other comprehensive loss are as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2000 2001 2000 2001
--------- -------- --------- ---------
Net loss.............................. $(130,009) $(81,081) $(206,951) $(151,127)
Unrealized investment gains
(losses)............................ (3,399) (687) (6,116) (385)
Foreign currency translation
adjustments......................... 37 (1,576) (131) (2,414)
--------- -------- --------- ---------
Other comprehensive loss.............. $(133,371) $(83,344) $(213,198) $(153,926)
========= ======== ========= =========
</Table>
Accumulated other comprehensive loss consists of unrealized gains (losses)
on available-for-sale securities, net of tax, and cumulative translation
adjustments, as presented on the accompanying consolidated balance sheet.
NOTE 8 -- NET LOSS PER SHARE
Net loss per share is calculated as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
2000 2001 2000 2001
--------- -------- --------- ---------
NET LOSS
Loss before extraordinary item.................... (130,009) (84,899) (206,951) (154,945)
Gain on retirement of convertible subordinated
notes.......................................... -- 3,818 -- 3,818
--------- -------- --------- ---------
Net loss.......................................... $(130,009) $(81,081) $(206,951) $(151,127)
========= ======== ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
Weighted average shares outstanding............... 62,283 74,968 57,890 74,619
Weighted average shares subject to repurchase
agreements..................................... (1,840) (124) (1,849) (325)
Weighted average shares held in escrow related to
acquisitions................................... (1,851) (1,050) (1,460) (1,328)
--------- -------- --------- ---------
Shares used in computation of basic and diluted
net loss per share............................. 58,592 73,794 54,581 72,966
========= ======== ========= =========
BASIC AND DILUTED NET LOSS PER SHARE
Loss before extraordinary item.................... $ (2.22) $ (1.15) $ (3.79) $ (2.12)
Gain on retirement of convertible subordinated
notes.......................................... $ -- $ 0.05 $ -- $ 0.05
--------- -------- --------- ---------
Net loss.......................................... $ (2.22) $ (1.10) $ (3.79) $ (2.07)
========= ======== ========= =========
</Table>
For the six-month periods ended June 30, 2000 and 2001 approximately 19.9
million and 31.3 million potential common shares, respectively, were excluded
from the determination of diluted net loss per share, as the effect of such
shares on a weighted average basis is anti-dilutive.
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CRITICAL PATH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of Critical Path, Inc., and
Subsidiaries should be read with the Condensed Consolidated Financial Statements
and Notes thereto of Critical Path, Inc. included herein, as well as our Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, as amended. The
following discussion contains forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, such as statements regarding our plans related to the sale of certain
product lines, our plans to exit certain products and services, our plans to
reduce costs through a reduction of personnel and a consolidation of office
space and our anticipated charges and cost savings as a result of these plans.
Our anticipated charges and cost savings as a result of those plans and our
belief in our ability to successfully emerge from the restructuring and
refocusing of our operations. The words "anticipate," "expect," "intend,"
"plan," "believe," "seek," and "estimate" and similar expressions are intended
to identify forward-looking statements. These forward-looking statements involve
a number of risks and uncertainties that could cause actual results to differ
materially. Factors that might cause future results to differ materially from
those projected in the forward-looking statements include, but are not limited
to, turnover of senior management, board of directors members and other key
personnel, difficulties of forecasting future results due to our limited
operating history, evolving business strategy and the emerging nature of the
market for our products and services, pending litigation and SEC investigation,
difficulties in implementing our strategic plan to exit certain non-core
products and services, difficulties of integrating acquired businesses, failure
to expand our sales and marketing activities, potential difficulties associated
with strategic relationships, investments and uncollected bills, risks
associated with an inability to maintain continued compliance with NASDAQ
National Market listing requirements, risks associated with our international
operations, unplanned system interruptions and capacity constraints, software
defects, and those discussed in "Additional Factors That May Affect Future
Operating Results" and elsewhere in this report. Readers are cautioned not to
place undue reliance on these forward-looking statements. The forward-looking
statements speak only as of the date hereof. We expressly disclaim any
obligation to publicly release the results of any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this filing.
OVERVIEW
Critical Path, Inc. is a global leader in messaging and directory
infrastructure solutions. We provide solutions to manage the flow of
mission-critical information through an integrated portfolio of messaging,
directory, and security solutions. Our technology provides the messaging and
directory infrastructure to support customers' new and existing eBusiness
initiatives. Our primary sources of revenue come from providing a wide range of
messaging and directory products and services. Critical Path was founded in 1997
and is headquartered in San Francisco, California with offices worldwide.
RESULTS OF OPERATIONS
In view of the rapidly evolving nature of the our business, prior
acquisitions, organizational restructuring, and limited operating history, we
believe that period-to-period comparisons of revenues and operating results,
including gross profit margin and operating expenses as a percentage of total
net revenues, are not meaningful and should not be relied upon as indications of
future performance. At June 30, 2001, we had 784 employees, in comparison with
1041 employees at December 31, 2000 and 945 employees at June 30, 2000. We do
not believe that our historical trends for revenue, expenses, or personnel are
indicative of future results.
Net Revenues
We derive most of our revenues through the sale of our messaging and
directory infrastructure solutions. These solutions include both licensed
software products and hosted messaging services. In addition, we receive
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revenues from professional services and maintenance and support services.
Software license revenue is derived from perpetual and term licenses for our
messaging, directory and enterprise application integration technologies. Hosted
messaging services relate to fees for our hosted messaging and collaboration
services. These are primarily based upon monthly contractual per unit rates for
the services involved, which are recognized on a ratable monthly basis over the
term of the contract. Professional services revenue is derived from fees
primarily related to training, installation and configuration services and
revenue is recognized as services are performed. Maintenance and support revenue
is derived from fees related to post-contract customer support agreements
associated with software product licenses and revenue is recognized ratably over
the term of the agreement.
Software License. We recognized $8.9 million and $14.5 million in software
license revenues during the three- and six-month periods ended June 30, 2001,
respectively, as compared to $13.9 million and $25.0 million in software license
revenues during the same periods in 2000, respectively. This significant
decrease from revenues in the same period of 2000 was attributed to several
factors which affected our operations in the first and second quarters of 2001.
Delays in information technology spending were experienced across many
industries due to macroeconomic conditions and these delays were exacerbated by
circumstances at Critical Path. Many of our customers who were evaluating our
products have delayed making decisions until they could gain a level of comfort
in Critical Path as we emerge from our management transition. Additionally, our
sales organization was distracted by the termination and resignation of much of
its leadership in the first quarter and its focus on rebuilding also has caused
a reduction in effectiveness. The evaluation process by our customers and
internal rebuilding has begun to take effect and as a result we experienced an
increase in software license sales from the first quarter to the second quarter
of 2001, however revenues are still lower than the same periods of the prior
year. In addition, related to our restructuring initiative, we have identified
certain non-core software license products which we are currently in the process
of exiting or selling to third parties. Although we have recognized revenue
during 2001 related to these non-core products, these initiatives have
significantly reduced the revenue for these products offsetting increases in the
revenues for our core solutions. We expect to see this trend continue and do not
anticipate non-core revenues will be a significant part of our revenues by the
end of the year.
Hosted Messaging. We recognized $11.1 million and $25.6 million in hosted
messaging revenues during the three- and six-month periods ended June 30, 2001,
respectively, as compared to $14.2 million and $23.3 million in hosted messaging
revenues in the same periods in 2000, respectively. This decrease in the second
quarter of 2001 as compared with the second quarter of 2000, resulted primarily
from our restructuring initiative, as we have identified certain non-core hosted
messaging services, which we are currently in the process of exiting or selling
to third parties. Although we have recognized revenue during 2001 related to
these non-core services, the restructuring initiative has significantly reduced
the revenue related to these non-core services. There was an increase in hosted
messaging revenue for the six-months ended June 30, 2001 as compared with the
same period in 2000, resulting from completion of certain acquisitions at the
end of the first quarter of 2000.
Professional Services. We recognized $2.9 million and $6.3 million in
professional service revenues during the three- and six-month periods ended June
30, 2001, respectively, as compared to $3.0 million and $5.5 million in
professional service revenues in same periods in 2000, respectively.
Professional service revenue increased in the final quarter of 2000 and the
first quarter of 2001 as a result of the completion of the PeerLogic, Inc.
acquisition in September 2000, however these increases were offset in the second
quarter of 2001 by the effects of our restructuring initiative and the exit of
certain non-core products and services. Although we have recognized revenue
during 2001 as a result of these non-core products and services, these
restructuring initiatives have significantly reduced the professional services
revenue surrounding these non-core products.
Maintenance and Support. We recognized $4.1 million and $7.9 million in
maintenance and support revenues during the three- and six-month periods ended
June 30, 2001, respectively, as compared to $2.3 million and $4.2 million in
maintenance and support revenues in same periods in 2000, respectively.
Maintenance and support service revenue increased as a result of the completion
of several acquisitions during 2000 and additional sales of software license
products during 2000 and 2001.
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Critical Path's international operations accounted for approximately 45%
and 37% of net revenues in the three- and six-month periods ended June 30, 2001,
respectively, as compared to approximately 40% and 40% of net revenues in the
same periods of 2000, respectively. There was a decrease in the first quarter of
2001 in international revenues related primarily to a reduction in enterprise
information technology spending, and the associated impact on the sales of our
license products in our international markets. During the second quarter of
2001, international license product sales increased, resulting in an increase in
international revenues.
Cost of Net Revenues
Software License. Cost of net software license revenues consists primarily
of product media duplication, manuals and packaging materials, personnel and
facility costs, and third-party royalties. The overall decrease in cost of net
software license revenue for the three- and six-month periods ended June 30,
2001 was the result of reduced software license revenue and an overall reduction
in royalties paid to third parties.
Hosted Messaging. Cost of net hosted messaging revenues consists primarily
of costs incurred in the delivery and support of messaging services, including
depreciation of capital equipment used in network infrastructure, amortization
of purchased technology, Internet connection charges, accretion of acquisition-
related retention bonuses, personnel costs incurred in operations, and other
direct and allocated indirect costs. We added several new hosted messaging
clusters to our data centers during 2000, to expand the capacity of our hosting
network to manage current customer requirements and any future growth. We also
added additional employees in connection with the acquisitions completed in
2000. Additional costs were incurred during the latter half of 2000 to add
technology platforms for new service offerings. As a result of these significant
acquisitions of equipment and operations resources, depreciation, personnel and
other costs have increased substantially in comparison with the first half of
2000.
Professional Service. Cost of net professional service revenues consists
primarily of personnel costs including custom engineering, installation and
training services for both hosted and licensed solutions, and other direct and
allocated indirect costs. As a result of the acquisitions completed in 2000,
additional costs were incurred in the first and second quarters of 2001 on
professional service resources in comparison with the first and second quarters
of 2000.
Maintenance and Support. Cost of net maintenance and support revenues
consists primarily of personnel costs related to the customer support functions
for both hosted and licensed solutions, and other direct and allocated indirect
costs. As a result of the acquisitions completed in 2000, additional costs were
incurred in the first and second quarters of 2001 on customer support resources
in comparison with the first and second quarters of 2000.
Cost of net service revenues was primarily impacted by the increased
compensation and other personnel costs resulting from the additional headcount
added through our acquisitions completed during 2000, and through our continued
efforts to enhance our portfolio of messaging and directory infrastructure
solutions. During the second quarter of 2001, we initiated a strategic
restructuring plan which significantly reduced our workforce in addition to
impacting several other aspects of our business. Operations, customer support,
and professional services staff decreased to 273 employees at June 30, 2001 from
277 employees at June 30, 2000 and 340 employees at December 31, 2000.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation for sales and marketing personnel, advertising, public relations,
other promotional costs, and, to a lesser extent, related overhead. Increases in
marketing and promotional expenses, incentive compensation payments to sales
personnel, and increases in compensation associated with additional headcount
added through the acquisitions completed during the first quarter and duration
of 2000, resulted in the increase in sales and marketing expenses from the first
half of 2000 through the first half of 2001. However, during the first quarter
of 2001, the termination and resignation of several employees in the sales
organization, the termination of certain strategic marketing relationships
related to non-core services and certain other cost cutting measures resulted in
a reduction in sales and marketing expense in the second quarter of 2001, as
compared to the second quarter
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of 2000. Sales and marketing staff decreased to 201 employees at June 30, 2001
from 291 employees at June 30, 2000 and 305 employees at December 31, 2000.
Research and Development. Research and development expenses consist
primarily of compensation for technical staff, payments to outside contractors,
depreciation of capital equipment associated with research and development
activities, and, to a lesser extent, related overhead. Research and development
expenses increased during 2000 and the first quarter of 2001 primarily as a
result of increased compensation and other personnel costs from the additional
headcount added through the acquisitions completed during 2000. These increases
caused an increase in research and development expense from the first half of
2000 to the first half of 2001. During the second quarter of 2001, we terminated
several employees in research and development in connection with our
restructuring initiative and implemented certain other cost cutting measures,
which resulted in a reduction in research and development expense in the second
quarter of 2001 as compared with the second quarter of 2000. Research and
development staff decreased to 199 employees at June 30, 2001 from 222 employees
at June 30, 2000 and 252 employees at December 31, 2000.
General and Administrative. General and administrative expenses consist
primarily of compensation for personnel, fees for outside professional services,
occupancy costs and, to a lesser extent, related overhead. General and
administrative expense increased during 2000 and the first quarter of 2001
primarily as a result of increased compensation and other personnel costs from
the additional headcount added through the acquisitions completed during 2000.
We have incurred higher fees for outside professional services in the first half
of 2001, in particular significantly higher legal fees related to the SEC
investigation and significantly higher accounting fees related to the extended
audit performed for fiscal year 2000. These increases in general and
administrative expenses have been offset by the termination of several employees
in connection with our restructuring initiative and the implementation of
certain other cost cutting measures, however, these increases net of reductions
resulted in an overall increase in general and administrative expense in the
second quarter of 2001 as compared to the second quarter of 2000. General and
administrative staff decreased to 111 employees at June 30, 2001 from 155
employees at June 30, 2000 and 144 employees at December 31, 2000.
Amortization of Intangible Assets
In connection with acquisitions completed in 1999 and 2000, which were all
accounted for using the purchase method of accounting, we recorded goodwill and
other intangible assets, primarily for assembled workforce, customer base, and
existing technology. During the fourth quarter of 2000, we recognized a $1.3
billion charge related to the impairment of certain goodwill and other
intangible assets. As a result of this impairment charge, amortization expense
decreased significantly from the first half of 2000 to the first half of 2001.
Additionally, in connection with the Company's restructuring plan announced in
April 2001, an impairment assessment of certain of our long-lived assets was
performed. As a result of this assessment, the Company has recorded an
additional $14.2 million impairment charge to reduce these intangible assets to
their estimated fair values or eliminate them, as appropriate. Based on the
types of identifiable intangibles acquired certain amounts of amortization
expense were allocated to cost of net revenues and the remaining amortization
expense was allocated to operating expenses. There was an increase in
amortization expense related to amounts allocated to cost of net revenues; this
increase was the direct result of an acquisition completed in the third quarter
of 2000, as certain of the intangible assets allocated to acquired existing
technology have not been impaired.
Acquisition-Related Retention Bonuses
In connection with the acquisitions completed in 1999 and 2000, we
established certain retention bonus programs that in the aggregate amounted to
approximately $20.7 million in incentives for certain former employees of the
acquired companies to encourage their continued employment with Critical Path.
The significant decrease in acquisition-related retention bonus expense from the
first half of 2000 to the first half of 2001 resulted from the completion,
during fiscal year 2000, of all but one of these bonus programs.
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Restructuring
In April 2001, we announced a three part strategic restructuring plan that
involved reorganizing Critical Path's product and service offerings around a
group of core communications solutions. The three elements of the plan include:
(i) focusing on core communications solutions; (ii) headcount reduction; and
(iii) facilities and operations consolidation. Additionally, we have implemented
an aggressive expense management plan to further reduce operating costs while
maintaining strong customer service for its core solutions. As a result of these
strategic initiatives, we anticipate that we will realize future annual cost
savings of approximately $30.0 to $50.0 million. Current accounting rules only
allow for restructuring charges that have been incurred or have been estimated
in connection with a formal approved exit or restructuring plan. Accordingly,
there are certain amounts which have been included in our estimated one-time
restructuring and impairment charges which have not been recorded as such
amounts are part of an exit or restructuring plan not yet formally approved by
management. The non-core products and services comprised approximately 23.6% and
30.3% of total revenues in the three- and six-month periods ended June 30, 2001
and approximately 27.5% and 26.5% of total revenues in the three- and six-month
periods ended June 30, 2000. It is expected that these products and services
will be an insignificant part of our revenue stream by the fourth quarter of
2001.
Core Solutions and Services. Core communications solutions are our
messaging and directory infrastructure platform, including mail, calendar,
address book, file storage, secure delivery, directory and meta-directory, and
access services supporting wireline and wireless users. During the quarter, we
announced that new sales of products and related services for resource
management, project collaboration, fax messaging, message boards, and data
integration products were being discontinued. We are in discussions with outside
parties related to the sale of several product lines, which are expected to
close before the end of the year. During the second quarter, charges related to
the exit of these products aggregated $1.4 million, of which $107,000 has been
paid. We do not anticipate any additional charges during the remainder of the
year.
Headcount Reduction. We announced that we would lay off approximately 450
employees as part of the restructuring. The reduction is expected to come from
both the discontinuance of non-core products and organizational changes designed
to improve general operational efficiencies. During the second quarter, we laid
off approximately 212 employees and anticipate that another 130 employees will
be laid off or will leave Critical Path as part of the sales of several product
lines before the end of the year. Additionally, during the quarter there were
approximately 40 voluntary resignations, net of newly hired employees. At June
30, 2001 total headcount was approximately 784. During the second quarter,
severance and related charges were approximately $5.0 million, of which
approximately $4.7 million has been paid. We anticipate that severance and
related charges during the remainder of the year will be approximately $3.0 to
$5.0 million.
Facilities and Operations Consolidation. We announced that we would reduce
our 77 worldwide office facilities by approximately two thirds. During the
second quarter, we consolidated 33 facilities into existing or new cost
effective offices and we anticipate that an additional 17 will be consolidated
before the end of the year. During the second quarter, lease terminations, and
related charges aggregated approximately $2.1 million, of which approximately
$900,000 has been paid. We anticipate additional charges during the remainder of
the year will be approximately $4.0 to $5.0 million.
Stock-Based Expenses
Warrants. During 1999 and 2000, we issued warrants to purchase shares of
our preferred and common stock pursuant to certain strategic agreements with
ICQ, Inc., Qwest Communications Corporation, Worldsport Network Ltd., one of our
lessors, and a major telecommunications company. These issuances allowed the
warrantholders to purchase an aggregate of 7.1 million shares of our common
stock in exchange for sub-branded advertising and various other services. During
the three- and six-months ended June 30, 2001, we recognized stock-based
expenses related to these warrants of approximately $4.9 million and $9.8
million, respectively, and during the three- and six-months ended June 30, 2000,
we recognized amounts of approximately $7.5 million and $11.5 million,
respectively. We believe that these warrant agreements could have a significant
current and future impact on our operating results.
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In March 2001, the Company entered into certain agreements with Vectis
Group, LLC ("Vectis Group") to engage Vectis Group to act as an advisor to the
Company with respect to various strategic alternatives the Company is currently
exploring and assist with other management related services. As part of the
agreement, Vectis Group agreed to provide consulting services to the Company in
exchange for a monthly retainer fee and warrants to purchase 500,000 shares of
the Company's Common Stock with an exercise price of $2.00 per share, issuable
upon execution of the agreement. Using the Black-Scholes option-pricing model
and assuming a term of three years, the term of the agreement, and expected
volatility of 215%, the initial and final fair value of the warrant on the
effective date of the agreement approximated $732,000, which was recognized upon
the execution of the agreement in March 2001, as the relationship is terminable
at any time.
Interest and Other Income (Expense)
Interest and other income, net of expense, consists primarily of interest
earnings on cash and cash equivalents as well as net realized gains (losses) on
foreign exchange transactions. On March 30, 2000, we issued $300.0 million of
five-year, 5.75% Convertible Subordinated Notes due April 1, 2005. As a result
of this increase in cash available for investing, interest income increased
significantly between the first and second quarters of 2000. Our cash balance
was significantly reduced between the second quarter of 2000 and the second
quarter of 2001 as a result of cash used in operations, causing a decrease in
interest income for the first half of 2001. Interest income amounted to $1.6
million and $3.9 million for the three- and six-months ended June 30, 2001,
respectively, and $4.8 million and $5.9 million for the three- and six-months
ended June 30, 2000, respectively. We also recognized net gains from foreign
currency transactions associated with our international operations in the
amounts of $1.3 million and $1.5 million for the three- and six-months ended
June 30, 2001, respectively, and a $91,000 net loss and $79,000 net gain for the
three- and six-months ended June 30, 2000, respectively.
Interest Expense
Interest expense consists primarily of the interest and amortization of
debt issuance costs related to the convertible subordinated notes we issued in
March 2000, and interest and stock-based charges on certain capital leases. We
incurred approximately $4.3 million and $8.6 million in interest on these notes,
and approximately $537,000 and $1.1 million related to amortization of debt
issuance costs for the three- and six-month periods ended June 30, 2001,
respectively. Additionally, we incurred approximately $4.3 million in interest
on these notes, and approximately $537,000 related to amortization of debt
issuance costs for the three- and six-month periods ended June 30, 2000. During
the three- and six-month periods ended June 30, 2001, amortization of
stock-based charges was $4,000 and $20,000, respectively, and interest charges
on capital lease obligations amounted to $485,000 and $749,000, respectively.
For the three- and six-month periods ended June 30, 2000, amortization of
stock-based charges was $16,000 and $32,000, respectively, and interest charges
on capital lease obligations amounted to $896,000 and $1.2 million,
respectively.
Equity in Net Loss of Critical Path Pacific
In June 2000, we established a joint venture, Critical Path Pacific, with
Mitsui and Co., Ltd., NTT Communications Corporation and NEC Corporation to
deliver advanced Internet messaging solutions to businesses in Asia. We invested
$7.5 million and hold a 40% ownership interest in the joint venture. This
investment is being accounted for using the equity method. During the three- and
six-month periods ended June 30, 2001, we recorded equity in net loss of joint
venture of $397,000 and $1.2 million, respectively. No amounts were recorded in
the first and second quarters of 2000.
Provision for Income Taxes
No current provision or benefit for U.S. federal or state income taxes has
been recorded as we have incurred net operating losses for income tax purposes
since our inception. No deferred provision or benefit for federal or state
income taxes has been recorded as we are in a net deferred tax asset position
for which a full valuation allowance has been provided due to uncertainty of
realization. We recognized a provision for foreign
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income taxes during the first and second quarters of 2001 as certain of our
European operations generated income taxable in certain European jurisdictions.
Convertible Subordinated Notes
On March 30, 2000, we issued $300.0 million of five-year, 5.75% Convertible
Subordinated Notes due April 1, 2005. In June 2001, we retired $5.0 million face
value of our convertible subordinated notes, which resulted in an after-tax
extraordinary gain of $3.8 million in the second quarter. Additionally, in July
2001, the Company retired an additional $40.4 million face value convertible
subordinated notes, which resulted in a substantial after-tax extraordinary
gain.
LIQUIDITY AND CAPITAL RESOURCES
During 2001 we have begun investing a portion of our cash in high grade,
low risk investments with an average maturity of twelve months. As of June 30,
2001, our cash and short-term investments totaled $132.6 million, comprised of
$114.3 million in cash and cash equivalents and $18.3 million in short-term
investments. Our working capital was approximately $106.2 million. During the
first half of 2001, we used approximately $83.9 million in cash. After incurring
restructuring charges and realizing the expected quarterly cost savings in
connection with our strategic restructuring, implementing certain worldwide cost
control policies and procedures, and the potential increase in revenue volume as
we continue to move beyond the issues experienced in the first quarter of 2001,
we believe that we have sufficient cash to operate for the duration of 2001.
We used $55.9 million in cash to fund operating activities during the first
and second quarters of 2001 primarily due to our net loss adjusted for non-cash
charges, acquisition-related retention bonus payments and payments related to
our restructuring plan. Our cash disbursements related primarily to compensation
for our employees. In addition, we used cash to fund various other operating
costs, which are identified in the Results of Operations portion of this
section.
We used $39.7 million in cash to fund investing activities during the first
and second quarters of 2001 to enter into certain short-term investments and to
purchase property, equipment and other capital expenditures, however the cash
used for those capital expenditures in 2001 has significantly reduced from
capital expenditure levels in 2000. The primary use of cash during the first
half of 2001 was related to short-term investments of approximately $18.3
million, which is comprised primarily of low risk corporate bonds and government
securities. Additionally we incurred capital expenditures related to the
acquisition of the outstanding equity interest in CP Italia, a consolidated
subsidiary, an investment banking fee related to the ISOCOR acquisition and the
installation of additional network infrastructure equipment in our data centers.
We used $4.5 million in cash from financing activities during the first and
second quarters of 2001 to retire principal on capital lease obligations and
$5.0 million of our convertible subordinated notes. These uses were offset by
net proceeds from the sale of the Company's common stock. Additionally we
received $289.2 million in net cash proceeds from financing activities during
2000 from the sale of $300.0 million in convertible subordinated notes, as well
as from the exercise of employee stock options and the purchase of stock under
our employee stock purchase plan. These cash proceeds were partially offset by
payments to retire principal on capital lease obligations.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
WE HAVE EXPERIENCED TURNOVER OF SENIOR MANAGEMENT AND OUR CURRENT MANAGEMENT
TEAM HAS BEEN TOGETHER FOR A LIMITED TIME, WHICH COULD HARM OUR BUSINESS AND
OPERATIONS.
We are currently engaged in a search for a new Chief Executive Officer. Our
success depends on our ability to recruit and hire a Chief Executive Officer. If
we are not able to successfully recruit a Chief Executive Officer, our business
will be seriously harmed.
In the first half of 2001, we announced a series of changes in our
management and board of directors. In the early part of the second quarter of
2001, we announced a series of additional changes in our management
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and board of directors. It is possible this high turnover at our senior
management levels may continue. Because of these recent changes, our management
team has not worked together for a significant length of time and may not be
able to work together effectively to successfully implement our strategy. If our
management team is unable to accomplish our business objectives, our ability to
grow our business could be severely impaired.
We do not have long-term employment agreements with any of our executive
officers. The loss of the services of one or more of our current senior
executive officers could harm our business and affect our ability to
successfully implement our business objectives.
IF WE FAIL TO IMPROVE SALES AND MARKETING ACTIVITIES, WE MAY BE UNABLE TO
IMPROVE OUR BUSINESS.
Our ability to increase revenues will depend on our ability to successfully
recruit, train and retain sales and marketing personnel. Competition for
qualified personnel is intense and we may not be able to hire and retain
personnel with relevant experience. The complexity and implementation of our
messaging and directory infrastructure products and services require highly
trained sales and marketing personnel to educate prospective customers regarding
the use and benefits of our services. Current and prospective customers, in
turn, must be able to educate their end-users. Any delays or difficulties
encountered in our staffing efforts would impair our ability to attract new
customers and enhance our relationships with existing customers. This in turn
would adversely impact the timing and extent of revenues. Because we have
experienced high turnover in our sales force and the majority of our current
sales and marketing personnel have recently joined us and have limited
experience working together, our sales and marketing organizations may not be
able to compete successfully against the sales and marketing organizations of
our competitors. If we do not successfully operate our sales and marketing
activities, our business could suffer and the price of our common stock could
decline.
WE DEPEND ON STRATEGIC RELATIONSHIPS AND OTHER SALES CHANNELS AND THE LOSS OF
ANY STRATEGIC RELATIONSHIPS COULD HARM OUR BUSINESS AND NEGATIVELY AFFECT OUR
REVENUES.
We depend on strategic relationships to expand distribution channels and to
undertake joint product development and marketing efforts. Our ability to
increase revenues depends upon marketing services through new and existing
strategic relationships. We depend on a broad acceptance of outsourced messaging
services on the part of potential partners and acceptance of our company as the
supplier for these outsourced messaging services. We also depend on joint
marketing and product development through strategic relationships to achieve
market acceptance and brand recognition. Our agreements with strategic partners
typically do not restrict them from introducing competing services. These
agreements typically are for terms of one to three years, and automatically
renew for additional one-year periods unless either party gives prior notice of
its intention to terminate the agreement. In addition, these agreements are
terminable by our partners without cause, and some agreements are terminable by
us, upon 30 - 120 days' notice. Most of the agreements also provide for the
partial refund of fees paid or other monetary penalties in the event that our
services fail to meet defined minimum performance standards. Distribution
partners may choose not to renew existing arrangements on commercially
acceptable terms, or at all. If we lose any strategic relationships, fail to
renew these agreements or relationships or fail to develop new strategic
relationships, our business will suffer. The loss of any key strategic
relationships would have an adverse impact on our current and future revenues.
In addition to strategic relationships, we also depend on the ability of our
customers to sell and market our services to their end-users.
DUE TO OUR LIMITED OPERATING HISTORY, EVOLVING BUSINESS STRATEGY AND THE
EMERGING NATURE OF THE MESSAGING AND DIRECTORY INFRASTRUCTURE MARKET, OUR FUTURE
REVENUES ARE UNPREDICTABLE, AND OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
We cannot accurately forecast our revenues as a result of our limited
operating history, evolving business strategy and the emerging nature of the
Internet messaging infrastructure market. Forecasting is further complicated by
rapid changes in our business due to the ten acquisitions we completed in 1999
and 2000, our current strategic restructuring, as well as significant
fluctuations in license revenues as a percentage of total revenues from an
insignificant percentage in 1999, to 38% in 2000 and to 27% in the first half of
2001. Our revenues could fall short of expectations if we experience delays or
cancellations of even a small number of
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orders. We often offer volume-based pricing, which may affect operating margins.
A number of factors are likely to cause fluctuations in operating results,
including, but not limited to:
- continued growth of the Internet in general and the use of messaging and
directory infrastructure products and services in particular;
- demand for outsourced messaging services;
- demand for licensing of messaging, directory, and other products;
- our ability to attract and retain customers and maintain customer
satisfaction;
- our ability to attract and retain qualified personnel with messaging and
directory infrastructure industry expertise, particularly sales and
marketing personnel;
- the reaction of our customers and potential customers to our ongoing
integration of acquired businesses;
- our ability to upgrade, develop and maintain our systems and
infrastructure;
- the budgeting cycles of our customers and potential customers;
- the amount and timing of operating costs and capital expenditures
relating to expansion of business and infrastructure;
- our ability to effectively respond to the rapid technology change of the
messaging and directory infrastructure market;
- technical difficulties or system outages; and
- the announcement or introduction of new or enhanced services by
competitors.
In addition to the factors set forth above, operating results will be
impacted by the extent to which we incur non-cash charges associated with
stock-based arrangements with employees and non-employees. In particular, we
have incurred and expect to continue to incur substantial non-cash charges
associated with the grant of stock options to employees and non-employees and
the grant of warrants to our customers and other parties with which we have
commercial relationships. These grants of options and warrants also may be
dilutive to existing shareholders.
Our operating results also could be impacted by a decision to eliminate a
product or service offering through termination, sale or other disposition or to
sustain certain products and services at a minimum level where customer
commitments prevent us from eliminating the offering altogether. Decisions to
eliminate or limit our offering of a product or service will involve the
expenditure of capital, the realization of losses, a reduction in our workforce,
facility consolidation or the elimination of revenues along with the associated
costs, any of which could harm our financial condition and operating results.
As a result of the foregoing, period-to-period comparisons of operating
results are not a good indication of future performance. It is likely that
operating results in some quarters will be below market expectations. In this
event, the price of our common stock is likely to decline.
WE HAVE A HISTORY OF LOSSES, EXPECT CONTINUING LOSSES AND MAY NEVER ACHIEVE
PROFITABILITY.
As of June 30, 2001, we had an accumulated deficit, including other
comprehensive income, of approximately $2.1 billion. We have not achieved
profitability in any period and expect to continue to incur net losses in
accordance with generally accepted accounting principles for the foreseeable
future. We expect that our operating expenses will decrease as a result of our
strategic restructuring. However, we will continue to spend resources on
maintaining and strengthening our business, and this may have a negative effect
on our operating results and our financial condition in the near term.
We have spent heavily on technology and infrastructure development. We may
continue to spend substantial financial and other resources to develop and
introduce new end-to-end messaging and directory
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infrastructure solutions, and improve our sales and marketing organizations,
strategic relationships and operating infrastructure. In addition, in future
periods we will continue to incur significant non-cash charges related to the
ten acquisitions we completed in 1999 and 2000 and stock-based compensation. We
expect that our cost of revenues, sales and marketing expenses, general and
administrative expenses, operations and customer support expenses and
depreciation and amortization expenses could continue to increase in absolute
dollars and may increase as a percent of revenues. If revenues do not
correspondingly increase, our operating results and financial condition could be
harmed. If we continue to incur net losses in future periods, we may not be able
to retain employees, or fund investments in capital equipment, sales and
marketing programs, and research and development to successfully compete against
our competitors. We may never obtain sufficient revenues to achieve
profitability. If we do achieve profitability, we may not sustain or increase
profitability in the future. This may, in turn, cause the price of our common
stock to decline.
A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF OUR REVENUES, IF
WE LOSE A MAJOR CUSTOMER OR IF WE ARE UNABLE TO ATTRACT NEW CUSTOMERS, OUR
OPERATING RESULTS COULD BE HARMED.
We expect that sales of our services to a limited number of customers will
continue to account for a high percentage of our revenue for the foreseeable
future. Our future success depends on our ability to retain our current
customers, and to attract new customers, in our target markets. The loss of a
major customer could harm our business. Our agreements with our customers
typically have terms of one to three years with automatic one year renewals and
can be terminated without cause upon 30 - 120 days' notice. If our customers
terminate their agreements before the end of the contract term, the loss of the
customer could have an adverse impact on our current and future revenues. Also,
if we are unable to attract and enter into agreements with new customers, our
business will not grow and we will not generate additional revenues.
IF WE ARE UNABLE TO SUCCESSFULLY COMPETE IN OUR PRODUCT MARKET, OUR OPERATING
RESULTS COULD BE HARMED.
Because we have a variety of messaging and directory infrastructure
products and services, we encounter different competitors at each level of our
products and services. Our competitors for corporate customers seeking
outsourced hosted messaging solutions are email service providers, such as
Commtouch, Easylink, USA.NET and application service providers offering hosted
exchange services. Our competitors for service providers seeking insourced or
outsourced product-based solutions are iPlanet and OpenWave. For secure delivery
services, our competitors include Tumbleweed for product-based solutions and
SlamDunk for service-based solutions. In the enterprise/eBusiness directory
category, we compete primarily with iPlanet, Microsoft and Novell, and our
competitors in the meta-directory market are iPlanet, Microsoft, Novell and
Siemens.
We believe that competitive factors affecting the market for messaging and
directory infrastructure solutions include:
- breadth of platform features and functionality;
- ease of integration into customers' existing systems;
- ease of expansion and upgrade;
- flexibility to enable customers to manage certain aspects of their
systems internally and leverage outsourced services in other cases when
resources, costs and time to market reasons favor an outsourced offering;
- cost of ownership and operation;
- scalability, reliability and performance; and
- ability to enhance customers' brand identities by allowing them to
maintain brand control.
We believe competition will increase as current competitors increase the
sophistication of their offerings and as new participants enter the market. Many
of our current and potential competitors have longer operating histories, larger
customer bases, greater brand recognition and significantly greater financial,
marketing and other resources than we do and may enter into strategic or
commercial relationships with larger, more
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established and better-financed companies. Any delay in our development and
delivery of new services or enhancement of existing services would allow our
competitors additional time to improve their service or product offerings, and
provide time for new competitors to develop messaging and directory
infrastructure products and services and solicit prospective customers within
our target markets. Increased competition could result in pricing pressures,
reduced operating margins and loss of market share, any of which could cause our
business to suffer.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL AND TO INITIATE OTHER OPERATIONAL
STRATEGIES THAT MAY DILUTE EXISTING SHAREHOLDERS.
We believe that existing capital resources will enable us to maintain
current and planned operations through December 31, 2001. However, additional
capital may be required to continue operations and achieve profitability. In
addition, we may be required to raise additional funds due to unforeseen
circumstances. If our capital requirements vary materially from those currently
planned, we may require additional financing sooner than anticipated. Such
financing may not be available in sufficient amounts or on terms acceptable to
us and may be dilutive to existing shareholders.
Additionally, we face a number of challenges in operating our business,
including our highly leveraged capital structure and significant contingent
liabilities associated with litigation. In the event that resolution of these or
other operational matters involve issuance of stock, our existing shareholders
may experience significant dilution.
PENDING LITIGATION COULD SERIOUSLY HARM OUR BUSINESS.
Since February 2001, various of our shareholders have filed separate
lawsuits against us, our independent accountants and certain of our current and
former officers and directors. The uncertainty associated with substantial
unresolved lawsuits could seriously harm our business, financial condition and
reputation. In particular, the lawsuits could harm our relationships with
existing customers and our ability to obtain new customers.
The continued defense of the lawsuits also could result in the diversion of
our management's time and attention away from business operations, which could
harm our business. Negative developments with respect to the lawsuits could
cause the price of our common stock to decline significantly. In addition,
although we are unable to determine the amount, if any, that we may be required
to pay in connection with the resolution of these lawsuits by settlement or
otherwise, the size of any such payment could seriously harm our financial
condition. Most of the lawsuits have been filed as purported class actions by
persons who claim that they purchased our common stock during a purported class
period. The complaints generally allege that we and the other named defendants
made false or misleading statements of material fact about our financial
statements, including our revenues, revenue recognition practices, business
operations and prospects for the year 2000 and beyond. The complaints, in
general, do not specify the amount of damages that plaintiffs seek. As a result,
we are unable to estimate the possible range of damages that might be incurred
as a result of the lawsuits. We have not set aside any financial reserves
relating to potential damages associated with any of these lawsuits.
THE PENDING SEC INVESTIGATION COULD HARM OUR BUSINESS.
In February 2001, the Securities and Exchange Commission, or SEC, issued a
formal order of investigation of us and certain unidentified individuals
associated with us. The investigation relates to non-specified accounting
matters, financial reports, other public disclosures and trading activity in our
stock. While we do not know the current status of the investigation or any
possible actions that may be taken against us as a result, any negative
developments with respect to the investigation or any SEC action against us
could harm our business and cause the price of our common stock to decline
significantly.
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WE MAY NOT BE ABLE TO MAINTAIN OUR LISTING ON THE NASDAQ NATIONAL MARKET AND IF
WE FAIL TO DO SO, THE PRICE AND LIQUIDITY OF OUR COMMON STOCK MAY DECLINE.
The Nasdaq Stock Market has quantitative maintenance criteria for the
continued listing of common stock on The Nasdaq National Market. The current
requirements affecting us include having (i) net tangible assets of at least $4
million and (ii) a minimum bid price per share of $1. As of June 30, 2001, we
are not complying with the $4 million of net tangible assets requirement. Since
July 12, 2001, the closing bid price per share for our common stock has been
below $1. If our net tangible assets remain less than $4 million, or if the bid
price of our common stock price continues to remain below $1 per share, our
common stock may not remain listed on The Nasdaq National Market. The Nasdaq
National Market's Audit Committee Rules require audit committees to be comprised
of at least three independent directors. We currently comply with this
requirement, however, in the event that we are not able to comply with this or
any of the other requirements in the future we may be delisted from The Nasdaq
National Market. If we are delisted, it could have a material adverse effect on
the market price of, and the liquidity of the trading market for, our common
stock.
The SEC approved certain amendments to The Nasdaq Stock Market Marketplace
Rules which are effective June 20, 2001, including but not limited to changing
the current net tangible assets listing standard to an equity listing standard.
The new equity standard requires net equity of at least $10 million. We may
begin to qualify under this standard immediately, but compliance with the new
equity listing standard is not required until November 1, 2002. If we do not
comply with this standard by November 1, 2002 we may be delisted from The Nasdaq
National Market. Such action may negatively affect our standing with The Nasdaq
National Market, which in turn would harm our business and its financial
condition.
OUR STOCK PRICE HAS DECLINED DURING RECENT QUARTERS AND CONTINUED VOLATILITY IN
THE STOCK MARKET MAY CAUSE FLUCTUATIONS AND/OR FURTHER DECLINE IN OUR STOCK
PRICE.
The trading price of our common stock has been and may continue to
experience cumulative decline and wide fluctuations. For example, during the
second quarter of 2001, the closing sale prices of our common stock on The
Nasdaq National Market ranged from $1.72 on May 2, 2001 to $0.84 on April 9,
2001, and the closing sale price of our common stock on July 27, 2001 was $0.42.
Our stock price may decline or fluctuate in response to any number of factors
and events, such as technological innovations, strategic and sales
relationships, new product and service offerings by us or our competitors,
changes in financial estimates and recommendations of securities analysts, the
operating and stock price performance of other companies that investors may deem
comparable, and news reports relating to trends in our markets. In addition, the
stock market in general, particularly with respect to technology stocks, has
experienced extreme volatility and a significant cumulative decline in recent
months. This volatility and decline has affected many companies, including our
company, irrespective to the specific operating performance of such companies.
These broad market influences and fluctuations may adversely affect the price of
our stock, and our ability to remain listed on The Nasdaq National Market,
regardless of our operating performance.
LIMITATIONS OF OUR DIRECTOR AND OFFICER LIABILITY INSURANCE MAY HARM OUR
BUSINESS.
Our liability insurance for actions taken by officers and directors during
the period from March 1999 to March 2001, the period during which events related
to securities class action lawsuits against us and certain of our current and
former executive officers are alleged to have occurred, provides only limited
liability protection. If these policies do not adequately cover our expenses
related to those lawsuits, our business and financial condition could be
seriously harmed.
Under California law, in connection with our charter documents and
indemnification agreements we entered into with our executive officers and
directors, we must indemnify our current and former officers and directors to
the fullest extent permitted by law. The indemnification covers any expenses and
liabilities reasonably incurred in connection with the investigation, defense,
settlement or appeal of legal proceedings.
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WE MAY EXPERIENCE DIFFICULTY IN ATTRACTING AND RETAINING KEY PERSONNEL, WHICH
MAY NEGATIVELY AFFECT OUR ABILITY TO DEVELOP NEW SERVICES OR RETAIN AND ATTRACT
CUSTOMERS.
The loss of the services of key personnel could harm our business results.
Our success also depends on our ability to recruit, retain and motivate highly
skilled sales and marketing, operational, technical and managerial personnel.
Competition for these people is intense and we may not be able to successfully
recruit, train or retain qualified personnel. If we fail to do so, we may be
unable to develop new services or continue to provide a high level of customer
service, which could result in the loss of customers and revenues.
We do not have long-term employment agreements with any of our key
personnel. In addition, we do not maintain key person life insurance on our
employees and have no plans to do so. The loss of the services of one or more of
our current key personnel could harm our business and affect our ability to
successfully implement our business objectives.
OUR FAILURE TO MANAGE GROWTH COULD CAUSE OUR BUSINESS TO SUFFER.
In the past, the expansion of our operations has placed a significant
strain on managerial, operational and financial resources. To manage any future
growth, we may need to improve or replace our existing operational, customer
service and financial systems, procedures and controls. Any failure to properly
manage these systems and procedural transitions could impair our ability to
attract and service customers, and could cause us to incur higher operating
costs and delays in the execution of our business plan. We will also need to
hire additional personnel including sales personnel. Our management may not be
able to hire, train, retain, motivate and manage required personnel. In
addition, our management may not be able to successfully identify, manage and
exploit existing and potential market opportunities. If we cannot manage growth
effectively, our business and operating results could suffer.
WE HAVE A STRATEGIC PLAN TO EXIT CERTAIN NON-CORE PRODUCTS AND SERVICES, IF WE
ARE NOT SUCCESSFUL IN IMPLEMENTING OUR PLAN, OUR BUSINESS COULD BE NEGATIVELY
IMPACTED.
In the first quarter of 2001, we developed a strategic plan that involved
reorganizing our product and service offerings around a group of core products
deemed most imperative to our ability to serve the messaging and directory
infrastructure market. In the second quarter of 2001, implementation of the plan
commenced and, accordingly, some products and services that have been determined
to be non-core to our strategy were strategically exited. Our strategic plan
also includes an initiative to reduce operating costs through a reduction of
approximately 450 personnel and a consolidation of approximately two-thirds of
our office space in keeping with our increased focus on core messaging products
and services. During the second quarter, we had a reduction in force of
approximately 212 personnel and were able to consolidate about 33 of our
facilities. We are continuing to implement these actions and we expect to incur
significant one-time charges. The non-core products and services comprised
approximately 37% of total revenues in the first quarter of 2001, approximately
24% of revenues in the second quarter of 2001 and 26% of total revenues during
fiscal year 2000. It is expected that these products and services will not be a
part of our revenue stream by the fourth quarter of 2001.
WE WILL FACE TECHNICAL, OPERATIONAL AND STRATEGIC CHALLENGES THAT MAY PREVENT US
FROM SUCCESSFULLY CONTINUING THE INTEGRATION OF ANY BUSINESSES WE HAVE ACQUIRED.
Acquisitions involve risks related to the integration and management of
acquired technology, operations and personnel. The integration of businesses
that we have acquired into our business has been and will continue to be a
complex, time consuming and expensive process, which may disrupt our business if
not completed in a timely and efficient manner. We must operate as a combined
organization utilizing common information and communication systems, operating
procedures, financial controls and human resources practices to be successful.
In particular, we are currently evaluating, upgrading or replacing our financial
information systems and establishing uniformity among the systems of the
acquired businesses. We may
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encounter substantial difficulties, costs and delays involved in integrating the
operations of our subsidiaries, including:
- potential incompatibility of business cultures;
- perceived adverse changes in business focus; and
- potential failure in effectively managing our rapid growth in personnel.
Consequently, we may not be successful in integrating acquired businesses
or technologies and may not achieve anticipated revenues and cost benefits. We
also cannot guarantee that these acquisitions will result in sufficient revenues
or earnings to justify our investment in, or expenses related to, these
acquisitions or that any synergies will develop. If we are not successful in
integrating acquired businesses or if expected earnings or synergies do not
materialize, we could be forced to attempt to resell or cease operations of
acquired businesses. In either event, we would likely incur significant expenses
as well as non-cash charges to write-off acquired assets, which could seriously
harm our financial condition and operating results.
Further, due in part to the significant underperformance of some of our
acquisitions relative to expectations, we have reviewed the products and
services we sell to customers, the locations in which we operate and the manner
in which we go to market with our core product and service offerings. As a
result of this review, in 2001, we decided to eliminate certain acquired product
or service offerings through termination, sale or other disposition or to
sustain certain products and services at a minimum level where customer
commitments prevent us from eliminating the offering altogether. Any decision,
including our recent decisions, to eliminate or limit our offering of an
acquired product or service could involve the expenditure of capital, the
realization of losses, a reduction in workforce, facility consolidation, and/or
the elimination of revenues along with the associated costs, any of which could
harm our financial condition and operating results.
WE MAY NEED TO LICENSE THIRD-PARTY TECHNOLOGIES AND WE FACE RISKS IN DOING SO.
We intend to continue to license certain technology from third parties,
including web server and encryption technology. The market is evolving and we
may need to license additional technologies to remain competitive. We may not be
able to license these technologies on commercially reasonable terms or at all.
In addition, we may fail to successfully integrate any licensed technology
into our services. These third-party in-licenses may expose us to increased
risks, including risks related to the integration of new technology, the
diversion of resources from the development of proprietary technology, and an
inability to generate revenues from new technology sufficient to offset
associated acquisition and maintenance costs. An inability to obtain any of
these licenses could delay product and service development until equivalent
technology can be identified, licensed and integrated. Any delays in services
could cause our business and operating results to suffer.
WE MAY HAVE LIABILITY FOR INTERNET CONTENT AND WE MAY NOT HAVE ADEQUATE
LIABILITY INSURANCE.
As a provider of messaging and directory services, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
transmitted via our services. We do not and cannot screen all of the content
generated by our users, and we could be exposed to liability with respect to
this content. Furthermore, some foreign governments, such as Germany, have
enforced laws and regulations related to content distributed over the Internet
that are more strict than those currently in place in the United States.
Although we carry general liability and umbrella liability insurance, our
insurance may not cover claims of these types or may not be adequate to
indemnify us for all liability that may be imposed. There is a risk that a
single claim or multiple claims, if successfully asserted against us, could
exceed the total of our coverage limits. There also is a risk that a single
claim or multiple claims asserted against us may not qualify for coverage under
our insurance policies as a result of coverage exclusions that are contained
within these policies. Should either of these risks occur, capital contributed
by our shareholders may need to be used to
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settle claims. Any imposition of liability, particularly liability that is not
covered by insurance or is in excess of insurance coverage could harm our
reputation and business and operating results, or could result in the imposition
of criminal penalties.
IF OUR SYSTEM SECURITY IS BREACHED, OUR BUSINESS AND REPUTATION COULD SUFFER.
A fundamental requirement for online communications is the secure
transmission of confidential information over public networks. Third parties may
attempt to breach our security or that of our customers. If these attempts are
successful, customers' confidential information, including customers' profiles,
passwords, financial account information, credit card numbers or other personal
information could be breached. We may be liable to our customers for any breach
in security and a breach could harm our reputation. We rely on encryption
technology licensed from third parties. Although we have implemented network
security measures, our servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to interruptions,
delays or loss of data. We may be required to expend significant capital and
other resources to license encryption technology and additional technologies to
protect against security breaches or to alleviate problems caused by any breach.
Failure to prevent security breaches may harm our business and operating
results.
UNKNOWN SOFTWARE DEFECTS COULD DISRUPT OUR SERVICES AND HARM OUR BUSINESS AND
REPUTATION.
Our software products are inherently complex. Additionally, our service
offerings depend on complex software, both internally developed and licensed
from third parties. Complex software often contains defects, particularly when
first introduced or when new versions are released. We may not discover software
defects in our products or that affect new or current services or enhancements
until after they are deployed. Although we have not experienced any material
software defects to date, it is possible that, despite testing, defects may
occur in the software. These defects could cause service interruptions, which
could damage our reputation or increase service costs, cause us to lose revenue,
delay market acceptance or divert development resources, any of which could
cause our business to suffer.
UNPLANNED SYSTEM INTERRUPTIONS AND CAPACITY CONSTRAINTS COULD REDUCE OUR ABILITY
TO PROVIDE MESSAGING SERVICES AND COULD HARM OUR BUSINESS REPUTATION.
Our customers have, in the past, experienced some interruptions in our
messaging service. We believe that these interruptions will continue to occur
from time to time. These interruptions are due to hardware failures, unsolicited
bulk email, or "spam," attacks and operating system failures. Our business will
suffer if we experience frequent or long system interruptions that result in the
unavailability or reduced performance of systems or networks or reduce our
ability to provide email services. We expect to experience occasional temporary
capacity constraints due to sharply increased traffic, which may cause
unanticipated system disruptions, slower response times, impaired quality and
degradation in levels of customer service. If this were to continue to happen,
our business and reputation could suffer dramatically.
We have entered into messaging agreements with some customers that require
minimum performance standards, including standards regarding the availability
and response time of messaging services. If we fail to meet these standards, our
customers could terminate their relationships with us and we could be subject to
contractual monetary penalties.
WE RELY ON TRADEMARK, COPYRIGHT AND TRADE SECRET LAWS AND CONTRACTUAL
RESTRICTIONS TO PROTECT OUR PROPRIETARY RIGHTS, AND IF THESE RIGHTS ARE NOT
SUFFICIENTLY PROTECTED, IT COULD HARM OUR ABILITY TO COMPETE AND GENERATE
REVENUE.
We also rely on a combination of trademark, copyright and trade secret
laws, and contractual restrictions, such as confidentiality agreements and
licenses, to establish and protect our proprietary rights. Our ability to
compete and grow our business could suffer if these rights are not adequately
protected. We seek to protect our source code for our software, documentation
and other written materials under trade secret and copyright laws. We license
our software pursuant to agreements which impose certain restrictions on the
licensee's
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ability to utilize the software. We also seek to avoid disclosure of our
intellectual property by requiring employees and consultants with access to our
proprietary information to execute confidentiality agreements. Our proprietary
rights may not be adequately protected because:
- laws and contractual restrictions may not prevent misappropriation of our
technologies or deter others from developing similar technologies; and
- policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming, and we may be unable to determine the
extent of this unauthorized use.
Also, the laws of other countries in which we market our products may offer
little or no protection of our proprietary technologies. Reverse engineering,
unauthorized copying or other misappropriation of our proprietary technologies
could enable third parties to benefit from our technologies without paying us
for it, which would harm our competitive position and market share.
WE MAY NOT BE ABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE OF THE MESSAGING
AND DIRECTORY INFRASTRUCTURE INDUSTRY.
The messaging directory infrastructure industry is characterized by rapid
technological change, changes in user and customer requirements and preferences,
and the emergence of new industry standards and practices that could render our
existing services, proprietary technology and systems obsolete. We must
continually improve the performance, features and reliability of our services,
particularly in response to competitive offerings. Our success depends, in part,
on our ability to enhance our existing email and messaging services and to
develop new services, functionality and technology that address the increasingly
sophisticated and varied needs of prospective customers. If we don't properly
identify the feature preferences of prospective customers, or if we fail to
deliver email features which meet the standards of these customers, our ability
to market our service successfully and to increase revenues could be impaired.
The development of proprietary technology and necessary service enhancements
entail significant technical and business risks and require substantial
expenditures and lead-time. We may not be able to keep pace with the latest
technological developments. We may also be unable to use new technologies
effectively or adapt services to customer requirements or emerging industry
standards.
WE MAY NOT BE ABLE TO PROTECT INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
We regard our copyrights, service marks, trademarks, trade secrets and
similar intellectual property as critical to our success, and we rely on
trademark and copyright law, trade secret protection and confidentiality and/or
license agreements with employees, customers and partners to protect proprietary
rights. Despite these precautions, unauthorized third parties may infringe or
copy portions of our services or reverse engineer or obtain and use information
that we regard as proprietary. End user license provisions protecting against
unauthorized use, copying, transfer and disclosure of the licensed program may
be unenforceable under the laws of certain jurisdictions and foreign countries.
The status of United States patent protection in the software industry is
not well defined and will evolve as the U.S. Patent and Trademark Office grants
additional patents. We have several patents pending in the United States and may
seek additional patents in the future. We do not know if the patent application
or any future patent application will be issued with the scope of the claims
sought, if at all, or whether any patents received will be challenged or
invalidated. In addition, the laws of some foreign countries do not protect
proprietary rights to the same extent as do the laws of the United States. Our
means of protecting proprietary rights in the United States or abroad may not be
adequate and competitors may independently develop similar technology.
Additionally, although we have not received notice of any other alleged patent
infringement, we cannot be certain that our products do not infringe issued
patents that may relate to our products. In addition, because patent
applications in the United States are not publicly disclosed until the patent is
issued, applications may have been filed which relate to our software products.
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IF WE DO NOT SUCCESSFULLY ADDRESS THE RISKS INHERENT IN THE EXPANSION OF OUR
INTERNATIONAL OPERATIONS, OUR BUSINESS COULD SUFFER.
We derived 37% of our revenue from international sales in the first half of
2001 and 40% of our revenue from international sales in 2000. We intend to
continue to operate in international markets and to spend significant financial
and managerial resources to do so. If revenues from international operations do
not exceed the expense of establishing and maintaining these operations, our
business, financial condition and operating results will suffer. We have limited
experience in international operations and may not be able to compete
effectively in international markets. We face certain risks inherent in
conducting business internationally, including:
- difficulties and costs of staffing and managing international operations;
- fluctuations in currency exchange rates and imposition of currency
exchange controls;
- differing technology standards;
- difficulties in collecting accounts receivable and longer collection
periods;
- unexpected changes in regulatory requirements, including U.S. export
restrictions on encryption technologies;
- political and economic instability;
- potential adverse tax consequences; and
- reduced protection for intellectual property rights in some countries.
Any of these factors could harm our international operations and,
consequently, our business and consolidated operating results. Specifically,
failure to successfully manage international growth could result in higher
operating costs than anticipated or could delay or preclude altogether our
ability to generate revenues in key international markets.
OUR RESERVES MAY BE INSUFFICIENT TO COVER BILLS WE ARE UNABLE TO COLLECT.
We assume a certain level of credit risk with our customers in order to do
business. Conditions affecting any of our customers could cause them to become
unable or unwilling to pay us in a timely manner, or at all, for products or
services we have already provided them. For example, if the current economic
conditions continue to decline or if new or unanticipated government regulations
are enacted which affects our customers, they may be unable to pay their bills.
In the past, we have experienced significant collection delays from certain
customers, and we cannot predict whether we will continue to experience similar
or more severe delays in the future. In particular, a portion of our customers
are suffering from the general weakness in the economy and among technology
companies in particular. Although we have established reserves that we believe
are sufficient to cover losses due to delays in or inability to pay, there can
be no assurance that such reserves will be sufficient to cover such losses. If
losses due to delays or inability to pay are greater than our reserves, it could
harm our business, operating results and financial condition.
WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.
California is in the midst of a serious energy crisis that may disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below 1.5%,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout the state. If blackouts interrupt our
power supply or the power supply of any of our customers, we, or our customers,
may be temporarily unable to operate. Any interruption in our ability to
continue operations could delay the development or interfere with the sales of
our products. Future interruptions could damage our reputation, harm our ability
to retain existing customers and to obtain new customers, and could result in
lost revenue, any of which could substantially harm our business and results of
operations. Any interruption in the ability of our customers to continue
operations could also harm our
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business. We do not carry sufficient business interruption insurance to
compensate us for losses that may occur, and any losses or damages we incur
could harm our business.
Furthermore, the deregulation of the energy industry instituted in 1996 by
the California government and shortages in wholesale electricity supplies have
caused power prices to increase. If wholesale prices continue to increase, our
operating expenses will likely increase, as our headquarters and many employees
are based in California.
OUR ARTICLES OF INCORPORATION AND BYLAWS CONTAIN PROVISIONS THAT COULD DELAY OR
PREVENT A CHANGE IN CONTROL.
Our articles of incorporation and bylaws contain provisions that could
delay or prevent a change in control of our company. These provisions could
limit the price that investors might be willing to pay in the future for shares
of our common stock. Some of these provisions:
- authorize the issuance of preferred stock that can be created and issued
by our board of directors without prior shareholder approval, commonly
referred to as "blank check" preferred stock, with rights senior to those
of our common stock;
- prohibit shareholder action by written consent; and
- establish advance notice requirements for submitting nominations for
election to our board of directors and for proposing matters that can be
acted upon by shareholders at a meeting.
In March 2001, we adopted a shareholder rights plan or "poison pill." This
plan could cause the acquisition of our company by a party not approved by our
board of directors to be prohibitively expensive.
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SUPPLEMENTAL PRO FORMA FINANCIAL DATA
The following supplemental pro forma financial information presents
Critical Path's condensed consolidated results of operations during the three-
and six-month periods of 2001 and 2000, excluding the impact of certain special
charges consisting of (i) amortization of intangible assets associated with
purchase business combinations, (ii) accruals for employee retention bonuses
associated with purchase business combinations, and (iii) stock-based
compensation associated with outstanding options and warrants, (iv) one-time
charges related to our restructuring initiative, (v) impairment of long-lived
assets, (vi) write-down of investments and (vii) gain on the retirement of
convertible subordinated debt. This supplemental presentation is for
informational purposes only, and is not intended to replace the consolidated
operating results prepared and presented in accordance with generally accepted
accounting principles.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 2001 2000 2001
-------- -------- -------- --------
(UNAUDITED)
Net revenues
Software license.............................. $ 13,897 $ 8,913 $ 24,967 $ 14,463
Hosted messaging.............................. 14,220 11,141 23,315 25,580
Professional service.......................... 3,030 2,900 5,523 6,317
Maintenance and support....................... 2,348 4,131 4,243 7,868
-------- -------- -------- --------
Total net revenues.................... 33,495 27,085 58,048 54,228
-------- -------- -------- --------
Cost of net revenues
Software license.............................. 737 126 1,744 417
Hosted messaging.............................. 13,538 17,440 25,418 35,378
Professional service.......................... 1,388 2,594 2,444 5,560
Maintenance and support....................... 1,812 2,414 3,216 5,000
-------- -------- -------- --------
Total cost of net revenues............ 17,475 22,574 32,822 46,355
-------- -------- -------- --------
Gross profit.................................... 16,020 4,511 25,226 7,873
-------- -------- -------- --------
Operating expenses
Sales and marketing........................... 17,342 15,694 30,947 34,406
Research and development...................... 9,213 8,333 15,536 18,267
General and administrative.................... 7,332 11,745 14,098 25,038
-------- -------- -------- --------
Total operating expenses.............. 33,887 35,772 60,581 77,711
-------- -------- -------- --------
Loss from operations............................ (17,867) (31,261) (35,355) (69,838)
Interest and other income (expense), net........ 4,697 2,895 5,954 5,320
Interest expense................................ (5,244) (5,311) (5,501) (10,362)
Minority interest in net income of consolidated
subsidiary.................................... (325) -- (325) --
Equity in net loss of joint venture............. -- (397) -- (1,173)
-------- -------- -------- --------
Loss before income taxes........................ (18,739) (34,074) (35,227) (76,053)
Provision for income taxes...................... (1,439) (1,150) (1,799) (1,493)
-------- -------- -------- --------
Net loss........................................ $(20,178) $(35,224) $(37,026) $(77,546)
======== ======== ======== ========
Net loss per share -- basic and diluted......... $ (0.34) $ (0.48) $ (0.68) $ (1.06)
Weighted average shares -- basic and diluted.... 58,592 73,794 54,581 72,966
</Table>
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2001, our investment portfolio consisted of
available-for-sale securities, excluding those classified as cash equivalents,
of $26.6 million. These securities consist of $8.3 million of strategic equity
investments in corporate partners, certain of which are publicly traded and
marketable and certain of which are privately held and $18.3 million of high
grade low risk government securities and corporate bonds. These securities are
subject to equity price risk. Critical Path's long-term obligations consist of
our $295.0 million five-year, 5.75% Convertible Subordinated Notes due April
2005, and certain fixed rate capital leases. We do not attempt to reduce or
eliminate our market exposure on these securities.
A significant portion of our worldwide operations has a functional currency
other than the United States dollar. Accordingly, we are exposed to foreign
currency exchange rate risk inherent in our sales commitments, anticipated
sales, and assets and liabilities of these operations. Fluctuations in exchange
rates may harm our results of operations and could also result in exchange
losses. The impact of future exchange rates fluctuations cannot be predicted
adequately. To date, we have not sought to hedge the risks associated with
fluctuations in exchange rates.
Information relating to quantitative and qualitative disclosure about
market risk is set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Critical Path, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Critical Path, Inc. and its subsidiaries as of June 30, 2001, and the related
condensed consolidated statement of operations for each of the three and
six-month periods ended June 30, 2000 and June 30, 2001 and the condensed
consolidated statement of cash flows for each of the six month periods ended
June 30, 2000 and June 30, 2001. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated interim financial
statements for them to be in conformity with accounting principles generally
accepted in the United States of America.
We previously audited in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2000, and the related consolidated statements of operations, of
shareholders' equity, and of cash flows for the year then ended (not presented
herein), and in our report dated April 4, 2001 we expressed an unqualified
opinion on those financial statements. In our opinion, the information set forth
in the accompanying condensed balance sheet as of June 30, 2001, is fairly
stated in all material respects in relation to the consolidated balance sheet
from which it has been derived.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, CA
August 2, 2001
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to lawsuits in the normal course of our business. Litigation
in general, and securities and intellectual property litigation in particular,
can be expensive and disruptive to normal business operations. Moreover, the
results of complex legal proceedings are difficult to predict. Other than as
described below, we are not a party to any other material legal proceedings.
Securities Class Actions
Beginning on February 2, 2001, a number of securities class action
complaints were filed against us, certain of our current and former officers and
directors and our independent accountants in the United States District Court
for the Northern District of California. The complaints have been filed as
purported class actions by individuals who allege that they purchased our common
stock during a purported class period; the alleged class periods vary among the
complaints. The complaints have been consolidated into a single action. The
complaints generally allege that, in differing periods from December 1999 to
February 1, 2001, we and other named the defendants made false or misleading
statements of material fact about our financial statements, including our
revenues, revenue recognition policies, business operations and prospects for
the year 2000 and beyond. The complaints seek an unspecified amount in damages
on behalf of persons who purchased Critical Path stock during certain periods.
Derivative Actions
Beginning on February 5, 2001, we have been named as a nominal defendant in
a number of derivative actions, purportedly brought on our behalf, filed in the
Superior Court of the State of California and in the United States District
Court for the Northern District of California. The derivative complaints allege
that certain of Critical Path's current and former officers and directors
breached their fiduciary duties to us, engaged in abuses of their control of us,
were unjustly enriched by their sales of our common stock, engaged in insider
trading in violation of California law or published false financial information
in violation of California law. The plaintiffs seek unspecified damages on our
behalf from each of the defendants. Because of the nature of derivative
litigation, any recovery in the action would inure to our benefit.
SEC Investigation
In February 2001, the Securities and Exchange Commission issued a formal
order of investigation of Critical Path and certain unidentified individuals
associated with Critical Path with respect to non-specified accounting matters,
financial reports, other public disclosures and trading activity in our
securities. While we do not know the current status of the investigation or any
possible actions that may be taken against us as a result, any SEC action
against us could harm our business.
The uncertainty associated with substantial unresolved lawsuits and the SEC
investigation could seriously harm our business and financial condition. In
particular, the lawsuits or the investigation could harm our relationships with
existing customers and our ability to obtain new customers. The continued
defense of the lawsuits and conduct of the investigation could also result in
the diversion of our management's time and attention away from business
operations, which could harm our business. Negative developments with respect to
the lawsuits or the investigation could cause our stock price to decline
significantly. In addition, although we are unable to determine the amount, if
any, that we may be required to pay in connection with the resolution of these
lawsuits or the investigation by settlement or otherwise, the size of any such
payment could seriously harm our financial condition.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 6, 2001, an Annual Meeting of the Shareholders of Critical Path was
held at the Park Hyatt Hotel, 333 Battery Street, San Francisco, California.
At the Annual Meeting, the following persons were elected by the
Shareholders of Critical Path as directors to serve until the next annual
meeting or until their earlier resignation or removal: Kevin R. Harvey, David C.
Hayden, William E. McGlashan, Jr., Amy Rao and George Zachary.
The following table sets for the number of votes cast for and withheld,
including abstentions and broker non-votes, for the persons standing for
election as a director:
<Table>
<Caption>
VOTES FOR WITHHELD
---------- ---------
Kevin R. Harvey...................................... 43,546,697 273,184
David C. Hayden...................................... 40,806,168 3,013,713
William E. McGlashan, Jr. ........................... 43,547,925 271,956
Amy Rao.............................................. 41,147,082 2,672,799
George Zachary....................................... 43,538,614 281,267
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<Table>
3.1* Amended and Restated Articles of Incorporation.
3.2* Amendment to the Articles of Incorporation.
3.3* Amended and Restated Bylaws.
4.1* Form of Common Stock Certificate.
4.2* Preferred Stock Rights Agreement, dated as of March 29, 2001
between Critical Path, Inc. and Computershare, including the
Certificate of Determination, the form of Rights Certificate
and the Summary of Rights attached thereto as Exhibits A, B
and C, respectively.
4.3 Warrant to Purchase Common Stock of Critical Path, Inc.
issued to Vectis Group, LLC.
10.1 Finder and Advisory Agreement between Critical Path, Inc.
and Vectis Group, LLC dated as of March 29, 2001.
10.2 Strategic Analysis Agreement between Critical Path, Inc. and
Vectis Group, LLC dated as of March 29, 2001.
10.3 Advisory Services Agreement between Critical Path, Inc. and
Vectis Group LLC dated as of May 30, 2001.
15.1 Letter of PricewaterhouseCoopers LLP on Unaudited Interim
Financial Information.
</Table>
- ---------------
See Exhibit Index attached hereto, which is incorporated herein by
reference.
(b) Reports on Form 8-K
On April 2, 2001, we filed a report on Form 8-K under Item 5 and Item 7,
announcing the Company's Board of Directors had approved the adoption of a
Shareholder Rights Plan.
On April 26, 2001, we filed a report on Form 8-K under Item 5 and Item 7,
announcing a strategic reorganization, including the appointment of William
McGlashan, Jr. as interim Chief Operating Officer and Amy Rao as interim Vice
President for Sales, and the termination of Diana Whitehead, former President
and Mari Tangredi, former Executive Vice President of Business Development,
Sales and Professional Services.
On June 20, 2001, we filed a report on Form 8-K under Item 5 and Item 7,
announcing the appointment of Stephen C. Richards to the Company's Board of
Directors.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 14, 2001 CRITICAL PATH, INC.
By: /s/ LAWRENCE P. REINHOLD
------------------------------------
Lawrence P. Reinhold
Executive Vice President,
Chief Financial Officer
(Duly Authorized Officer and
Principal
Financial and Accounting Officer)
33
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INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
3.1(1) Amended and Restated Articles of Incorporation.
3.2(2) Amendment to the Articles of Incorporation.
3.3(1) Amended and Restated Bylaws.
4.1(3) Form of Common Stock Certificate.
4.2(4) Preferred Stock Rights Agreement, dated as of March 29, 2001
between Critical Path, Inc. and Computershare, including the
Certificate of Determination, the form of Rights Certificate
and the Summary of Rights attached thereto as Exhibits A, B
and C, respectively.
4.3 Warrant to Purchase Common Stock of Critical Path, Inc.
issued to Vectis Group, LLC.
10.1 Finder and Advisory Agreement between Critical Path, Inc.
and Vectis Group, LLC dated as of March 29, 2001.
10.2 Strategic Analysis Agreement between Critical Path, Inc. and
Vectis Group, LLC dated as of March 29, 2001.
10.3 Advisory Services Agreement between Critical Path, Inc. and
Vectis Group LLC dated as of May 30, 2001.
15.1 Letter of PricewaterhouseCoopers LLP on Unaudited Interim
Financial Information.
</Table>
- ---------------
(1) Incorporated by reference from Exhibits 3(i)(b) and 3(ii)(b) of Critical
Path, Inc.'s Registration Statement on Form S-1 (File Number 333-71499)
filed with the Securities and Exchange Commission on January 29, 1999.
(2) Incorporated by reference from Exhibit 3.2 of Critical Path, Inc.'s Form
10-K for the year ended December 31, 2000.
(3) Incorporated by reference from Exhibit 4.1 of Critical Path, Inc.'s
Registration Statement on Form S-1, Amendment Number 1 (File Number
333-71499) filed with the Securities and Exchange Commission on February 24,
1999.
(4) Incorporated by reference from Exhibit 4.5 of Critical Path, Inc.'s Form 8-A
filed on May 7, 2001.