AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 5, 2004
REGISTRATION NO. 333-111559
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
CRITICAL PATH, INC.
(Exact Name of Registrant as Specified in Its Charter)
<Table>
CALIFORNIA 91-1788300
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
</Table>
350 THE EMBARCADERO
SAN FRANCISCO, CA 94105-1204
(415) 541-2500
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
WILLIAM E. MCGLASHAN, JR.
CHIEF EXECUTIVE OFFICER
AND CHAIRMAN OF THE BOARD
CRITICAL PATH, INC.
350 THE EMBARCADERO
SAN FRANCISCO, CA 94105-1204
(415) 541-2500
(Name, Address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
<Table>
MICHAEL J. ZUKERMAN GREGG F. VIGNOS
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY PILLSBURY WINTHROP LLP
CRITICAL PATH, INC. P.O. BOX 7880
350 THE EMBARCADERO SAN FRANCISCO, CA 94120-7880
SAN FRANCISCO, CA 94105-1204 (415) 983-1000
(415) 541-2500
</Table>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PER UNIT AGGREGATE OFFERING PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
Rights to purchase Series E Redeemable
Convertible Preferred Stock(1)............ 14,000,000 -- -- --(2)
- ---------------------------------------------------------------------------------------------------------------------------------
Series E Redeemable Convertible Preferred
Stock, $0.001 par value per share,
issuable upon exercise of transferable
subscription rights....................... 14,000,000 $1.50 $21,000,000 $1,700(6)
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value per share,
issuable upon conversion of Series E
Redeemable Convertible Preferred 17,220,000
Stock(3).................................. shares(4) -- -- --(5)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL....................................... $1,700(6)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) The rights are being issued without consideration to the holders of the
Registrant's common stock as of the record date.
(2) Pursuant to Rule 457(g), no separate registration fee is payable with
respect to the rights being offered hereby since the rights are being
registered in the same registration statement as the securities to be
offered pursuant thereto.
(3) Associated with the Common Stock are rights to purchase Series C
Participating Preferred Stock that are not exercisable or evidenced
separately from the Common Stock prior to certain events.
(4) Represents a good faith estimate of the maximum number of shares of common
stock issuable upon conversion of the shares of Series E Redeemable
Convertible Preferred Stock being registered hereby. In accordance with Rule
416, the number of shares registered hereby shall also be deemed to include
an indeterminate number of additional shares of Common Stock that may be
issued upon conversion of the Series E Redeemable Convertible Preferred
Stock as a result of antidilution provisions thereof.
(5) Since both the shares of convertible preferred stock and the common stock
issuable upon conversion thereof are being registered under this
registration statement, pursuant to Rule 457(i) there is no separate
registration fee for the common stock.
(6) Previously paid.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MARCH 5, 2004
PROSPECTUS
(CRITICAL PATH LOGO)
UP TO 14,000,000 SHARES OF SERIES E REDEEMABLE CONVERTIBLE PREFERRED STOCK
UP TO 17,220,000 SHARES OF COMMON STOCK
---------------------
We are distributing at no charge to holders of our common stock
transferable subscription rights to purchase shares of our Series E redeemable
convertible preferred stock at a cash subscription price of $1.50 per share. You
will not be entitled to receive any subscription rights unless you are a
shareholder of record of shares of our common stock as of the close of business
on [RECORD DATE].
You must exercise your rights before they expire at 5:00 p.m., New York
City time, on , 2004, the expected expiration time of this rights
offering. We may decide to extend the expiration date but the expiration date
will not be later than , 2004. We may also elect to terminate the
rights offering at any time prior to consummation of the rights offering.
You should carefully consider whether to exercise your subscription rights
before the expiration date. Our board of directors is making no recommendation
regarding your exercise of subscription rights.
We will consummate the rights offering only if the proposals submitted to a
vote of our shareholders at our special meeting to be held on , 2004
are approved and the transactions contemplated in our agreement with the General
Atlantic Investors and the Cheung Kong Investors are consummated. If we obtain
shareholder approval and these transactions are consummated, and we issue all
the shares of Series E preferred stock offered in the rights offering, based on
current estimates, the application of generally accepted accounting principles
will cause us to record charges that will increase our net loss attributable to
common shares. Assuming we issued the Series E preferred stock in these
transactions on November 18, 2003, the date the convertible note purchase and
exchange agreement was executed and the Series E purchase price was established,
we would record a charge of approximately $46.5 million in the period our
shareholders approve the transactions and an additional $3.2 million over the
four-year redemption period of the Series E preferred stock. The actual amount
of the charges will depend on the difference between the fair value of our
common stock on the date we issue the Series E preferred stock and the
accounting conversion price of $1.50 per share.
The following table sets forth the percentage ownership of our securities
by the General Atlantic Investors and the Cheung Kong Investors if none,
one-half or all of the shares offered in the rights offering are purchased by
holders of our common stock:
<Table>
<Caption>
NUMBER OF SHARES OF SERIES E PREFERRED PERCENTAGE OF SECURITIES BENEFICIALLY PERCENTAGE OF SECURITIES BENEFICIALLY
STOCK PURCHASED IN THE RIGHTS OFFERING OWNED BY THE GENERAL ATLANTIC INVESTORS OWNED BY THE CHEUNG KONG INVESTORS
-------------------------------------- --------------------------------------- -------------------------------------
0 33.4% 29.5%
7,000,000 31.6% 27.7%
14,000,000 29.5% 26.0%
</Table>
We have agreed to offer subscription rights that are not exercised by the
expiration date of the rights offering to the General Atlantic Investors and the
Cheung Kong Investors, which have the right, but not the obligation, to purchase
the remaining shares of Series E preferred stock not purchased in this rights
offering.
In the event of a liquidation, dissolution, winding up or change of
control, the holders of Series E preferred stock will be entitled to receive at
least $1.50 per share of Series E preferred stock plus all accrued dividends on
such share before any proceeds are paid with respect to any other series or
class of our capital stock.
Shares of our common stock are traded on the Nasdaq National Market under
the symbol "CPTH." On March 4, 2004, the last reported sales price for our
common stock was $2.05 per share.
Our principal executive offices are located at 350 The Embarcadero, San
Francisco, California 94105 and our telephone number is (415) 541-2500.
---------------------
AN INVESTMENT IN OUR CAPITAL STOCK IS VERY RISKY. YOU SHOULD CAREFULLY
CONSIDER THE RISK FACTORS BEGINNING ON PAGE 1 OF THIS PROSPECTUS BEFORE
EXERCISING YOUR SUBSCRIPTION RIGHTS.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this prospectus is , 2004.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Prospectus Summary.................... ii
Questions and Answers About The Rights
Offering............................ ii
Risk Factors.......................... 1
Special Note Regarding Forward-Looking
Statements.......................... 21
Recent Developments................... 22
Deficiency of Earnings to Combined
Fixed Charges and Preferred Stock
Dividends........................... 24
Use of Proceeds....................... 24
Capitalization........................ 25
Determination of Offering Price....... 27
</Table>
<Table>
<Caption>
PAGE
----
Summary Executive Compensation........ 28
The Rights Offering................... 29
Description of Capital Stock.......... 39
Plan of Distribution.................. 45
Material United States Federal Income
Tax Consequences.................... 45
Legal Matters......................... 49
Experts............................... 49
Incorporation of Certain Documents by
Reference........................... 49
Where You Can Find More Information... 50
</Table>
This prospectus is part of a registration statement we filed with the
Securities and Exchange Commission. You should rely only on the information
contained in this prospectus or to which we have referred you. We have not
authorized anyone to provide you with different information. No dealer,
salesperson or other person is authorized to give any information or to
represent anything not contained in this prospectus. You must not rely on any
unauthorized information or representation. This prospectus is an offer to sell
only the securities offered by this prospectus, but only under circumstances and
in jurisdictions where it is lawful to do so. You should assume that the
information in this prospectus is accurate only as of the date of this
prospectus, regardless of the date of delivery of this prospectus or of any sale
of these securities. This prospectus may only be used where it is legal to sell
these securities.
i
PROSPECTUS SUMMARY
The following are summary highlights of selected information from this
prospectus and may not contain all of the information that is important to you.
This prospectus includes specific terms of the rights offering, as well as
information regarding our business. We encourage you to read this prospectus in
its entirety. You should pay special attention to the "Risk Factors" section of
this prospectus beginning on page 1. All references to "we," "our," "ours,"
"us," and "the Company," or "Critical Path" in this prospectus are to Critical
Path, Inc. and its subsidiaries, unless otherwise indicated. However, in the
descriptions of the transferable subscription rights and related matters, these
terms refer solely to Critical Path, Inc. and not to any of our subsidiaries. We
also encourage you to review the financial statements and other information
provided in the reports and other documents we file under the Securities
Exchange Act of 1934, as amended, as described in the "Where You Can Find More
Information" section of the prospectus at page 48.
QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING
Q: WHY ARE WE ENGAGING IN A RIGHTS OFFERING?
A: In November 2003, we entered into an agreement to issue $10 million in
principal amount of 10% convertible secured notes to General Atlantic
Partners 74, L.P., GAP Coinvestment Partners II, L.P., GapStart, LLC and
GAPCO GmbH & Co. K.G., (referred to collectively as the General Atlantic
Investors), and agreed to convert the notes, plus $1 million in accrued
interest, into approximately 7.3 million shares of our Series E preferred
stock. In the same agreement, we agreed to exchange approximately $32.8
million in face value of our 5 3/4% convertible subordinated notes held by a
group of investors led by Cheung Kong Group and its Whampoa Limited
affiliates including Campina Enterprises Limited, Cenwell Limited, Great
Affluent Limited, Dragonfield Limited and Lion Cosmos Limited (referred to
collectively as the Cheung Kong Investors) for approximately 21.9 million
shares of our Series E preferred stock. In January 2004, we issued $15
million in principal amount of 10% convertible secured notes to Permal U.S.
Opportunities Limited, Zaxis Equity Neutral, L.P., Zaxis Institutional
Partners, L.P., Zaxis Offshore Limited, Zaxis Partners, L.P. (referred to
collectively as the Apex Investors), and Passport Master Fund, L.P.
(referred to together with the Apex Investors as the January 2004
Investors). We will issue the Series E preferred stock to these investors
only if we receive shareholder approval of the matters being submitted for a
vote at our special meeting to be held on , 2004. Our primary
purposes for the rights offering are to raise capital necessary for us to
continue our operations and to allow the holders of our common stock an
opportunity to further invest in Critical Path and restore a portion,
although not all, of their proportionate interest in our capital stock at
the same price per share of Series E preferred stock as was established
under the agreements with the General Atlantic Investors, the Cheung Kong
Investors and the January 2004 Investors.
Q: WHAT IS THE RIGHTS OFFERING?
A: The rights offering is a distribution to holders of our common stock as of
[RECORD DATE], the record date, of up to 14,000,000 transferable
subscription rights at the rate of two subscription rights for every three
shares of common stock held on the record date. Any subscription rights you
receive based on shares of our common stock held by you on the record date
may be retained by you, and exercised or transferred prior to the expiration
of the rights offering, notwithstanding any subsequent transfer of your
shares of common stock.
Q: WHAT IS A SUBSCRIPTION RIGHT?
A: The subscription rights are rights to purchase shares of our Series E
preferred stock. Each subscription right carries with it a basic
subscription right and an over-subscription right.
ii
Q: WHAT IS THE BASIC SUBSCRIPTION RIGHT?
A: Each basic subscription right entitles you to purchase one share of our
Series E preferred stock at the subscription price of $1.50 per share. Each
share of Series E preferred stock is convertible into the number of shares
of common stock obtained by dividing $1.50 plus the amount of dividends
accreted to the Series E preferred stock from the date of issuance through
the most recent semi-annual dividend accrual date by $1.50.
Q: WHAT IS THE OVER-SUBSCRIPTION RIGHT?
A: The over-subscription right associated with each subscription right entitles
you, if you fully exercise your basic subscription right, to subscribe for
additional shares of our Series E preferred stock at the same subscription
price per share, on a pro rata basis, if any shares are not purchased by
other holders of subscription rights under their basic subscription rights
as of the expiration time. "Pro rata" means in proportion to the amount of
over-subscription price tendered by each person seeking to oversubscribe as
of the expiration time of the rights offering. The over-subscription right
must be exercised, if at all, with the basic subscription right prior to the
expiration time.
Q: HOW MANY SHARES MAY I PURCHASE IF I EXERCISE MY SUBSCRIPTION RIGHTS?
A: The number of shares of Series E preferred stock you can purchase will
depend on the number of subscription rights you receive. Holders will
receive two subscription rights for every three shares of our common stock
held on the record date.
Q: WHAT IF THERE IS AN INSUFFICIENT NUMBER OF SHARES TO SATISFY THE
OVER-SUBSCRIPTION REQUESTS?
A: If there is an insufficient number of shares of our Series E preferred stock
available to satisfy fully the over-subscription requests of rights holders,
subscription rights holders who exercised their over-subscription right will
receive the available shares pro rata based on the amount of
over-subscription price tendered by each person seeking to oversubscribe as
of the expiration time of the offering. Any excess subscription payments
will be returned, without interest or deduction, promptly after the
expiration of this rights offering.
Q: AM I REQUIRED TO PARTICIPATE IN THE RIGHTS OFFERING?
A: No.
Q: WILL CRITICAL PATH BE ISSUING FRACTIONAL SHARES OF SERIES E PREFERRED STOCK?
A: No. You may not purchase fractional shares of Series E preferred stock
pursuant to the exercise of subscription rights. We will accept any
inadvertent subscription indicating a purchase of fractional shares by
rounding down to the nearest whole share number and, as soon as practicable,
refunding without interest any payment received for a fractional share.
Q: WHAT ARE THE TERMS OF THE SERIES E PREFERRED STOCK?
A: The terms of the Series E preferred stock are as follows:
Rank: The Series E preferred stock will rank senior to all our
other capital stock with respect to rights on liquidation,
dissolution and winding up.
Dividends: The Series E preferred stock will accrue dividends at a
simple annual rate of 5 3/4% whether or not declared by the
board of directors. Dividends in respect of the Series E
preferred stock will not be paid in cash but will be added
to the value of the Series E preferred stock and will be
taken into account for purposes of determining the
liquidation and change in control preference, conversion
rate and voting rights. We must declare or pay dividends on
the Series E preferred stock when we declare or pay
dividends to the holders of common stock.
iii
Voting Rights: Holders of Series E preferred stock are entitled to notice
of all shareholders' meetings and are entitled to vote on
all matters submitted to the shareholders for a vote,
voting together with the holders of the common stock and
all other classes of capital stock entitled to vote, voting
as a single class (except where a separate vote is required
by our amended and restated articles of incorporation, our
bylaws or California law). The holders of Series E
preferred stock will be entitled to vote as a separate
class on any amendment to the terms or authorized number of
shares of Series E preferred stock, the issuance of any
equity security ranking senior to the Series E preferred
stock and the redemption of or the payment of a dividend in
respect of any junior security.
In order to comply with voting rule 4351 of the National
Association of Securities Dealers, Inc. (referred to as
the NASD), which prohibits issuers from creating a new
class of securities that votes at a higher rate than an
existing class of securities based on the relative
investment in the issuer made by the new security holders,
the voting power of the Series E preferred stock may be
impaired. The voting formula for each share of Series E
preferred stock will be the sum of $1.50 plus all accrued
dividends for such share divided by the "voting conversion
amount." The voting conversion amount will be equal to the
lower of (i) $1.70, (ii) the most recent closing bid price
of the common stock as of the date the Series E preferred
stock is first issued and (iii) the average closing bid
prices for the five trading days prior to the date the
Series E preferred stock is first issued; provided,
however, the voting conversion amount will not be less
than $1.50. The voting conversion amount will be
determined on the date the Series E preferred stock is
first issued and, once determined, will remain the same
(subject to adjustment for stock splits, subdivisions,
reclassifications, distributions and similar
transactions).
Conversion: At any time, holders of Series E preferred stock may elect
to convert their Series E preferred stock into common
stock. Each share of Series E preferred stock is
convertible into the number of shares of common stock
obtained by dividing $1.50 plus the amount of dividends
accrued to the Series E preferred stock from the date of
issuance through the most recent semi-annual dividend
accrual date by $1.50.
Call for
Redemption: After three years from the date the Series E preferred stock
is first issued, we may call for redemption the Series E
preferred stock under certain circumstances. On the fourth
anniversary of the date the Series E preferred stock is
first issued, we must call for redemption the Series E
preferred stock.
For a more complete description of the rights, preferences and privileges of the
Series E preferred stock, see "The Rights Offering -- Terms of the Series E
Preferred Stock," beginning on page 28.
Q: WHAT HAPPENS IF I CHOOSE NOT TO EXERCISE MY SUBSCRIPTION RIGHTS?
A: You will retain your current number of shares of our capital stock held
directly by you even if you do not exercise your subscription rights. If you
choose not to exercise your subscription rights, then the percentage of our
capital stock held directly by you will decrease. However, even if you
choose to exercise your subscription rights in full, your percentage
ownership of our capital stock held directly by you will still decrease. The
magnitude of the reduction will depend upon the extent to which rights
holders subscribe in the rights offering and the extent to which the General
Atlantic Investors and the Cheung Kong Investors exercise their rights to
purchase any shares of Series E preferred stock not subscribed for by the
holders of rights.
iv
Q: WHAT SHOULD I DO IF I WANT TO PARTICIPATE IN THE RIGHTS OFFERING BUT MY
SHARES ARE HELD IN THE NAME OF MY BROKER, CUSTODIAN BANK OR OTHER NOMINEE?
A: If you hold shares of our common stock through a broker, custodian bank or
other nominee, we will ask your broker, custodian bank or other nominee to
notify you of the rights offering. If you wish to exercise your subscription
rights, you will need to have your broker, custodian bank or other nominee
act for you. To indicate your decision, you should complete and return to
your broker, custodian bank or other nominee the form entitled "Beneficial
Owner Election Form." You should receive this form from your broker,
custodian bank or other nominee with the other rights offering materials.
You should contact your broker, custodian bank or other nominee if you
believe you are entitled to participate in the rights offering but you have
not received this form.
Q: WILL I BE CHARGED A SALES COMMISSION OR A FEE BY THE COMPANY IF I EXERCISE
MY SUBSCRIPTION RIGHTS?
A: No. We will not charge a brokerage commission or a fee to rights holders for
exercising their subscription rights. However, if you exercise your
subscription rights through a broker or nominee, you will be responsible for
any transaction fees charged by your broker or nominee.
Q: ARE THERE ANY CONDITIONS TO MY RIGHT TO EXERCISE MY SUBSCRIPTION RIGHTS?
A: Yes. We may cancel the rights offering if the matters set forth in our
, 2004 special meeting proxy statement are not approved or if
the subsequent closing under the convertible note purchase and exchange
agreement does not occur. We may not secure the necessary shareholder
approval or all conditions to closing may not be satisfied under the
convertible note purchase and exchange agreement. In addition, we reserve
the right to terminate the rights offering for any reason prior to the
expiration of the rights offering. For a more complete description of the
matters being submitted to a vote of our shareholders at the special
meeting, see the discussion under "Recent Developments" beginning on page 21
of this prospectus.
Q: WHAT WILL HAPPEN IF THE REQUISITE PERCENTAGE OF OUR SHAREHOLDERS DO NOT
APPROVE THE PROPOSALS AT THE SPECIAL MEETING?
A: If our shareholders do not approve the proposals at the special meeting, the
rights offering will terminate and the convertible notes held by the General
Atlantic Investors, the Cheung Kong Investors and the January 2004 Investors
will not be converted into or exchanged for Series E preferred stock.
Thereafter, the 5 3/4% notes, including those held by the Cheung Kong
Investors, and the notes held by the January 2004 Investors may be
converted, at the option of each note holder, into common stock. The 5 3/4%
notes are convertible into 2.46365 shares of common stock for each $1,000
principal amount outstanding. The notes held by the January 2004 investors
have a conversion rate of $1.65. However, the January 2004 Investors may not
convert their notes into common stock if they would beneficially own 9.9% or
more of our common stock after conversion. The notes held by the General
Atlantic Investors will remain outstanding and will not be convertible into
shares of our capital stock.
Q: WHAT IS THE BOARD OF DIRECTORS' RECOMMENDATION REGARDING WHETHER I SHOULD
EXERCISE MY RIGHTS IN THE RIGHTS OFFERING?
A: Our board of directors is not making any recommendation as to whether you
should exercise your subscription rights. You are urged to make your
decision based on your own assessment of our business and the rights
offering.
Q: HOW WAS THE SUBSCRIPTION PRICE ESTABLISHED?
A: The subscription price per share was the price proposed by the General
Atlantic Investors and the Cheung Kong Investors in connection with our
negotiation of the convertible note purchase and exchange agreement and was
approved by the independent members of our board of directors (which
v
excluded William E. McGlashan, Jr., our chief executive officer and a
related party of one of our holders of Series D preferred stock, and Raul J.
Fernandez and William E. Ford, each of whom is affiliated with the General
Atlantic Investors) based on the recommendation of the strategic
alternatives committee of the board of directors. It was also the price of
the Series E preferred stock in the January 2004 private placement.
Q: IS EXERCISING MY SUBSCRIPTION RIGHTS RISKY?
A: Yes. The exercise of your subscription rights involves risks. Exercising
your subscription rights means buying additional shares of our capital stock
and should be considered as carefully as you would consider any other equity
investment. Some of the risks of participating in the rights offering
include the following:
- In connection with the conversion of the notes held by the General
Atlantic Investors, the Cheung Kong Investors and the January 2004
Investors into shares of Series E preferred stock, the amendment of the
terms of our Series D preferred stock and other issuances of our Series E
preferred stock, including a fully subscribed rights offering, we expect
to record charges, based on current assumptions and estimates, of
approximately $50 million that will increase our net loss attributable to
our common shares which would materially and adversely affect our results
of operations for the periods in which they are recorded.
- We believe that existing capital resources will not be sufficient to
maintain current and planned operations beyond the third quarter of 2004.
Because the holders of our Series E preferred stock and our Series D
preferred stock are entitled to a liquidation preference, if we undergo a
liquidation or change in control transaction, all or substantially all of
the proceeds may be distributed to holders of our Series E preferred stock
and our Series D preferred stock in which case none of the proceeds would
be distributed to holders of our common stock.
- In order to comply with the NASD voting rules, the voting power of the
Series E preferred stock may be impaired. The extent of any impairment to
the voting rights of the holders of Series E preferred stock will not be
determined until the date the Series E preferred stock is issued, which
will be after you have submitted your irrevocable subscription payment if
you determine to participate in the rights offering.
- You may not revoke your subscription rights once you exercise your rights
and so you could be committed to buying shares above the prevailing market
value of our common stock into which the Series E preferred stock is
convertible.
- The Series E preferred stock issuable upon exercise of the rights will not
be listed on any securities exchange or the Nasdaq National Market or
included on any automated quotation system. We know of no party that
currently intends to make a market in the Series E preferred stock. An
active trading market may never develop or be sustained for the Series E
preferred shares. If there is no active trading market, or the trading
market is not sustained, you may be unable to sell your shares of Series E
preferred stock or unable to sell your shares at a price that is
satisfactory to you.
- If you do not act promptly and follow subscription instructions,
particularly if you make payment of the subscription price by personal
check, we may reject your exercise of subscription rights.
- Even if you exercise your subscription rights in connection with the
rights offering, you may be unable to preserve your proportionate
ownership interest.
- Our position for U.S. federal income tax consequences of the receipt of
the subscription rights may not be sustained by the Internal Revenue
Service.
- Among other things, you should carefully consider the risks described
under the heading "Risk Factors" beginning on page 1 for a more complete
discussion of the risks associated with an investment in our capital
stock.
vi
Q: MAY I TRANSFER MY SUBSCRIPTION RIGHTS IF I DO NOT WANT TO PURCHASE ANY
SHARES?
A: Yes. Should you choose not to exercise your subscription rights, you may
transfer your subscription rights. However, the subscription rights must
nevertheless be exercised prior to the expiration of the rights offering or
they will terminate.
Q: IS THERE AN ACTIVE TRADING MARKET FOR THE RIGHTS?
A. No. The rights have not been listed on any securities exchange or the Nasdaq
National Market or included on any automated quotation system. We know of no
party that currently intends to make a market in the rights. An active
trading market for the rights may not develop or be sustained. If there is
no active trading market, or the trading market is not sustained, you may be
unable to sell your rights or unable to sell your rights at a price that is
satisfactory to you.
Q: IS THERE AN ACTIVE TRADING MARKET FOR THE SERIES E PREFERRED STOCK?
A. No. The Series E preferred stock has not been listed on any securities
exchange or the Nasdaq National Market or included on any automated
quotation system. We know of no party that currently intends to make a
market in the Series E preferred stock. An active trading market for the
Series E preferred stock may not develop or be sustained. If there is no
active trading market, or the trading market is not sustained, you may be
unable to sell your shares of Series E preferred stock or unable to sell
your shares at a price that is satisfactory to you.
Q: HOW MANY SHARES WILL BE OUTSTANDING AFTER THE RIGHTS OFFERING, INCLUDING
THOSE OWNED BY THE GENERAL ATLANTIC INVESTORS, THE CHEUNG KONG INVESTORS AND
OUR OTHER SECURITYHOLDERS?
A: Table I summarizes information regarding the securities owned by the General
Atlantic Investors, the Cheung Kong Investors and our other securityholders,
including the January 2004 Investors, as of February 1, 2004 and the
percentages of beneficial ownership and voting power represented by these
securities. If our shareholders do not approve the conversion of the
convertible notes into Series E preferred stock at the special meeting of
our shareholders to be held on , 2004, the notes held by the
General Atlantic Investors will remain outstanding and will not be
convertible into any class or series of our capital stock. However, the
notes held by the January 2004 Investors and the Cheung Kong Investors will
be convertible at the option of each note holder, except that the January
2004 Investors may not convert their notes into common stock if any of them
(together with their affiliates) would beneficially own 9.9% or more of our
common stock after conversion.
Table II summarizes information regarding the securities owned by the
General Atlantic Investors, the Cheung Kong Investors and our other
securityholders, including the January 2004 Investors, as of February 1,
2004 and the percentages of beneficial ownership and voting power
represented by these securities, assuming our shareholders approve the
conversion of the outstanding convertible notes into shares of our Series E
preferred stock and the amendment of the certificate of designation of our
Series D preferred stock.
Tables III and IV adjust the February 1, 2004 ownership and voting power
information to give effect to the closing of the rights offering based on
two different assumptions. Table III assumes that the holders of our common
stock on [RECORD DATE] exercise their subscription rights to purchase all
approximately $21 million of Series E preferred stock offered in the rights
offering. Table IV assumes that holders of our common stock on [RECORD DATE]
do not participate in the rights offering and the General Atlantic Investors
exercise their rights to purchase 55% of the unsubscribed portion of the
rights offering and the Cheung Kong Investors exercise their rights to
purchase 45% of the unsubscribed portion of the rights offering in
accordance with our agreement with them. In addition to purchase a
percentage of the shares of Series E preferred stock not subscribed for in
the rights offering, each of the General Atlantic Investors and the Cheung
Kong Investors have the right, but not the obligation, to purchase shares of
Series E preferred stock not purchased by the other.
In a separate agreement, the Cheung Kong Investors have granted us the
option, which we may exercise in our sole discretion, to repurchase up to
approximately 10.9 million shares of their Series E preferred stock.
vii
TABLE I
<Table>
<Caption>
SECURITIES OWNED AS OF FEBRUARY 1, 2004
-------------------------------------------------------------------------------------------------
NUMBER PERCENTAGE OF
OUTSTANDING ON AN BENEFICIAL PERCENTAGE OF
AS CONVERTED TO OWNERSHIP OUR VOTING POWER
ACTUAL NUMBER COMMON STOCK REPRESENTED BY REPRESENTED BY
NAMES OF SECURITY HOLDERS CLASS OUTSTANDING BASIS SECURITIES OWNED SECURITIES OWNED
- ------------------------- ------------------------ ------------- ----------------- ---------------- ----------------
General Atlantic
Investors............. Series E Preferred Stock -- -- -- --
Series D Preferred Stock 2,545,455 9,834,161 26.0 26.0
Warrants to Purchase 625,000 625,000 1.6 1.6
Common Stock
---------- ---- ----
Total................. 10,459,161 27.6 27.6
========== ==== ====
Cheung Kong Investors... Series E Preferred -- -- -- --
Stock...................
Series D Preferred Stock 872,727 3,371,711 8.9 8.9
---------- ---- ----
Total................. 3,371,711 8.9 8.9
========== ==== ====
Other Holders(a)........ Series E Preferred -- -- --
Stock...................
Series D Preferred Stock 770,405 2,973,071 7.8 7.8
Common Stock 21,078,569 21,078,569 55.6 55.6
Warrants and Options 14,109,587 14,109,587 -- --
---------- ---- ----
Total................. 38,161,227 63.5 63.5
========== ==== ====
</Table>
TABLE II
<Table>
<Caption>
SECURITIES OWNED AS OF FEBRUARY 1, 2004 -- ASSUMING CONVERSION OF NOTES HELD BY THE GENERAL ATLANTIC
INVESTORS, THE CHEUNG KONG INVESTORS AND THE JANUARY 2004 INVESTORS INTO SERIES E PREFERRED STOCK AND THE
AMENDMENT OF THE TERMS OF THE SERIES D PREFERRED STOCK PRIOR TO THE RIGHTS OFFERING
---------------------------------------------------------------------------------------------------------
NUMBER PERCENTAGE OF PERCENTAGE OF
OUTSTANDING ON AN BENEFICIAL OUR VOTING POWER
AS CONVERTED TO OWNERSHIP REPRESENTED BY
ACTUAL NUMBER COMMON STOCK REPRESENTED BY SECURITIES
NAMES OF SECURITY HOLDERS CLASS OUTSTANDING BASIS SECURITIES OWNED OWNED(A)(B)
- ------------------------- --------------------------- ---------------- -------------------- ------------------- -------------------
General Atlantic
Investors............. Series E Preferred Stock 7,333,333 7,333,333 6.9 8.9
Series D Preferred Stock 2,545,455 27,535,652 25.9 13.5
Warrants to Purchase 625,000 625,000 0.6 0.9
Common Stock
---------- ---- ----
Total................. 35,493,985 33.4 23.2
========== ==== ====
Cheung Kong Investors... Series E Preferred Stock.. 21,863,333 21,863,333 20.6 26.5
Series D Preferred Stock 872,727 9,440,791 8.9 4.6
---------- ---- ----
Total................. 31,304,124 29.5 31.1
========== ==== ====
Other Holders(a)........ Series E Preferred Stock.. 10,744,604 10,744,609 10.1 13.0
Series D Preferred Stock 701,256 7,579,991 7.1 3.7
Common Stock 21,078,569 21,078,569 19.8 28.9
Warrants and Options 14,109,587 14,109,587 -- --
---------- ---- ----
Total................. 53,512,756 37.1 45.7
========== ==== ====
</Table>
viii
TABLE III
<Table>
<Caption>
SECURITIES OWNED AFTER RIGHTS OFFERING -- ASSUMING $21 MILLION SUBSCRIPTION BY HOLDERS OF COMMON STOCK
------------------------------------------------------------------------------------------------------
NUMBER PERCENTAGE OF PERCENTAGE OF
OUTSTANDING ON AN BENEFICIAL OUR VOTING POWER
AS CONVERTED TO OWNERSHIP REPRESENTED BY
ACTUAL NUMBER COMMON STOCK REPRESENTED BY SECURITIES
NAMES OF SECURITY HOLDERS CLASS OUTSTANDING BASIS SECURITIES OWNED OWNED(A)(B)
- ------------------------- ------------------------- -------------- ------------------ ----------------- -----------------
General Atlantic
Investors............. Series E Preferred Stock 7,333,333 7,333,333 6.1 7.6
Series D Preferred Stock 2,545,455 27,535,652 22.9 11.5
Warrants to Purchase 625,000 625,000 0.5 0.7
Common Stock
---------- ---- ----
Total................. 35,493,985 29.5 19.9
========== ==== ====
Cheung Kong Investors... Series E Preferred Stock 21,863,333 21,863,333 18.2 22.6
Series D Preferred Stock 872,727 9,440,791 7.9 4.0
---------- ---- ----
Total................. 31,304,124 26.0 26.6
========== ==== ====
Other Holders(a)........ Series E Preferred Stock 24,744,604 24,744,609 20.6 25.6
Series D Preferred Stock 701,256 7,579,991 6.3 3.2
Common Stock 21,078,569 21,078,569 17.5 24.7
Warrants and Options 14,109,587 14,109,587 -- --
---------- ---- ----
Total................. 67,512,756 44.4 53.5
========== ==== ====
</Table>
TABLE IV
<Table>
<Caption>
SECURITIES OWNED AFTER RIGHTS OFFERING -- ASSUMING $21 MILLION SUBSCRIPTION BY THE GENERAL ATLANTIC
INVESTORS AND THE CHEUNG KONG INVESTORS
----------------------------------------------------------------------------------------------------
NUMBER PERCENTAGE OF PERCENTAGE OF
OUTSTANDING ON AN BENEFICIAL OUR VOTING POWER
AS CONVERTED TO OWNERSHIP REPRESENTED BY
ACTUAL NUMBER COMMON STOCK REPRESENTED BY SECURITIES
NAMES OF SECURITY HOLDERS CLASS OUTSTANDING BASIS SECURITIES OWNED OWNED(A)(B)
- ------------------------- -------------------------- -------------- ----------------- ---------------- ----------------
General Atlantic
Investors............. Series E Preferred Stock 15,033,333 15,033,333 12.5 15.6
Series D Preferred Stock 2,545,455 27,535,652 22.9 11.5
Warrants to Purchase 625,000 625,000 0.5 0.7
Common Stock
---------- ----- -----
Total................. 43,193,985 35.9 27.8
========== ===== =====
Cheung Kong Investors... Series E Preferred Stock 28,163,333 28,163,333 23.4 29.2
Series D Preferred Stock 872,727 9,440,791 7.9 4.0
---------- ----- -----
Total................. 37,604,124 31.3 33.2
========== ===== =====
Other Holders(a)........ Series E Preferred Stock 10,744,604 10,744,609 8.9 11.1
Series D Preferred Stock 701,256 7,579,991 6.3 3.2
Common Stock 21,078,569 21,078,569 17.5 24.7
Warrants and Options 14,109,587 14,109,587 -- --
---------- ----- -----
Total................. 53,512,756 32.8 39.0
========== ===== =====
</Table>
- ---------------
(a) In order to comply with the NASD voting rules, the voting power of the
Series E preferred stock may be impaired. The percentage of voting power
represented by the Series E preferred stock in the table above assumes
holders of Series E preferred stock will be entitled to 0.8823529 votes for
each share of Series E preferred stock based on the $1.70 fair market value
of our common stock on November 18, 2003, the date we entered into the
convertible note purchase and exchange agreement. The actual voting formula
for each share of Series E preferred stock will be the sum of $1.50 plus all
accrued
ix
dividends for such share divided by the "voting conversion amount." The
voting conversion amount will be equal to the lower of (i) $1.70, (ii) the
most recent closing bid price of the common stock as of the date the Series
E preferred stock is first issued and (iii) the average closing bid prices
for the five trading days prior to the date the Series E preferred stock is
first issued; provided, however, the voting conversion amount will not be
less than $1.50. The voting conversion amount will be determined on the date
the Series E preferred stock is first issued and, once determined, will
remain the same (subject to adjustment for stock splits, subdivisions,
reclassifications, distributions and similar transactions). Pursuant to the
terms of the Series E preferred stock, the number of shares of common stock
into which the Series E preferred stock is convertible and the percentages
of beneficial ownership and voting power represented by the shares of Series
E preferred stock will increase as dividends accrue on the Series E
preferred stock.
(b) In order to comply with the NASD voting rules, the voting power of the
Series D preferred stock will be impaired after its terms are amended. As
reflected in the table above, for each share of Series D preferred stock,
the holder will initially be entitled to approximately 3.86342 votes.
Although the voting conversion ratio will remain the same (subject to
adjustment for stock splits, subdivisions, reclassifications, distributions
and similar transactions), pursuant to the terms of the Series D preferred
stock, the number of shares of common stock into which the Series D
preferred stock is convertible and the percentages of beneficial ownership
and voting power represented by the shares of Series D preferred stock will
increase as dividends accrue on the Series D preferred stock following the
amendment.
In addition to the ownership of our voting securities, holders of a
majority of the shares of Series D preferred stock have the right to designate
one director and the Cheung Kong Investors will be entitled to designate one
director. Because of their large percentage of ownership and board
representation, the General Atlantic Investors and the Cheung Kong Investors,
although unaffiliated, may have significant control over the formulation and
implementation of our corporate strategies and policies. In addition, the
significant level of General Atlantic Investors' and the Cheung Kong Investors'
ownership of our securities, assuming conversion of their outstanding
convertible notes into Series E preferred stock, could have the effect of
discouraging or impeding an acquisition proposal. See "Risk Factors" beginning
on page 1 and "The Rights Offering -- Effects of Rights Offering on the
Securities and Ownership of the General Atlantic Investors and the Cheung Kong
Investors" on page 37.
Q: AFTER I EXERCISE MY SUBSCRIPTION RIGHTS, CAN I CHANGE MY MIND AND CANCEL MY
PURCHASE?
A: No. All exercises of subscription rights are irrevocable. See "The Rights
Offering -- No Revocation" on page 36.
Q: WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF EXERCISING MY SUBSCRIPTION
RIGHTS AS A HOLDER OF COMMON STOCK?
A: While the issue is not free from doubt, our position is that a holder of
common stock should not recognize income or loss for federal income tax
purposes in connection with the receipt or exercise of subscription rights
in the rights offering. We urge you to consult your own tax advisor with
respect to the particular tax consequences of the rights offering or the
related share issuances to you. See "Material United States Federal Income
Tax Consequences" on page 44.
Q: IF THE RIGHTS OFFERING IS NOT COMPLETED, WILL MY SUBSCRIPTION PAYMENT BE
REFUNDED TO ME?
A: Yes. The subscription agent will hold all funds it receives in escrow until
completion of the rights offering. If the rights offering is not completed,
the subscription agent will return promptly, without interest or deduction,
all subscription payments. The subscription agent estimates it will take
approximately two business days following the termination of the rights
offering and clearance of subscription payments in the subscription agent's
account (which may take up to 10 business days) to return the subscription
payments.
x
Q: IF I AM A FOREIGN SHAREHOLDER OR A SHAREHOLDER WITH AN APO OR FPO ADDRESS,
HOW CAN I EXERCISE MY SUBSCRIPTION RIGHTS?
A: The subscription agent will mail rights certificates to you if you are a
rights holder whose address is outside the United States or if you have an
Army Post Office or a Fleet Post Office address. To exercise your
subscription rights, you must notify the subscription agent on or prior to
5:00 p.m., New York City time, on , 2004, and take all other steps which are
necessary to exercise your subscription rights, on or prior to that time. If
you do not follow these procedures prior to the expiration of the rights
offering, your subscription rights will expire.
Q: WHAT SHOULD I DO IF I HAVE OTHER QUESTIONS?
A: If you have questions or need assistance, please contact Georgeson
Shareholder Communications Inc., the information agent, at (800) 843-1451
for shareholders toll free and at (212) 440-9000 for banks and brokerage
firms from 9:00 a.m. to 11:00 p.m., New York City time, Monday through
Friday, and from 10:00 a.m. to 4:00 p.m., New York City time, on Saturday.
xi
RISK FACTORS
This rights offering and an investment in our Series E preferred stock and
common stock into which the Series E preferred stock is convertible involve a
high degree of risk. You should carefully consider the following material risks
and other information presented or incorporated by reference into this
prospectus before deciding to exercise your subscription rights and invest in
our Series E preferred stock and common stock. We may not successfully address
these risks.
RISKS RELATED TO OUR FINANCIAL CONDITION
WE WILL NEED TO RAISE ADDITIONAL CAPITAL AND MAY NEED TO INITIATE OTHER
OPERATIONAL STRATEGIES TO CONTINUE OUR OPERATIONS.
We believe that existing capital resources will not be sufficient to
maintain current and planned operations beyond the third quarter of 2004.
Accordingly, it is essential for us to complete a financing or other strategic
transaction prior to the fourth quarter of 2004 in order to continue to operate.
Such a financing would be dilutive to existing shareholders. If we are unable to
consummate this rights offering or complete a financing or other strategic
transaction on a timely basis, we will not be able to continue to operate beyond
the third quarter of 2004 without the protection of applicable bankruptcy laws.
If we are able to raise approximately $21 million from the rights offering,
which is the maximum amount of proceeds available to us in this rights offering,
we believe this will provide us with sufficient operating capital to continue
our operations through the first half of 2005. Even if we are able to obtain
additional financing in the near term, we may be required to raise additional
funds in the future, particularly if we are unable to generate positive cash
flow as a result of our operations. Such financing may not be available in
sufficient amounts or on terms acceptable to us. Additionally, we face a number
of challenges in operating our business, including our ability to overcome
viability concerns of our prospective customers given our current capital needs,
the amount of resources necessary to maintain worldwide operations and continued
sluggishness in technology spending.
In 2003, we hired J.P. Morgan Securities Inc. to help us identify and
pursue possible financing or strategic transactions. If JPMorgan is able to
identify one or more alternative financing, strategic or business combination
transactions, we may determine to pursue one or more of these transactions in
lieu of, or in addition to, the rights offering.
OUR INDEPENDENT ACCOUNTANTS' REPORT HAS BEEN UPDATED TO INCLUDE A GOING CONCERN
EXPLANATORY PARAGRAPH, WHICH MAY ADVERSELY AFFECT OUR STOCK PRICE AND OUR
ABILITY TO RAISE ADDITIONAL CAPITAL AND MAY CREATE A CONCERN AMONG CUSTOMERS AND
VENDORS AS TO WHETHER WE WILL BE ABLE TO FULFILL OUR CONTRACTUAL OBLIGATIONS.
We have suffered recurring losses from operations and negative cash flow
from operations. For the three quarter period ended September 30, 2003, we used
approximately $9.7 million of cash to fund our operating activities. This
factor, in combination with reliance upon debt and new equity financing to fund
the continuing losses from operations and cash flow deficits, raise substantial
doubt about our ability to continue as a going concern beyond this calendar
year. Our company's ability to continue as a going concern is dependent upon our
ability to obtain adequate financing and achieve a level of revenues adequate to
support our capital and operating requirements. PricewaterhouseCoopers LLP has
updated its report on our consolidated financial statements for the fiscal year
ended December 31, 2002 to include a going concern explanatory paragraph, which
states that "the Company has suffered recurring losses from operations and has a
net capital deficiency that raise substantial doubt about its ability to
continue as a going concern."
We are exploring opportunities to raise additional capital through various
financing vehicles, but sufficient funds may not be available to us on terms
that we deem acceptable, if they are available at all. In the event we are
unable to continue as a going concern, we may elect or be required to seek
protection from our creditors by filing a voluntary petition in bankruptcy or
may be subject to an involuntary petition in bankruptcy. The inclusion of the
going concern explanatory paragraph in PricewaterhouseCoopers LLP's audit report
may cause our stock price to fall and impair our ability to raise additional
capital. In addition,
1
the receipt of a going concern explanatory paragraph may create a concern among
our current and future customers and vendors as to whether we will be able to
fulfill our contractual obligations. As a result, current and future customers
may determine not to do business with us, which would cause our revenues to
decline.
RISKS RELATED TO THE RIGHTS OFFERING
THE SUBSCRIPTION PRICE DETERMINED FOR THIS RIGHTS OFFERING IS NOT NECESSARILY
AN INDICATION OF OUR VALUE.
The subscription price per share was the price proposed by the General
Atlantic Investors and the Cheung Kong Investors in connection with our
negotiation of the convertible note purchase and exchange agreement and was
approved by the independent members of our board of directors (which excluded
William E. McGlashan, Jr., our chief executive officer and a related party of
one of our holders of Series D preferred stock, and Raul J. Fernandez and
William E. Ford, each of whom is affiliated with the General Atlantic Investors)
based on the recommendation of the strategic alternatives committee of the board
of directors. The subscription price does not necessarily bear any relationship
to the book value of our assets, past operations, cash flows, losses, financial
condition or any other established criteria for value. You should not consider
the subscription price as an indication of the value of our Series E preferred
stock. After the date of this prospectus, our Series E preferred stock, or our
common stock into which the Series E preferred stock is convertible, may trade
at prices significantly below the subscription price and you may not be able to
recover your investment in the Series E preferred stock by selling it or the
common stock into which it is convertible.
ISSUANCE OF OUR SERIES E PREFERRED STOCK AND THE AMENDMENT TO THE TERMS OF OUR
SERIES D PREFERRED STOCK WILL CAUSE US TO RECORD CHARGES THAT INCREASE THE NET
LOSS ATTRIBUTABLE TO OUR COMMON SHAREHOLDERS, WHICH MAY BE MATERIAL TO OUR
RESULTS OF OPERATIONS FOR THE PERIOD IN WHICH THEY ARE RECORDED.
Based on our current estimates, the application of generally accepted
accounting principles to account for the rights offering, the conversion of the
notes held by the General Atlantic Investors, the Cheung Kong Investors and the
January 2004 Investors into Series E preferred stock, the amendment of the terms
of our Series D preferred stock and the issuance of Series E preferred stock in
exchange for some outstanding shares of Series D preferred stock will cause us
to record charges that increase our net loss attributable to common shares.
Because these charges will be based in part on the fair value of our common
stock and the Series E preferred stock on the date or dates the Series E
preferred stock is issued, and on the fair value of the Series D preferred stock
on the date its rights and preferences are modified, we are only able to
estimate the amount of the charges that will occur. Assuming that these
transactions occurred on November 18, 2003, except for the issuance of the notes
to the General Atlantic Investors which occurred on November 26, 2003 and the
issuance of the notes to the January 2004 Investors which occurred on January
16, 2004, and the estimated fair market values of the common stock, the Series E
preferred stock and the Series D preferred stock on such dates, we estimate that
one-time charges would total approximately $46.5 million to be recorded in the
period that shareholders approve the transactions, and that additional charges
totaling $3.2 million would be recorded over the four-year redemption period of
the Series E preferred stock if all 14 million shares of Series E preferred
stock are purchased in the rights offering. A change in the fair value of our
common stock, or our Series E preferred stock, as of the date or dates we issue
the Series E preferred stock, or our Series D preferred stock, as of the date we
amend the terms of the Series D preferred stock, would cause these estimates to
vary.
IN ORDER TO COMPLY WITH THE NASD VOTING RULES, THE VOTING POWER OF THE SERIES
E PREFERRED STOCK MAY BE IMPAIRED.
NASD rule 4351 prohibits issuers from creating a new class of securities
that votes at a higher rate than an existing class of securities or from taking
any other corporate action that disparately reduces or restricts the voting
rights of existing shareholders. Accordingly, the voting rights attributable to
the Series E preferred stock may not exceed their relative investment based on
the greater of our overall book or market value determined as of the date we
first entered into a definitive agreement to issue the Series E
2
preferred stock or the date we first issue the Series E preferred stock. The
voting rights for each share of Series E preferred stock will be determined by
using a formula which will be the sum of $1.50 plus all accrued dividends for
such share divided by the "voting conversion amount." In order to comply with
the NASD voting rule, the voting conversion amount will be equal to the lower
of:
- $1.70 (the fair market value of our common stock on November 18, 2003,
the date we first agreed to issue the Series E preferred stock),
- the most recent closing bid price of the common stock as of the date the
Series E preferred stock is first issued, and
- the average closing bid prices for the five trading days prior to the
date the Series E preferred stock is first issued,
though the conversion amount will not be less than $1.50. Accordingly, the
extent of any impairment to the voting rights of the holders of Series E
preferred stock will not be determined until the date the Series E preferred
stock is issued, which will be after you have submitted your irrevocable
subscription payment if you determine to participate in the rights offering.
THE USE OF OUR NET OPERATING LOSSES COULD BE LIMITED IF WE UNDERGO AN
OWNERSHIP CHANGE UPON EXERCISE OF THE SUBSCRIPTION RIGHTS.
If the exercise of the subscription rights causes us to undergo an
"ownership change" for federal income tax purposes (i.e., an increase by more
than 50% of the amount of stock held by one or more of our 5% shareholders
during the past 3 years), our use of our pre-change net operating losses will
generally be limited annually to the product of the long-term tax-exempt rate
(currently 4.58%) and the value of our stock immediately before the ownership
change. This could increase our federal income tax liability if we generate
taxable income in the future.
YOU MAY NOT REVOKE YOUR SUBSCRIPTION RIGHTS EXERCISE AND COULD BE COMMITTED TO
BUYING SHARES ABOVE THE PREVAILING MARKET VALUE OF OUR COMMON STOCK INTO WHICH
THE SERIES E PREFERRED STOCK IS CONVERTIBLE.
Once you exercise your subscription rights, you may not revoke the exercise
and cancel the purchase of the shares in the rights offering. The public trading
market price of our common stock may decline before the subscription rights
expire. If you exercise your subscription rights and, afterwards, the public
trading market price of our common stock decreases below the subscription price,
you will have committed to buying shares of our Series E preferred stock at a
price above the prevailing market value of our common stock into which the
Series E preferred stock is convertible. Moreover, you may be unable to sell
your shares of Series E preferred stock at a price equal to or greater than the
subscription price you paid for such shares.
IF AN ACTIVE TRADING MARKET DOES NOT DEVELOP FOR THE SERIES E PREFERRED STOCK,
THE TRADING PRICE AND LIQUIDITY OF THE SERIES E PREFERRED STOCK MAY BE
ADVERSELY AFFECTED.
The Series E preferred stock issuable upon exercise of the rights will not
be listed on any securities exchange or the Nasdaq National Market or included
on any automated quotation system. We know of no party that currently intends to
make a market in the Series E preferred stock. An active trading market for the
Series E preferred stock may not develop or be sustained. If a market does not
develop, or the trading market is not sustained, you may be unable to sell your
shares of Series E preferred stock or unable to sell your shares at a price that
is satisfactory to you. Future trading prices will also depend on many factors,
including, among others, our operating results, the price of our common stock
and the market for similar securities.
3
IF WE CANCEL THIS RIGHTS OFFERING, WE WILL NOT HAVE ANY OBLIGATION TO YOU
EXCEPT TO RETURN YOUR SUBSCRIPTION PAYMENTS.
If we elect to terminate this rights offering, we do not have any
obligation with respect to the subscription rights except to return, without
interest or deduction, any subscription payments we received from you. The
subscription agent estimates it will take approximately two business days
following the termination of the rights offering and clearance of subscription
payments in the subscription agent's account (which may take up to ten business
days) to return the subscription payments. Accordingly, if we terminate this
rights offering, you will have lost the opportunity to invest your subscription
payment in an alternative, and possibly profitable, investment during the time
your subscription payment was held by the subscription agent.
IF YOU DO NOT ACT PROMPTLY OR FAIL TO FOLLOW SUBSCRIPTION INSTRUCTIONS, WE MAY
REJECT YOUR EXERCISE OF SUBSCRIPTION RIGHTS.
Shareholders who desire to purchase shares in this rights offering must act
promptly to ensure that all required forms and payments are actually received by
the subscription agent prior to 5:00 p.m., New York City time, on , 2004, the
expiration time of this rights offering. If you are a beneficial owner of
shares, you must act promptly to ensure that your broker, custodian bank or
other nominee acts for you and that all required forms and payments are actually
received by the subscription agent prior to , 2004. We shall not be
responsible if your broker, custodian or nominee fails to ensure that all
required forms and payments are actually received by the subscription agent
prior to 5:00 p.m. on , 2004, the expiration time of this rights
offering. If you fail to complete and sign the required subscription forms, send
an incorrect payment amount, or otherwise fail to follow the subscription
procedures that apply to your exercise in this rights offering, we may,
depending on the circumstances, reject your subscription or accept it only to
the extent of the payment received. We do not undertake to contact you
concerning an incomplete or incorrect subscription form or payment, nor are we
under any obligation to correct such forms or payment. We have the sole
discretion to determine whether a subscription exercise properly follows the
subscription procedures.
IF YOU MAKE PAYMENT OF THE SUBSCRIPTION PRICE BY PERSONAL CHECK, YOUR CHECK
MUST CLEAR BEFORE THE EXPIRATION TIME OR WE WILL REJECT YOUR EXERCISE OF
SUBSCRIPTION RIGHTS.
Any personal check used to pay for shares to be issued in this rights
offering must clear prior to the expiration time of this rights offering, and
the clearing process may require five or more business days. If you choose to
exercise your subscription rights, in whole or in part, and to pay for shares by
personal check and your check has not cleared prior to the expiration time of
this rights offering, you will not have satisfied the conditions to exercise
your subscription rights and will not receive the shares you attempted to
purchase and you will lose the value of your subscription rights.
EVEN IF YOU EXERCISE YOUR SUBSCRIPTION RIGHTS IN CONNECTION WITH THE RIGHTS
OFFERING, YOU MAY BE UNABLE TO PRESERVE YOUR PROPORTIONATE OWNERSHIP INTEREST.
Even if you fully exercise your basis subscription right, and possibly your
over-subscription right, we are not offering a sufficient amount of Series E
preferred stock in the rights offering to allow you to restore your
proportionate interest prior to the consummation of the transactions
contemplated by the convertible note purchase and exchange agreement with the
General Atlantic Investors and the Cheung Kong Investors and the January 2004
private placement. Overall, as of February 1, 2004, prior to the consummation of
these transactions, the holders of common stock beneficially owned approximately
63.5% of our securities. Following consummation of these transactions, and
assuming the holders of common stock subscribe for all 14 million shares of
Series E preferred stock in the rights offering, the current holders of common
stock would beneficially own approximately 44.4% of our outstanding securities.
4
OUR POSITION REGARDING THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE RECEIPT
OF THE SUBSCRIPTION RIGHTS MAY NOT BE SUSTAINED BY THE INTERNAL REVENUE
SERVICE.
Our position for U.S. federal income tax purposes is that holders of our
common stock should not recognize taxable income upon the receipt of the
subscription rights. However, if the Internal Revenue Service does not agree
with our position, your receipt of the rights may be a taxable event to you. See
"Material United States Federal Income Tax Consequences," beginning on page 44.
RISKS RELATING TO OUR COMMON STOCK
Because the Series E preferred stock will be convertible into shares of our
common stock, there are risks relating to securities markets and the market
price of our common stock that you should consider when deciding whether to
exercise your rights.
THE CONVERSION OF OUR PREFERRED STOCK WOULD RESULT IN A SUBSTANTIAL NUMBER OF
ADDITIONAL SHARES OF COMMON STOCK OUTSTANDING, WHICH COULD DECREASE THE PRICE
OF OUR COMMON STOCK.
As of February 1, 2004, there were 4,188,587 shares of Series D preferred
stock outstanding which were convertible, at the option of the holders, into
approximately 16.2 million shares of common stock. If we obtain shareholder
approval, we will also be amending the terms of the Series D preferred stock,
including the conversion ratio, to increase the number of shares of common stock
initially issuable upon conversion of the Series D preferred stock to
approximately 44.6 million. In addition, if we obtain shareholder approval at
the special meeting of the shareholders, we will be issuing approximately 40
million shares of Series E preferred stock which are initially convertible, at
the option of the holders, into approximately 40 million shares of shares of
common stock. In addition, if all the subscription rights being offered in the
rights offering are exercised, the shares of Series E preferred stock issued in
the rights offering will initially convert into up to approximately 14.0 million
shares of common stock. Accordingly, if we obtain shareholder approval and we
sell all the shares of preferred stock offered in the rights offering, our
preferred stock will initially be convertible into approximately 98.6 million
shares of common stock. Increasing the number of additional shares of common
stock that may be sold into the market by this amount could substantially
decrease the price of our common stock.
AS THE PREFERRED STOCK ACCRUES DIVIDENDS, THE NUMBER OF SHARES OF COMMON STOCK
ISSUABLE UPON CONVERSION WILL INCREASE, WHICH MAY INCREASE THE DILUTION TO OUR
HOLDERS OF COMMON STOCK AND FURTHER DECREASE THE PRICE OF OUR COMMON STOCK.
Currently, shares of Series D preferred stock accrue dividends at a
compounded annual rate of 8%. If the maximum amount of dividends were to accrue
to the Series D preferred stock prior to the automatic call for redemption date,
a total of approximately 20.3 million shares of common stock, or an additional
4.1 million shares, would be issuable upon conversion. If our shareholders
approve the amendment to the terms of the Series D preferred stock and we issue
approximately 54 million shares of Series E preferred stock, all of which will
accrue dividends at a rate of 5 3/4% per year, and the maximum amount of
dividends accrue prior to the automatic call for redemption date, the number of
shares of common stock issuable upon conversion will increase by approximately
22.6 million shares to approximately 121.2 million shares.
OUR PREFERRED STOCK CARRIES A SUBSTANTIAL LIQUIDATION PREFERENCE, WHICH COULD
SIGNIFICANTLY IMPACT THE RETURN TO COMMON EQUITY HOLDERS UPON AN ACQUISITION.
In the event of liquidation, dissolution, winding up or change of control
of Critical Path, the holders of Series E preferred stock would be entitled to
receive $1.50 per share of Series E preferred stock plus all accrued dividends
on such share before any proceeds from the liquidation, dissolution or winding
up is paid with respect to any other series or class of our capital stock.
Accordingly, if we obtain stockholder approval for the transactions contemplated
by the convertible note purchase and exchange agreement and the January 2004
private placement, the approximately 40 million shares of Series E preferred
stock that will be outstanding will initially have an aggregate liquidation
preference of approximately $60 million. If all
5
14 million additional shares of Series E preferred stock are purchased pursuant
to the rights offering, the initial aggregate liquidation preference of the
Series E preferred stock will increase to approximately $81 million. The
aggregate amount of the preference will increase as the shares of Series E
preferred stock accrue dividends at a simple annual rate of 5 3/4%. After all of
the then outstanding shares of Series E preferred stock have received payment of
their liquidation preference, the holders of Series D preferred stock would be
entitled to receive, at a minimum, $13.75 per share of Series D preferred stock
plus all accrued dividends on such share before any proceeds from the
liquidation, dissolution or winding up is paid to holders of our common stock.
As of February 1, 2004, the shares of Series D preferred stock have an aggregate
initial liquidation preference of approximately $68.0 million, which, as
amended, will increase on a daily basis at an annual rate of 5 3/4%. As amended,
the shares of Series D preferred stock have a maximum aggregate initial
liquidation preference of approximately $91 million. If we are acquired before
the fourth anniversary of the date the shares of Series E preferred stock are
first issued, the holders of Series D preferred stock will be entitled to
receive an initial preference payment equal to approximately $91 million,
regardless of the amount of dividends accrued at the time of the acquisition.
Holders of our common stock will not receive any proceeds from a liquidation,
winding up or dissolution, including from a change of control, until after the
liquidation preferences of the our Series E preferred stock and our Series D
preferred stock are paid in full. Consequently, the sale of all or substantially
all of the shares of Critical Path may result in substantially all of the
proceeds of such transaction being distributed to the holders of our Series E
preferred stock and Series D preferred stock.
From time to time we engage in discussions with or receive proposals from
third parties relating to potential acquisitions or strategic transactions that
could constitute a change of control. We will in the future continue to evaluate
potential business combinations or strategic transactions which, if consummated,
may constitute a change of control and trigger the liquidation preferences
described above.
THE ISSUANCE OF OUR SERIES E PREFERRED STOCK TO THE GENERAL ATLANTIC INVESTORS
AND THE CHEUNG KONG INVESTORS UPON CONVERSION OF THEIR CONVERTIBLE NOTES AND
THE AMENDMENT OF THE TERMS OF THE SERIES D PREFERRED STOCK WILL RESULT IN
SIGNIFICANT EQUITY OWNERSHIP BY THE GENERAL ATLANTIC INVESTORS AND THE CHEUNG
KONG INVESTORS, WHICH MAY LIMIT THE ABILITY OF OUR OTHER SHAREHOLDERS TO
INFLUENCE SIGNIFICANT CORPORATE DECISIONS WHICH COULD DELAY OR PREVENT A
CHANGE OF CONTROL OR DEPRESS OUR STOCK PRICE.
If we obtain shareholder approval and convert the notes held by the General
Atlantic Investors and the Cheung Kong Investors into Series E preferred stock
and amend the terms of our Series D preferred stock, which are conditions to the
consummation of the rights offering, the General Atlantic Investors will
beneficially own approximately 33.4% of our outstanding securities (which
represents 23.2% of the voting power) and the Cheung Kong Investors will
beneficially own approximately 29.5% of our outstanding securities (which
represents 31.1% of the voting power). In addition, the General Atlantic
Investors have the right, but not the obligation, to purchase 55% of the shares
of Series E preferred stock not subscribed for by the holders of our common
stock and the Cheung Kong Investors have the right, but not the obligation, to
purchase 45% of the shares of Series E preferred stock not subscribed for by the
holders of our common stock. Further, the General Atlantic Investors and the
Cheung Kong Investors have the right to purchase shares of Series E preferred
stock, if any, not purchased by the other. Accordingly, the percentage ownership
of the General Atlantic Investors and the Cheung Kong Investors may increase as
a result of the rights offering. In addition, the holders of our Series D
preferred stock, which is controlled by the General Atlantic Investors, are
entitled to elect one director and, upon consummation of the transactions
contemplated by the convertible note purchase and exchange agreement, the Cheung
Kong Investors will have the right to elect one director. As a result, the
General Atlantic Investors and the Cheung Kong Investors, although not
affiliated, will have the ability, acting together, to control the outcome of
shareholder votes, including votes concerning the election of a majority of our
directors, approval of merger transactions involving us, the sale of all or
substantially all of our assets or other business combination transactions,
charter and bylaw amendments and other significant corporate actions, which
could delay or prevent a change in control or depress our stock price.
6
THE ISSUANCE OF OUR SERIES E PREFERRED STOCK TO THE GENERAL ATLANTIC INVESTORS
AND THE CHEUNG KONG INVESTORS UPON CONVERSION OF THEIR CONVERTIBLE NOTES AND
THE AMENDMENT OF THE TERMS OF THE SERIES D PREFERRED STOCK WILL RESULT IN
SIGNIFICANT EQUITY OWNERSHIP BY THE GENERAL ATLANTIC INVESTORS AND THE CHEUNG
KONG INVESTORS, WHICH MAY RESULT IN POTENTIAL CONFLICTS OF INTERESTS, WHICH
COULD ADVERSELY AFFECT THE HOLDERS OF OUR COMMON STOCK, DELAY A CHANGE IN
CONTROL AND DEPRESS OUR STOCK PRICE.
The significant equity ownership by each of the General Atlantic Investors
and the Cheung Kong Investors could create conflicts of interest between these
majority shareholders and our other shareholders and between the General
Atlantic Investors and the Cheung Kong Investors. For example, the General
Atlantic Investors and the Cheung Kong Investors can approve a change in control
transaction in order to receive payment of their liquidation preference even if
our other shareholders oppose the transaction, which could depress the price of
our common stock. Alternatively, the General Atlantic Investors and the Cheung
Kong Investors may prevent or delay a corporate transaction that is favored by
our other shareholders. In addition, it is also possible that the risk that the
General Atlantic Investors and the Cheung Kong Investors may disagree on
approving a significant corporate transaction, for example a change in control
transaction, could depress our stock price, limit the number of potential
investors willing to pursue such a transaction with us or limit the price that
investors might be willing to pay for future shares of our common stock.
WE MAY NOT BE ABLE TO MAINTAIN OUR LISTING ON THE NASDAQ NATIONAL MARKET, AND
IF WE FAIL TO DO SO, THE PRICE AND LIQUIDITY OF OUR COMMON STOCK MAY DECLINE.
The Nasdaq Stock Market has quantitative maintenance criteria for the
continued listing of common stock on the Nasdaq National Market. The current
requirements affecting us include (i) having total assets of at least $50
million, (ii) having total revenue of $50 million, and (iii) maintaining a
minimum closing bid price per share of $1.00. On December 23, 2002, The Nasdaq
Stock Market Inc. issued a letter to the Company that it was not in compliance
with the minimum closing bid price requirement and, therefore, faced delisting
proceedings. Since that time, we have worked with The Nasdaq Stock Market in an
effort to maintain our listing. On July 24, 2003, The Nasdaq Stock Market
notified us that we had regained compliance with the requirements for continued
listing. Nevertheless, we may not be able to comply with the quantitative or
quantitative maintenance criteria or any of the Nasdaq National Market's listing
requirements or other rules, or other markets listing requirements to the extent
our stock is listed elsewhere, in the future. If we fail to maintain continued
listing on the Nasdaq National Market and must move to a market with less
liquidity, our stock price would likely further decline. If we are delisted, it
could have a material adverse effect on the market price of, and the liquidity
of the trading market for, our common stock.
OUR STOCK PRICE HAS DEMONSTRATED VOLATILITY AND OVERALL DECLINES DURING RECENT
QUARTERS AND CONTINUED VOLATILITY IN THE STOCK MARKET MAY CAUSE FURTHER
FLUCTUATIONS AND/OR DECLINE IN OUR STOCK PRICE.
The trading price of our common stock has been and may continue to
experience volatility, wide fluctuations and declines. For example, during the
fourth quarter of 2003, the closing sale prices of our common stock on the
Nasdaq National Market ranged from $1.26 on December 29, 2003 to $3.21 on
October 31, 2003 and November 3, 2003. Our stock price may further decline or
fluctuate in response to any number of factors and events, such as announcements
related to technological innovations, intense regulatory scrutiny and new
corporate and securities and other legislation, strategic and sales
relationships, new product and service offerings by us or our competitors,
litigation outcomes, changes in senior management, changes in financial
estimates and recommendations of securities analysts, the operating and stock
price performance of other companies that investors may deem comparable, news
reports relating to trends in our markets and the market for our stock, media
interest in accounting scandals and corporate governance questions, overall
market conditions and domestic and international economic factors unrelated to
our performance. In addition, the stock market in general, particularly with
respect to technology stocks, has experienced extreme volatility and a
significant cumulative decline in recent quarters. This volatility and decline
has affected many companies, including our company, irrespective of the specific
operating
7
performance of such companies. These broad market influences and fluctuations
may adversely affect the price of our stock, and our ability to remain listed on
the Nasdaq National Market, regardless of our operating performance or other
factors.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES, EXPECT CONTINUING LOSSES AND MAY NEVER ACHIEVE
PROFITABILITY.
As of September 30, 2003, we had an accumulated deficit, including other
comprehensive income, of approximately $2.2 billion. We have not achieved
profitability in any period and may continue to incur net losses in accordance
with generally accepted accounting principles for the foreseeable future.
However, we intend to continue to spend resources on maintaining and
strengthening our business, and this may, in the near term, cause our operating
expenses to increase and our operating results to decline.
In past quarters, we have spent heavily on technology and infrastructure
development. We may continue to spend substantial financial and other resources
to further develop and introduce new messaging and directory infrastructure
solutions, and to improve our sales and marketing organizations, strategic
relationships and operating infrastructure. We expect that our cost of revenues,
sales and marketing expenses, general and administrative expenses, operations,
research and customer support expenses and depreciation and amortization
expenses could continue to increase in absolute dollars and may increase as a
percent of revenues. In addition, in future periods we may incur significant
non-cash charges related to stock-based compensation. If revenues do not
correspondingly increase, our operating results could decline. 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
also may never obtain sufficient revenues to exceed our cost structure and
achieve profitability. If we do achieve profitability, we may not be able to
sustain or increase profitability in the future. This may also, in turn, cause
the price of our common stock to demonstrate volatility and/or continue to
decline.
OUR CASH RESOURCES LOCATED IN ACCOUNTS OUTSIDE OF THE UNITED STATES MAY NOT BE
READILY AVAILABLE FOR OUR DOMESTIC OPERATIONS.
We may face restrictions on our ability to use cash that we currently hold
outside of the United States for purposes other than the operation of each of
our respective foreign subsidiaries that hold cash. For example, our ability to
use cash held in our German subsidiary for any reason other than the operation
of this subsidiary may result in certain tax liabilities and may be subject to
local laws that could prevent the transfer of cash from Germany to any other
foreign or domestic account. At September 30, 2003, approximately $6.5 million
was held outside of the United States. Our inability to utilize this cash could
slow our ability to grow our business and reach our business objectives. We may
also be forced to incur certain costs, such as tax liabilities, to be able to
use this cash for domestic operations, which could cause our expenses to
increase and our operating results to decline.
DUE TO OUR EVOLVING BUSINESS STRATEGY AND THE NATURE OF THE MESSAGING AND
DIRECTORY INFRASTRUCTURE MARKET, OUR FUTURE REVENUES ARE UNPREDICTABLE AND OUR
QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
We cannot accurately forecast our revenues as a result of our evolving
business strategy and the emerging nature of the Internet messaging
infrastructure market. Forecasting is further complicated by recent strategic
and operational restructurings, as well as significant fluctuations in license
revenues as a percentage of total revenues from 38% in 2000 to 30% in 2001, 40%
in 2002 and 28% for the nine month period ended September 30, 2003. Our revenues
in some past quarters fell and could continue to fall short of expectations if
we experience delays or cancellations of even a small number of orders. We often
offer volume-based pricing, which may affect our operating margins. A number of
factors are likely to cause fluctuations in operating results, including, but
not limited to:
- the demand for licensed solutions for messaging, and identity management
products;
8
- the demand for outsourced messaging services generally and the use of
messaging and identity management infrastructure products and services in
particular;
- our ability to attract and retain customers and maintain customer
satisfaction;
- our ability to attract and retain qualified personnel with industry
expertise, particularly sales personnel;
- the ability to upgrade, develop and maintain our systems and
infrastructure and to effectively respond to the rapid technology change
of the messaging and identity management infrastructure market;
- the budgeting and payment cycles of our customers and potential
customers;
- the amount and timing of operating costs and capital expenditures
relating to expansion of business and infrastructure;
- our ability to quickly handle and alleviate technical difficulties or
system outages;
- the announcement or introduction of new or enhanced services by
competitors;
- general economic and market conditions and their affect on our operations
and the operations of our customers; and
- the effect of war on terrorism and any related conflicts or similar
events worldwide.
In addition to the factors set forth above, operating results have been and
will continue to be impacted by the extent to which we incur non-cash charges
associated with stock-based arrangements with employees and non-employees. In
particular, during the year ended December 31, 2002 and the three months ended
March 31, 2003, we incurred stock-based compensation expense of $10.0 million
and $59,000, respectively, relating to the grant of options and warrants to
employees and non-employees in prior years. As of March 31, 2003, we had
recognized all stock-based compensation related to these prior grants. We also
incurred non-cash charges of $182,000 during the nine months ended September 30,
2003, associated with the acceleration of vesting of stock options and the
extension of stock options exercise periods in connection with employee
terminations. Grants of options and warrants also may be dilutive to existing
shareholders.
Our revenues and operating results have declined and could continue to
decline as a result of the elimination of product or service offerings through
termination, sale or other disposition. Future decisions to eliminate, revise or
limit any other offerings of a product or service would involve other factors
that could cause our revenues to decline and our expenses to increase, including
the expenditure of capital, the realization of losses, further reductions in our
workforce, facility consolidation or the elimination of revenues along with the
associated costs.
As a result of the foregoing, we do not believe that period-to-period
comparisons of operating results are a good indication of future performance. It
is likely that operating results in some quarters will be below market
expectations. In this event, the price of our common stock is likely to prove
volatile and/or subject to further declines.
IF WE FAIL TO IMPROVE OUR SALES AND MARKETING RESULTS, WE MAY BE UNABLE TO
GROW OUR BUSINESS, WHICH COULD CAUSE OUR OPERATING RESULTS TO DECLINE.
Our ability to increase revenues will depend on our ability to continue
successfully to recruit, train and retain experienced and effective sales and
marketing personnel and for our personnel to achieve results once they are
employed with us. Competition for experienced and effective personnel in certain
markets is intense and we may not be able to hire and retain personnel with
relevant experience. The complexity and implementation of our messaging and
identity management 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-
9
users. Any delays or difficulties encountered in our staffing and training
efforts would impair our ability to attract new customers and enhance our
relationships with existing customers, and ultimately, grow revenues. This would
also adversely impact the timing and extent of our revenues from quarter to
quarter and overall or could jeopardize sales altogether. Because we have
experienced turnover in our sales force and have fewer resources than many of
our competitors, our sales and marketing organizations may not be able to
compete successfully against the sales and marketing organizations of our
competitors. Moreover, our competitors frequently have larger and more
established sales forces calling upon potential enterprise customers with more
frequency. In addition, certain of our competitors have longer and closer
relationships with the senior management of enterprise customers who decide
whose technologies and solutions to deploy. If we do not successfully operate
and grow our sales and marketing activities, our revenues and operating results
could decline and the price of our common stock could continue to decline.
WE HAVE EXPERIENCED SIGNIFICANT TURNOVER OF SENIOR MANAGEMENT AND OUR CURRENT
EXECUTIVE MANAGEMENT TEAM HAS BEEN TOGETHER FOR A LIMITED TIME, WHICH COULD
SLOW THE GROWTH OF OUR BUSINESS AND CAUSE OUR OPERATING RESULTS TO DECLINE.
Throughout 2002, 2003 and the early part of 2004, we announced a series of
changes in our management that included the departure of many senior executives,
and there have also been many changes in our board of directors. Many of the
members of the current board of directors and senior executives of the Company
joined us in 2002 and 2003, and we may continue to make additional changes to
our senior management team. Our chief financial officer, James Clark, joined us
on February 4, 2004. Because of these changes, our management team has not
worked together as a group for a significant length of time and may not be able
to work together effectively to successfully execute on revenue goals, implement
our strategies and manage our operations. If our management team is unable to
accomplish our business objectives, our ability to grow our business and
successfully meet operational challenges could be severely impaired. We do not
have long-term employment agreements with any of our executive officers. It is
possible that this high turnover at our senior management levels may also
continue for a variety of reasons. The loss of the services of one or more of
our key senior executive officers could also affect our ability to successfully
implement our business objectives which could slow the growth of our business
and cause our operating results to decline.
WE DEPEND ON STRATEGIC RELATIONSHIPS AND THE LOSS OF ANY KEY STRATEGIC
RELATIONSHIPS COULD REDUCE OUR ABILITY TO SELL OUR PRODUCTS AND SERVICES AND
OUR REVENUES TO DECLINE.
We depend on strategic relationships to expand distribution channels and
opportunities and to undertake joint product development and marketing efforts.
Our ability to increase revenues depends upon aggressively marketing our
services through new and existing strategic relationships. In the third quarter
of 2002, we entered into certain partnership agreements in our hosted messaging
business with the Hewlett-Packard Company for the development and marketing of a
complete managed messaging solution. In coming quarters we will continue to
invest heavily in this relationship and make changes in our operations,
including completion of the outsourcing of our data operations, to accommodate
the integration of this partnership. To the extent this integration does not
proceed as anticipated or the anticipated benefits of this partnership are not
borne out, our revenues may not reach the level expected from the amount of
capital we have invested in this relationship and our financial results may
decline. In addition, if service levels are not adequate in connection with the
outsourcing of our data centers, our customers may terminate agreements and our
revenues will decline. We have also invested heavily and continue to invest in
this model of hosted services operations. To the extent this strategic decision
and the business relationships surrounding its execution do not prove profitable
and productive, our revenues and financial results could decline. We also depend
on a broad acceptance of our software and outsourced messaging services on the
part of potential resellers and partners and our acceptance as a supplier of
outsourced messaging solutions. We also depend on joint marketing and product
development through strategic relationships to achieve further market acceptance
and brand recognition. Our agreements with strategic partners typically do not
restrict them from introducing competing services. These agreements typically
are for terms of one to three years, and automatically renew for additional
one-year periods unless either party
10
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 a period of 30 to 120 days notice. Most of
our hosted customer agreements also provide for the partial refund of fees paid
or other monetary penalties in the event that our services fail to meet defined
minimum performance standards. Distribution partners may choose not to renew
existing arrangements on commercially acceptable terms, or at all. In addition
to strategic relationships, we also depend on the ability of our customers
aggressively to sell and market our services to their end-users. If we lose any
strategic relationships, fail to renew these agreements or relationships, fail
to fully exploit our relationships, or fail to develop new strategic
relationships, we could encounter increased difficulty in selling our products
and services.
A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF OUR REVENUES
AND IF WE LOSE A MAJOR CUSTOMER OR ARE UNABLE TO ATTRACT NEW CUSTOMERS,
REVENUES COULD DECLINE.
We expect that sales of our products and services to a limited number of
customers will continue to account for a high percentage of our revenue for the
foreseeable future. For example, for the nine-month period ended September 30,
2003, our top 10 customers accounted for approximately 29% of our total
revenues. Similarly, for the year ended December 31, 2002, our top 10 customers
accounted for approximately 31% of our total revenues and, for the year ended
December 31, 2001, our top 10 customers accounted for approximately 20% of our
total revenues. Our future success depends on our ability to retain our current
customers, and to attract new customers, in our target markets. The loss of one
or several major customers, whether through termination of agreements,
acquisitions or bankruptcy, could significantly reduce our revenues. Our
agreements with our customers typically have terms of one to three years often
with automatic one-year renewals and can be terminated without cause upon
certain notice periods that vary among our agreements and range from a period of
30 to 120 days notice.
In addition, a number of our customers, particularly for our hosted
services business and in the technology industry, have also suffered from
falling revenue. Especially in the telecommunications industry, which
represented 57% of the revenues from our top 10 customers for the nine-month
period ended September 30, 2003. Similarly, customers in the telecommunications
industry accounted for 44% of revenues from our top 10 customers for the year
ended December 31, 2002 and for 55% of revenues from our top 10 customers for
the year ended December 31, 2001. The relative financial performance of our
customers will continue to impact our sales cycles and our ability to attract
new business. Worldwide technology spending has also decreased in recent
quarters across all industries. If our customers terminate their agreements for
any reason before the end of the contract term, the loss of the customer could
reduce our current and future revenues. Also, if we are unable to enter into
agreements with new customers and develop business with our existing 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 ABILITY TO
RETAIN OUR CUSTOMERS AND ATTRACT NEW CUSTOMERS COULD DECLINE.
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 primary competitors for service providers seeking
insourced or outsourced product-based solutions are Sun Microsystems' iPlanet,
OpenWave Systems, Inc., Mirapoint, Inc., Oracle Corporation, Microsoft
Corporation and IBM Corporation's Lotus Division. In the enterprise eBusiness
directory category, we compete primarily with iPlanet, Microsoft Corporation and
Novell Corporation, and our competitors in the meta-directory market are
iPlanet, Microsoft, Novell and Siemens Corporation. Our competitors for
corporate customers seeking outsourced hosted messaging solutions are e-mail
service providers, such as CommTouch, Easylink Services Corporation (formerly
Mail.com), USA.Net and application service providers who offer hosted
communications services and hosted Microsoft Exchange services.
11
WE BELIEVE THAT SOME OF THE COMPETITIVE FACTORS AFFECTING THE MARKET FOR
MESSAGING AND IDENTITY MANAGEMENT INFRASTRUCTURE SOLUTIONS INCLUDE:
- breadth of platform features and functionality of our offerings and the
sophistication and innovation of competitors;
- total cost of ownership and operation;
- scalability, reliability, performance and ease of expansion and upgrade;
- ease of integration to customers' existing systems; and
- 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.
We believe competition will continue to be fierce and further increase as
current competitors aggressively pursue customers, increase the sophistication
of their offerings and as new participants enter the market. Many of our current
and potential competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than we do and may enter into strategic or commercial
relationships with larger, more established and better-financed companies. Any
delay in our development and delivery of new services or enhancement of existing
services would allow our competitors additional time to improve their service or
product offerings, and provide time for new competitors to develop and market
messaging and directory infrastructure products and services and solicit
prospective customers within our target markets. Increased competition could
result in pricing pressures, reduced operating margins and loss of market share,
any of which could cause our financial results to decline.
WE MAY NOT BE ABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE OF THE
MESSAGING AND IDENTITY MANAGEMENT INFRASTRUCTURE INDUSTRY.
The messaging and identity management 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 develop or introduce and improve the
performance, features and reliability of our services, particularly in response
to competitive offerings. Our success depends, in part, on our ability to
enhance our existing email and messaging services and to develop new services,
functionality and technology that address the increasingly sophisticated and
varied needs of prospective customers. If we do not properly identify the
feature preferences of prospective customers, or if we fail to deliver email
features that meet the standards of these customers, our ability to market our
service successfully and to increase revenues could be impaired. The development
of proprietary technology and necessary service enhancements entails significant
technical and business risks and requires substantial expenditures and
lead-time. We may not be able to keep pace with the latest technological
developments. We may also be unable to use new technologies effectively or adapt
services to customer requirements or emerging industry standards.
OUR SALES CYCLE IS LENGTHY, AND ANY DELAYS OR CANCELLATIONS IN ORDER IN A
PARTICULAR QUARTER COULD CAUSE OUR OPERATING RESULTS TO BE BELOW EXPECTATIONS
WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE.
Because we sell complex and sophisticated technology, our sales cycle, in
particular with respect to our software solutions, can be long and
unpredictable, often taking between four to 18 months. Because of the nature of
our product and service offerings it can take many months of customer education
and product evaluation before a purchase decision is made. In addition, many
factors can influence the decision to purchase our product and service offerings
including budgetary restraints and decreases in capital expenditures, quarterly
fluctuations in operating results of customers and potential customers, the
emerging and evolving nature of the internet-based services and wireless
services markets. Furthermore, general global economic conditions, and weakness
in global securities markets, continuing recessionary spending
12
levels, and a protracted slowdown in technology spending in particular, have
further lengthened and affected our sales cycle. Such factors have led to and
could continue to lead to delays and postponements in purchasing decisions and
in many cases cancellations of anticipated orders. Any delay or cancellation in
sales of our products or services could cause our operating results to be lower
than those projected and cause our stock price to decline.
FAILURE TO RESOLVE PENDING SECURITIES CLAIMS AND OTHER MATERIAL LAWSUITS MAY
LEAD TO CONTINUED COSTS AND EXPENSES AND INCREASED DOUBTS FROM EXISTING AND
POTENTIAL CUSTOMERS AND INVESTORS AS TO OUR PROSPECTS, WHICH COULD CAUSE OUR
REVENUES AND OUR STOCK PRICE TO DECLINE.
We are a defendant in a shareholder lawsuit filed in San Diego Superior
Court by shareholders of one of our former customers alleging we participated in
fraudulent transactions to inflate artificially revenues of that customer. We
are also a defendant in a number of securities class action lawsuits filed in
the U.S. District Court for the Southern District of New York, alleging that
prospectuses under which securities were sold contained false and misleading
statements with respect to discounts and commissions received by underwriters.
Should these lawsuits linger for a long period of time, whether ultimately
resolved in our favor or not, or further lawsuits be filed against us, coverage
limits of our insurance or our ability to pay such amounts may not be adequate
to cover the fees and expenses and any ultimate resolution associated with such
litigation. Likewise, we may not be able to conclude or settle such litigation
on terms that coincide with the coverage limits of our insurance or ability to
pay upon any final determination. It is also likely that our insurance may not
cover some or all of the claims alleged in the pending lawsuits, which would
require us, rather than our insurance carrier, to pay all or some of the
expenses and damages, if any, relating to these claims. The size of these
payments, individually or in the aggregate, could seriously impair our cash
reserves and financial condition. The continued defense of these lawsuits also
could result in continued diversion of our management's time and attention away
from business operations, which could cause our financial results to decline. A
failure to resolve definitively current or future material litigation in which
we are involved or in which we may become involved in the future, regardless of
the merits of the respective cases, could also cast doubt as to our prospects in
the eyes of our customers, potential customers and investors, which could cause
our revenues and stock price to further decline.
LINGERING EFFECTS OF THE RECENT SEC INVESTIGATION COULD CAUSE FURTHER
DISRUPTION IN OUR OPERATIONS AND LEAD TO A DECLINE IN OUR FINANCIAL RESULTS.
In 2001, the SEC investigated the Company and certain of its former
officers and directors related to non-specified accounting matters, financial
reports, other public disclosures and trading activity in our stock. In February
2002, the SEC concluded the investigation as to the Company. We consented,
without admitting or denying liability, to a cease and desist order and an
administrative order for violation of certain non-fraud provisions of the
federal securities laws. In addition, since then the SEC and the Department of
Justice charged five former employees of the Company with various violations of
the securities laws. We believe that the investigation continues with respect to
a number of other former executives and employees of the Company and expect that
such investigation may result in further charges against former employees
although we do not know the status of such investigation. Despite the conclusion
of the investigation of the Company, lingering concerns about these actions have
nevertheless cast doubt on the future of the Company in the eyes of customers
and investors. In addition, a number of recent arrests, allegations and
investigations in connection with accounting improprieties, insider trading and
fraud at other public companies have created investor uncertainty and scrutiny
in general as to the stability and veracity of public companies' financial
statements. Such lingering doubts stemming from the Company's past accounting
restatements and such general market uncertainty could cause the price of our
common stock to continue to fluctuate and/or decline further.
13
OUR FAILURE TO CAREFULLY MANAGE EXPENSES AND GROWTH COULD REQUIRE US TO USE
SUBSTANTIAL RESOURCES AND CAUSE OUR OPERATING RESULTS TO DECLINE.
In the past, our management of operational expenses, including the
restructurings of our operations, and the growth of our business have placed
significant strains on managerial, operational and financial resources and
contributed to our history of losses. In addition, to manage any future growth
and profitability, 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. If we cannot
manage growth and expenses effectively, our business and operating results could
decline.
LIMITATIONS OF OUR DIRECTOR AND OFFICER LIABILITY INSURANCE MAY CAUSE US TO
USE OUR CAPITAL RESOURCES, WHICH COULD CAUSE OUR FINANCIAL RESULTS TO DECLINE
OR SLOW OUR GROWTH.
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 former executive
officers are alleged to have occurred, provided only limited liability
protection. These insurance policies may not cover pending matters and related
expenses from that period or future periods. If these policies do not adequately
cover our expenses related to those lawsuits and the investigation, we will need
to use our capital resources to fund these expenses which would diminish our
capital resources available to fund our general operations and our growth. Our
current director and officer liability insurance, which was put in place in
March 2003, and continues through March 2004, contains similar provisions, and
in the event circumstances arise requiring coverage by these policies, the
policies may not be adequate for the liabilities and expenses potentially
incurred. To the extent liabilities, expenses or settlements exceed the
limitations or are outside of the scope of coverage, our business and financial
condition could materially decline.
Under California law, in connection with our charter documents and
indemnification agreements we entered into with our executive officers and
directors, we must indemnify our current and former officers and directors to
the fullest extent permitted by law. The indemnification covers any expenses and
liabilities reasonably incurred in connection with the investigation, defense,
settlement or appeal of legal proceedings. The Company has made payments in
connection with the indemnification of officers and directors in connection with
currently pending lawsuits and has reserved for estimated future amounts to be
paid in connection with legal expenses and others costs of defense of pending
lawsuits.
WE MAY EXPERIENCE DIFFICULTY IN ATTRACTING AND RETAINING KEY PERSONNEL, WHICH
MAY NEGATIVELY AFFECT OUR ABILITY TO DEVELOP NEW SERVICES OR RETAIN AND
ATTRACT CUSTOMERS.
The loss of the services of key personnel may create a negative perception
of our business and adversely affect our ability to achieve our business goals.
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. In addition,
volatility and declines in our stock price may also affect our ability to retain
key personnel, all of whom have been granted stock-based incentive compensation.
In recent quarters we have also initiated reductions in our work force and job
eliminations to balance the size of our employee base with anticipated revenue
levels. Reductions in our workforce could make it difficult to motivate and
retain remaining employees or attract needed new employees, and provide
distractions affecting our ability to deliver products and solutions in a timely
fashion and provide a high level of customer service and support.
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
14
services of one or more of our current key personnel could make it difficult to
successfully implement our business objectives.
IF WE ARE NOT SUCCESSFUL IN IMPLEMENTING STRATEGIC PLANS FOR OUR OPERATIONS,
OUR EXPENSES MAY NOT BE OFFSET BY OUR CORRESPONDING SALES AND OUR FINANCIAL
RESULTS COULD SIGNIFICANTLY DECLINE.
In 2002, we incurred a number of restructuring charges related to the right
sizing of our business given market conditions and the current operating
environment. These efforts included additional facilities and equipment lease
terminations, continuing expense management and headcount reductions. In 2003,
we continued to restructure our operations including consolidating some office
locations and reducing our global workforce by approximately 175 positions, or
approximately 30% of the workforce. We expect to continue to make determinations
about the strategic future of our business and operations, and our ability to
execute on such plans effectively and to make such determinations prudently
could affect our future operations. A failure to execute successfully on such
plans and to plan appropriately could cause or expenses to continue to outpace
our revenues and our financial condition could significantly decline.
WE MAY EXPERIENCE A DECREASE IN MARKET DEMAND DUE TO THE SLOWED ECONOMY IN THE
UNITED STATES, WHICH HAS BEEN FURTHER STYMIED BY THE CONCERNS OF TERRORISM,
WAR AND SOCIAL AND POLITICAL INSTABILITY.
Economic growth has slowed significantly. In addition, the terrorist
attacks in the United States and turmoil and war in the Middle East have
increased the uncertainty in the United States economy and may further add to
the decline in the United States business environment. The war on terrorism,
along with the effects of terrorist attacks and other similar events, and the
war in Iraq, could contribute further to the slowdown of the already slumping
market demand for goods and services, including digital communications software
and services. If the economy continues to decline as a result of the recent
economic, political and social turmoil, or if there are further terrorist
attacks in the United States or elsewhere, or as a result of the war in the
Middle East and elsewhere, we may experience decreases in the demand for our
products and services, which may cause our operating results to decline.
WE MAY FACE CONTINUED TECHNICAL, OPERATIONAL AND STRATEGIC CHALLENGES
PREVENTING US FROM SUCCESSFULLY INTEGRATING OR DIVESTING ACQUIRED BUSINESSES.
Acquisitions involve risks related to the integration and management of
acquired technology, operations and personnel. In addition, in connection with
our strategic restructuring, the Company elected to divest or discontinue many
of the acquired businesses. Both the integration and divestiture of acquired
businesses have been and will continue to be complex, time consuming and
expensive processes, which may disrupt and distract our management. With respect
to integration, we must operate as a combined organization utilizing common
information and communication systems, operating procedures, financial controls
and human resources practices to be successful. With respect to the
divestitures, the timing and transition of those businesses and their customers
to other entities has required and will continue to require resources from our
legal, finance and corporate development teams as well as expenses associated
with the conclusion of those transactions, winding up of entities and
businesses. In addition to the added costs of the divestitures, we may not
ultimately achieve anticipated benefits and/or cost reductions from such
divestitures.
In the past, due to the significant underperformance of some of our
acquisitions relative to expectation, we eliminated certain acquired product or
service offerings through termination, sale or other disposition. Such decisions
to eliminate or limit our offering of an acquired product or service involved
and could continue to include the expenditure of capital, the realization of
losses, further reduction in workforce, facility consolidation and the
elimination of revenues along with the associated costs, any of which could
cause our operating results to decline.
15
WE CURRENTLY LICENSE MANY THIRD-PARTY TECHNOLOGIES AND MAY NEED TO LICENSE
FURTHER TECHNOLOGIES WHICH COULD DELAY AND INCREASE THE COST OF PRODUCT AND
SERVICE DEVELOPMENTS.
We intend to continue to license certain technologies from third parties
and incorporate them into our products and services, including web server
technology, virus and anti-spam solutions, storage and encryption technology and
billing and customer tracking solutions. The market is evolving and we may need
to license additional technologies to remain competitive. We may not be able to
license these technologies on commercially reasonable terms or at all. To the
extent we cannot license needed technologies or solutions, we may have to devote
our resources to the development of such technologies, which could delay and
increase the cost of product and service developments.
In addition, we may fail to integrate successfully any licensed or hosted
technology into our services. These third-party in-licenses may expose us to
increased risks, including risks related to the integration of new technology,
potential patent and copyright infringement issues, the diversion of resources
from the development of proprietary technology, and an inability to generate
revenues from new technology sufficient to offset associated acquisition and
maintenance costs. In addition, an inability to obtain needed licenses could
delay product and service development until equivalent technology can be
identified, licensed and integrated. Any delays in services or integration
problems could hinder our ability to retain and attract customers and cause our
business and operating results to suffer.
CHANGES IN THE REGULATORY ENVIRONMENT FOR THE OPERATION OF OUR BUSINESS OR
THOSE OF OUR CUSTOMERS COULD POSE RISKS.
Few laws currently apply directly to activity on the Internet and the
messaging business; however, new laws are proposed and other laws made
applicable to Internet communications every year. In particular, the operations
of the Company's business faces risks associated with privacy, confidentiality
of user data and communications, consumer protection, taxation, content,
copyright, trade secrets, trademarks, antitrust, defamation and other legal
issues. In particular, legal concerns with respect to communication of
confidential data have affected our financial services and health care customers
due to newly enacted federal legislation. The growth of the industry and the
proliferation of Internet-based messaging devices and services may prompt
further legislative attention to our industry and thus invite more regulatory
control of our business. The imposition of more stringent protections or new
regulations and application of laws to our business could burden our company and
those with which we do business. Any decreased generalized demand for our
services or the loss of, or decrease, in business by a key partner due to
regulation or the expense of compliance with any regulation, could either
increase the costs associated with our business or affect revenue, either of
which could cause our financial condition or operating results to decline.
Certain of our service offerings include operations subject to the Digital
Millennium Copyright Act of 1998 and the European Union's recent privacy
directives. Our efforts to remain in compliance with DMCA and the EU privacy
directives may not be sufficient. New legislation and case law may also affect
our products and services and the manner in which we offer them, which could
cause our revenues to decline.
In addition, the applicability of laws and regulations directly applicable
to the businesses of our customers, particularly customers in the fields of
banking and health care, will continue to affect us. The security of information
about our customers' end-users continues to be an area where a variety of laws
and regulations with respect to privacy and confidentiality are enacted. As our
customers implement the protections and prohibitions with respect to the
transmission of end user data, our customers will look to us to assist them in
remaining in compliance with this evolving area of regulation. In particular the
Gramm-Leach-Bliley Act contains restrictions with respect to the use and
protection of banking records for end-users whose information may pass through
our system and the Health Insurance Portability and Accountability Act contains
provisions that require our customers to ensure the confidentiality of their
customers' health care information.
Finally, the Sarbanes-Oxley Act of 2002 and new rules subsequently
implemented by the Securities and Exchange Commission have required changes in
corporate governance practices of public companies.
16
In addition to final rules and rule proposals already made by the Securities and
Exchange Commission, the Nasdaq Stock Market has adopted revisions to its
requirements for listed companies. The Company is currently reviewing all of its
accounting policies and practices, legal disclosure and corporate governance
policies under the new legislation, including those related to its relationships
with its independent accountants, enhanced financial disclosures, internal
controls, board and board committee practices, corporate responsibility and loan
practices, and intends fully to comply with such laws. We expect these new rules
and regulations to make it more difficult for us to attract and retain qualified
executive officers and qualified members of our board of directors, particularly
to serve on our various committees of the Board including, in particular, the
audit committee. Given the significant turnover of the members of our board of
directors and the fact that some members would not qualify as "independent"
under the new SEC rules and the listing standards adopted by the Nasdaq Stock
Market to which we are subject, it may be difficult for us to maintain
sufficient independent directors to comply these new rules and regulations. If
we fail to comply, our common stock may be delisted from the Nasdaq National
Market.
WE MAY HAVE LIABILITY FOR INTERNET CONTENT AND WE MAY NOT HAVE ADEQUATE
LIABILITY INSURANCE.
As a provider of messaging and directory services, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
transmitted via our services. We do not and cannot screen all of the content
generated by our users, and we could be exposed to liability with respect to
this content. Furthermore, some foreign governments, such as Germany, have
enforced laws and regulations related to content distributed over the Internet
that are more strict than those currently in place in the United States. In some
instances, we may be subject to criminal liability in connection with Internet
content transmission.
Our current insurance may not cover claims of these types or may not be
adequate to indemnify us for all liability that may be imposed. There is a risk
that a single claim or multiple claims, if successfully asserted against us,
could exceed the total of our coverage limits. There also is a risk that a
single claim or multiple claims asserted against us may not qualify for coverage
under our insurance policies as a result of coverage exclusions that are
contained within these policies. Should either of these risks occur, capital
contributed by our shareholders might need to be used to settle claims. Any
imposition of liability, particularly liability that is not covered by insurance
or is in excess of insurance coverage could result in substantial out-of-pocket
costs to us, or could result in the imposition of criminal penalties.
UNKNOWN SOFTWARE DEFECTS COULD DISRUPT OUR SERVICES AND HARM OUR BUSINESS AND
REPUTATION.
Our software products are inherently complex. Additionally, our product and
service offerings depend on complex software, both internally developed and
licensed from third parties. Complex software often contains defects or errors
in translation, particularly when first introduced or when new versions are
released or localized for international markets. We may not discover software
defects in our products or that affect new or current services or enhancements
until after they are deployed. Despite testing, it is possible that 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.
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
hosted messaging service. We believe that these interruptions will continue to
occur from time to time. These interruptions may be due to hardware failures,
unsolicited bulk e-mail, or "spam," attacks and operating system failures or
other causes beyond our control. Our ability to retain existing customers and
attract new customers will suffer and our revenues will decline 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 unanticipated sharply increased traffic, which may cause
unanticipated system disruptions, slower response times, impaired
17
quality and degradation in levels of customer service. If this were to continue
to happen, our ability to retain existing customers and attract new customers
could suffer dramatically and our revenues would decline.
We have entered into hosted 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.
IF OUR SYSTEM SECURITY IS BREACHED, OUR REPUTATION COULD SUFFER AND OUR
REVENUES COULD DECLINE.
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. 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 make it
difficult to retain and attract customers and cause us to spend additional
resources that could cause our operating results to decline.
WE RELY ON TRADEMARK, COPYRIGHT, TRADE SECRET LAWS, CONTRACTUAL RESTRICTIONS
AND PATENTS TO PROTECT OUR PROPRIETARY RIGHTS, AND IF THESE RIGHTS ARE NOT
SUFFICIENTLY PROTECTED, OUR ABILITY TO COMPETE AND GENERATE REVENUE COULD BE
HARMED.
We rely on a combination of trademark, copyright and trade secret laws,
contractual restrictions, such as confidentiality agreements and licenses, and
patents to establish and protect our proprietary rights, which we view as
critical to our success. Our ability to compete and grow our business could
suffer if these rights are not adequately protected. Despite the precautionary
measures we take, unauthorized third parties may infringe or copy portions of
our services or reverse engineer or obtain and use information that we regard as
proprietary, which could harm our competitive position and market share. In
addition, we have several patents pending in the United States and may seek
additional patents in the future. However, the status of United States patent
protection in the software industry is not well defined and will evolve as the
U.S. Patent and Trademark Office grants additional patents. We do not know if
our patent applications or any of our future patent applications will be issued
with the scope of the claims sought, if at all, or whether any patents we have
received or will receive will be challenged or invalidated.
Our proprietary rights may not be adequately protected because:
- laws and contractual restrictions may not prevent misappropriation of our
technologies or deter others from developing similar technologies;
- policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming, and we may be unable to determine the
extent of this unauthorized use; and
- end user license provisions in our contracts that protect us against
unauthorized use, copying, transfer and disclosure of the licensed
program may be unenforceable.
In addition, the laws of some foreign countries may not protect proprietary
rights to the same extent as do the laws of the United States. Our means of
protecting proprietary rights in the United States or abroad may not be adequate
and competitors may independently develop similar technology. Additionally, 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.
18
OUR RESERVES MAY BE INSUFFICIENT TO COVER RECEIVABLES 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 economic conditions
decline or if new or unanticipated government regulations are enacted which
affect our customers, they may experience financial difficulties and be unable
to pay their bills. In the past, we have experienced significant collection
delays from certain customers, and we cannot predict whether we will continue to
experience similar or more severe delays in the future. In particular, some of
our customers are suffering from the general weakness in the economy and among
technology companies in particular. Any reserves that we may establish to cover
losses due to delays in their inability to pay may not be sufficient to cover
our losses. If losses due to delays or inability to pay are greater than our
reserves, our capital resources may not be sufficient to meet our operating
needs and our business could suffer.
IF WE DO NOT SUCCESSFULLY ADDRESS THE RISKS INHERENT IN THE CONDUCT OF OUR
INTERNATIONAL OPERATIONS, OUR REVENUES AND FINANCIAL RESULTS COULD DECLINE.
We derived 57% of our revenues from international sales in the first nine
months of 2003 and 54% of our revenues from international sales in 2002. We
intend to continue to operate in international markets and to spend significant
financial and managerial resources to do so. In particular, in 2002 we purchased
the remaining interests of our joint venture partners for our operations in
Japan. We hope to expend revenues and plan to increase resources to grow our
operations in the Asian market. If revenues from international operations do not
exceed the expense of establishing and maintaining these operations, our
business and our ability to increase revenue and improve our operating results
could suffer. We have limited experience in international operations and may not
be able to compete or operate effectively in international markets. We face
certain risks inherent in conducting business internationally, including:
- difficulties and costs of staffing and managing international operations;
- fluctuations in currency exchange rates and imposition of currency
exchange controls;
- differing technology standards and language and translation issues;
- difficulties in collecting accounts receivable and longer collection
periods;
- changes in regulatory requirements, including U.S. export restrictions on
encryption technologies;
- political and economic instability;
- potential adverse tax consequences; and
- reduced protection for intellectual property rights in some countries.
Any of these factors could harm our international operations and,
consequently, our business and consolidated operating results. Specifically,
failure to successfully manage international growth could result in higher
operating costs than anticipated or could delay or preclude altogether our
ability to generate revenues in key international markets.
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
19
- 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.
In addition, the General Atlantic Investors' and the Cheung Kong Investors'
own a sufficient amount of our securities to be able to control the outcome of
matters submitted to a vote of our shareholders, which could have the effect of
discouraging or impeding an acquisition proposal.
20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the documents we incorporate by reference contain
forward-looking statements within the meaning of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, as amended and in effect
from time to time. The words "anticipates," "expects," "intends," "plans,"
"believes," "seek," and "estimate" and similar expressions are intended to
identify forward-looking statements. These are statements that relate to future
periods and include statements regarding our ability to operate in the future,
our ability to obtain funding, the adequacy of funds to meet anticipated
operating needs, the extent to which holders of our common stock, the General
Atlantic Investors and the Cheung Kong Investors will purchase of shares of
Series E preferred stock offered in the rights offering, the amount of charges
that we will record that will increase our net loss attributable to common
shares in connection with the issuance of our Series E preferred stock and the
amendment of the terms of our Series D preferred stock, our future strategic,
operational and financial plans, possible financing, strategic or business
combination transactions, anticipated or projected revenues, expenses and
operational growth, markets and potential customers for our products and
services, plans related to sales strategies and global sales efforts, the
anticipated benefits of our relationships with strategic partners, growth of our
competition, our ability to compete, investments in product development, the
adequacy of our current facilities and our ability to obtain additional space,
our litigation strategy, use of future earnings, the feature, benefits and
performance of our current and future products and services, plans to reduce
operating costs through continued expense reduction, anticipated effects of
restructuring and retirement of debt, and our belief as to our ability to
successfully emerge from the restructuring and refocusing of our operations.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. Factors
that might cause future results to differ materially from those projected in the
forward-looking statements include, but are not limited to, difficulties of
forecasting future results due to our limited operating history, failure to
obtain additional financing on favorable terms or at all, failure to meet sales
and revenue forecasts, evolving business strategy and the emerging nature of the
market for our products and services, the settlement of litigation and the
continuing SEC investigation against former executives and directors, turnover
within and integration of senior management, board of directors members and
other key personnel, difficulties in our strategic plans to exit certain
products and services offerings, failure to expand our sales and marketing
activities, potential difficulties associated with strategic relationships,
investments and uncollected bills, general economic conditions in markets in
which we do business, risks associated with our international operations,
inability to predict future trading prices of our common stock which have
fluctuated significantly in the past, foreign currency fluctuations, unplanned
system interruptions and capacity constraints, software defects, and failure to
expand our sales and marketing activities, risks associated with an inability to
maintain continued compliance with the Nasdaq National Market listing
requirements, and those discussed elsewhere in this prospectus. You 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 update these statements or to publicly release the
results of any revisions to these forward-looking statements to reflect events
or circumstances after the date of this prospectus.
21
RECENT DEVELOPMENTS
MATTERS TO BE ACTED UPON AT A SPECIAL MEETING OF OUR SHAREHOLDERS TO BE HELD
ON , 2004
On November 18, 2003, we entered into an agreement with the General
Atlantic Investors and the Cheung Kong Investors pursuant to which, among other
things, we issued $10 million in principal amount of 10% convertible secured
notes to the General Atlantic Investors and, subject to and upon shareholder
approval, we agreed to convert the $10 million notes issued to the General
Atlantic Investors, plus $1 million in accrued interest, into approximately 7.3
million shares of Series E preferred stock, upon shareholder approval. In this
agreement we also agreed to exchange approximately $32.8 million in face value
of our 5 3/4% convertible subordinated notes held by the Cheung Kong Investors
for approximately 21.9 million shares of Series E preferred stock, upon
shareholder approval. On January 16, 2004, we entered into an agreement with the
January 2004 Investors pursuant to which we issued $15 million in principal
amount of 10% secured convertible secured notes to the January 2004 Investors.
Our primary purposes for the rights offering are to raise capital necessary for
us to continue our operations and to allow the holders of our common stock an
opportunity to further invest in Critical Path and restore a portion, although
not all, of their proportionate interest in our capital stock at the same price
per share of Series E preferred stock as was established under the agreements
with the General Atlantic Investors, the Cheung Kong Investors and the January
2004 Investors.
We have called a special meeting of our shareholders for , 2004.
Our board of directors is soliciting proxies for the special meeting pursuant to
a proxy statement that is being mailed to our shareholders. Shareholders of
record on , 2004 will be entitled to vote at the special meeting. We are
seeking to approve:
- the issuance of approximately 7.3 million shares of Series E preferred
stock with a price per share of $1.50 to the General Atlantic Investors,
issuable upon conversion of $11 million principal amount and interest of
the convertible secured notes, and such additional shares of Series E
preferred stock as they may purchase in connection with the proposed
rights offering;
- the issuance of approximately 21.9 million shares of Series E preferred
stock with a price per share of $1.50 to the Cheung Kong Investors,
issuable upon exchange of approximately $32.8 million principal amount of
5 3/4% convertible subordinated notes, and such additional shares of
Series E preferred stock as they may purchase in connection with the
proposed rights offering;
- the issuance of approximately 7.5 million shares of Series E preferred
stock with a price per share of $1.50 to the Apex Investors, issuable
upon conversion of approximately $11.3 million principal amount and
interest of the convertible secured notes;
- the amendment of warrants to purchase 625,000 shares of common stock held
by members of the General Atlantic Investors that reduce the exercise
price per share from $4.20 to $1.50;
- an amendment to our current amended and restated articles of
incorporation to increase the authorized number of shares of common stock
from 125 million to 200 million and the authorized number of shares of
preferred stock from 5 million to 75 million; and
- an amended and restated certificate of determination of preferences of
Series D preferred stock to, among other things, amend the Series D
preferred stock liquidation preference upon a liquidation and change of
control, to eliminate the participation feature, to reduce the conversion
price from $4.20 to $1.50 and to reduce the amount of dividends to which
the holders of Series D preferred stock are entitled.
If the matters above are approved by our shareholders, a convertible note
in the principal amount of $3.75 million plus interest held by the remaining
January 2004 Investor will be converted into approximately 2.5 million shares of
Series E preferred stock and we will exchange 69,149 shares of Series D
preferred stock for 733,333 shares of Series E preferred stock pursuant to a
settlement agreement that we entered into with MBCP PeerLogic, LLC and its
affiliates on November 21, 2003.
22
LITIGATION
On December 24, 2003, we were named in a lawsuit filed by former
shareholders of Remedy Corporation against current and former officers and
directors of Peregrine Systems, Inc., Peregrine's former accountants, some of
Peregrine's customers, including us, and various other unnamed defendants. The
complaint alleges that we, as Peregrine's customer, engaged in a series of
fraudulent transactions with Peregrine that were not accounted for by Peregrine
in conformity with GAAP and that this substantially inflated the value of
Peregrine securities issued as consideration in Remedy's merger with Peregrine
in August 2001. The complaint alleges causes of action for fraud and deceit,
negligent misrepresentation, violations of California Corporations Code
provisions regarding sales of securities by means of false statements or
omissions, violations of California Corporations Code provisions regarding
securities sales made on the basis of undisclosed, material inside information,
common law conspiracy to commit fraud, and common law aiding and abetting the
commission of fraud. The complaint seeks an unspecified amount of compensatory
and punitive damages, along with rescission of the Peregrine securities
purchased in the Remedy merger, interest and attorneys fees. On February 23,
2004, we filed a demurrer and a motion to strike the complaint, both of which
are currently scheduled to be heard on April 9, 2004.
MANAGEMENT AND BOARD OF DIRECTOR CHANGES
On January 30, 2004, William S. Cohen and Raul J. Fernandez resigned from
our board of directors and Peter Currie, who is an associate of the General
Atlantic Investors, was appointed to fill one of the vacancies created by the
resignations. On February 26, 2004, Frost R. R. Prioleau was appointed to fill
the remaining vacancy. On March 1, 2004, Wm. Christopher Gorog resigned from our
board of directors. On February 4, 2004, William M. Smartt resigned and we
appointed James Clark as our Chief Financial Officer.
23
DEFICIENCY OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The following table sets forth the deficiency of earnings to combined fixed
charges and preferred stock dividends for Critical Path on a historical basis
for the periods indicated.
<Table>
<Caption>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ---------------------------------------------------------
2003 2002 2001 2000 1999 1998
------------- --------- -------- ----------- --------- --------
(IN THOUSANDS)
$(55,720) $(129,428) $(70,748) $(1,844,284) $(116,941) $(11,461)
</Table>
For purposes of calculating the deficiency of earnings to combined fixed
charges and preferred stock dividends, deficiency of earnings is the sum of loss
before income taxes and before adjustment for minority interests in consolidated
subsidiaries and loss for equity investees plus fixed charges. Fixed charges
consist of interest expense, amortization of debt issuance costs and that
portion of operating lease rental expense that is representative of the interest
factor.
In addition to the shares of Series E preferred stock being offered in the
rights offering, at or prior to the consummation of the rights offering,
Critical Path will issue approximately 40 million shares of Series E preferred
stock, par value $0.001 per share, which will carry a 5 3/4% simple annual
dividend.
USE OF PROCEEDS
If the shares of common stock offered in the rights offering are purchased
by the holders of our common stock on the record date, or by the General
Atlantic Investors or the Cheung Kong Investors, or some combination of them,
the aggregate net proceeds to Critical Path will be approximately $20.4 million
after deducting fees and estimated expenses of approximately $550,000. The
actual proceeds will depend on the number of shares subscribed for in the rights
offering.
We anticipate using the net proceeds to fund our general operations.
However, if we determine that we have raised adequate funds to meet anticipated
operating needs through the rights offering and other capital raising
transactions, we may use a portion of these proceeds up to approximately $16.4
million to repurchase shares of Series E preferred stock held by the Cheung Kong
Investors.
24
CAPITALIZATION
The following table sets forth our summary capitalization as of September
30, 2003:
- on an actual basis;
- on a pro forma basis to give effect to:
- the issuance of the $10 million in principal amount of 10% convertible
secured notes to the General Atlantic Investors;
- the issuance of the $15 million in principal amount of 10% convertible
secured notes to the January 2004 Investors;
- the repayment of the outstanding balance of the line of credit facility
with Silicon Valley Bank; and
- the issuance of 553,914 shares of common stock and 188,587 shares of
Series D preferred stock on November 21, 2003 in connection with a $5.1
million settlement with MBCP PeerLogic, LLC and its affiliates.
- on a pro forma, as adjusted, basis to give effect to:
- the conversion of $58.8 million principal and interest amount of
convertible notes held by the General Atlantic Investors, the Cheung
Kong Investors and the January 2004 Investors into Series E preferred
stock;
- the sale of an aggregate of approximately $21 million of our Series E
preferred stock, consisting of all shares offered in the rights
offering;
- the amendment of the terms of the Series D preferred stock; and
- the conversion of 69,149 shares of Series D preferred stock held by MBCP
PeerLogic, LLC and its affiliates into 733,333 shares of Series E
preferred stock.
Except for the pro forma, as adjusted, calculations for the issuance of
Series E preferred stock upon conversion of the 10% convertible secured notes to
the General Atlantic Investors and the January 2004 Investors, which take into
account the fair market value of our common stock on the dates each note was
funded, the pro forma, as adjusted, calculations assume a fair market value of
the Series D preferred stock and the Series E preferred stock based on a fair
market value of our common stock of $1.73 per share which was the closing price
of the common stock on the date the convertible note purchase and exchange
agreement was executed. Except for the pro forma, as adjusted, calculations for
the issuance of Series E preferred stock upon conversion of the 10% convertible
secured notes, the actual amounts will depend on the fair market value of our
common stock, Series D preferred stock, and our Series E preferred stock on the
date each of the transactions contemplated by the convertible note purchase and
exchange agreement and the rights offering are consummated. See the discussion
under "Risk Factors -- Risks Relating To The Rights Offering" beginning on page
2 of this prospectus. This table should be read in conjunction with our
financial statements and related notes incorporated by reference into this
prospectus.
25
<Table>
<Caption>
SEPTEMBER 30, 2003
-------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS)
Line of credit facility............................... $ 4,900 $ -- $ --
Capital lease and other obligations, current.......... 2,823 2,823 2,823
----------- ----------- -----------
$ 7,723 $ 2,823 $ 2,823
Long-term debt
10% convertible secured notes held by the General
Atlantic
Investors(a)........................................ $ -- $ 10,000 $ --
10% convertible secured notes held by the January 2004
Investors(b)........................................ -- 15,000 --
5 3/4% convertible subordinated notes due April 1,
2005(c)............................................. 38,360 38,360 5,565
Capital lease and other obligations, long-term........ 433 433 433
----------- ----------- -----------
$ 38,793 $ 63,793 $ 5,998
Mandatory redeemable preferred stock
Series E convertible preferred stock(a)(b)(c)(d)...... -- -- 77,474
Series D convertible preferred stock(e)(f)............ $ 47,909 $ 51,664 $ 65,040
----------- ----------- -----------
$ 47,909 $ 51,664 $ 142,514
Shareholders' deficit
Common stock and additional paid-in
capital(d)(e)(f).................................... $ 2,158,277 $ 2,159,578 $ 2,178,869
Common stock warrants................................. 5,947 5,947 5,947
Notes receivable from shareholders.................... (725) (725) (725)
Accumulated deficit and other comprehensive
loss(a)(b)(c) $(2,224,684) $(2,229,740) $(2,261,086)
----------- ----------- -----------
Total shareholders' deficit........................... $ (61,185) $ (64,940) $ (76,995)
----------- ----------- -----------
Total capitalization.................................. $ 33,240 $ 53,340 $ 74,340
=========== =========== ===========
</Table>
- ---------------
(a) Upon shareholder approval of the matters being presented at the special
meeting to be held on , 2004, the $10 million in principal amount
of convertible secured notes held by the General Atlantic Investors, plus
interest, will convert into $11 million of Series E preferred stock at
$1.50 per share. As a result, we will recognize interest expense of
approximately $5.7 million as of the date of conversion resulting from the
beneficial conversion feature included in the Series E preferred stock. Pro
forma, as adjusted, assumes the Series E preferred stock was issued on
November 18, 2003, the date of the execution of the convertible note
purchase and exchange agreement.
(b) Upon shareholder approval of the matters set forth in our , 2004
special meeting proxy statement, the $15 million in principal amount plus
interest of convertible secured notes held by the January 2004 Investors
will convert into approximately $15 million of Series E preferred stock at
$1.50 per share. As a result, interest expense of approximately $1.5
million will be recognized as of the date of conversion resulting from the
beneficial conversion feature included in the Series E preferred stock. Pro
forma, as adjusted, assumes the Series E preferred stock was issued on
January 16, 2004, the date of the January private placement.
(c) Upon shareholder approval of the matters set forth in our , 2004
special meeting proxy statement, $32.8 million face value of 5 3/4%
convertible subordinated notes held by the Cheung Kong Investors will be
exchanged for approximately 21.9 million shares of Series E preferred
stock. As a result, a charge equal to the fair value of the Series E
preferred stock less the carrying value of the convertible subordinated
notes, net of unamortized issuance costs, will be recorded to arrive at net
loss and net loss attributable to common shareholders as of the date of the
exchange. Pro forma, as adjusted, reflects a loss on exchange equal to
approximately $24.2 million and assumes the Series E preferred stock was
issued on November 18, 2003, the date of the execution of the convertible
note purchase and exchange agreement.
26
(d) Upon shareholder approval of the matters set forth in our , 2004
special meeting proxy statement, the issuance of Series E preferred stock
pursuant to the proposed rights offering will result in a beneficial
conversion feature if the fair value of the common stock into which the
Series E preferred stock is convertible upon issuance is greater than $1.50
per share. The amount of the beneficial conversion feature is recorded in
additional paid-in capital and reduces the carrying value of the Series E
preferred stock. The Series E preferred stock carrying value will be
increased for the beneficial conversion feature amount through a charge to
arrive at net loss attributable to common shareholders over a four year
period from the date of issuance using the effective interest method. Pro
forma, as adjusted, assumes the issuance of Series E preferred stock in the
rights offering on November 18, 2003, the date of the execution of the
convertible note purchase and exchange agreement, which results in a
beneficial conversion feature amount of approximately $3.2 million.
(e) Upon shareholder approval of the matters set forth in our , 2004
special meeting proxy statement, we will amend the terms of our Series D
preferred stock. As a result, we will record a charge, as of the date of
the amendment, equal to the incremental fair value of the amended Series D
preferred stock resulting from the modifications to the terms of the Series
D preferred stock to arrive at net loss attributable to common shareholders
with the offset to the Series D preferred stock carrying value. Pro forma,
as adjusted, assumes the amendment occurred on November 18, 2003, the date
of the execution of the convertible note purchase and exchange agreement,
and results in a charge equal to $15.0 million.
(f) Upon shareholder approval of the matters set forth in our , 2004
special meeting proxy statement, 69,149 of the Series D preferred stock
issued to MBCP PeerLogic, LLC and its affiliates will be exchanged for
Series E preferred stock, and a charge equal to the fair value of the
Series E preferred stock less the carrying value of the Series D preferred
stock will be recorded, as of the date of the exchange, to arrive at net
loss attributable to common shareholders. Pro forma, as adjusted, assumes
the exchange occurred on November 18, 2003, the date of the execution of
the convertible note purchase and exchange agreement, and results in a
charge equal to $248,000.
DETERMINATION OF OFFERING PRICE
The subscription price per share was the price proposed by the General
Atlantic Investors and the Cheung Kong Investors in connection with our
negotiation of the convertible note purchase and exchange agreement and was
approved by the independent members of our board of directors (which excluded
William E. McGlashan, Jr., our chief executive officer and a related party of
one of our holders of Series D preferred stock, and Raul J. Fernandez and
William E. Ford, each of whom is affiliated with the General Atlantic
Investors). The independent members of our board of directors considered our
expected ability to raise capital necessary for us to continue our operations.
The committee also took into account the cost and availability of raising funds
through other debt or equity methods and an opinion of our financial advisor
engaged to evaluate the transactions with the General Atlantic Investors and the
Cheung Kong Investors.
27
SUMMARY EXECUTIVE COMPENSATION TABLE
The following table summarizes all compensation earned by or paid to the
Named Executive Officers for services rendered in all capacities to Critical
Path during the fiscal year ended December 31, 2003.
<Table>
<Caption>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($)(1) OPTIONS COMPENSATION ($)
- --------------------------- ---------- ------------ ------------ ----------------
William E. McGlashan Jr.(2).............. 392,500 -- 625,000 --
Chairman of the Board of Directors and
Chief Executive Officer
James Clark(3)........................... -- -- -- --
Executive Vice President and
Chief Financial Officer
P. Tracy Currie.......................... 287,517 -- 37,500 317,428(4)
General Manager, Hosted Operations and
Executive Vice President, Services
Robert (Al) Shipp........................ 218,750 -- -- 262,500(5)
Former President
Barry Twohig............................. 221,042 -- 112,500 --
Senior Vice President, Engineering
Paul Bartlett (6)........................ 261,667 -- 437,500 --
Chief Operating Officer
Bernard Harguindeguy..................... 113,637 -- -- 455,563(7)
General Manager, Identity Management
</Table>
- ---------------
(1) We did not pay any discretionary bonuses to our officers in 2003. In
connection with certain employment agreements and commission plans, the
Company paid commissions in fiscal 2003 as noted herein.
(2) Mr. McGlashan joined the Company in April 2001 as interim Chief Operating
Officer and President. In August 2001, Mr. McGlashan accepted the position
of interim Chief Executive Officer and entered into a direct employment
agreement with the Company.
(3) Mr. Clark joined us in February 2004 as Executive Vice President and Chief
Financial Officer. Mr. Clark did not receive any compensation in 2003.
(4) In 2003, we paid consulting fees of $317,428 to CTD, LLC, an affiliate of
Mr. Currie, for services rendered.
(5) In connection with his separation from the Company in December 31, 2003, Mr.
Shipp received a lump sum separation payment of $262,500.
(6) Mr. Bartlett joined the Company in April 2002 as Executive Vice President,
Corporate Development, and was appointed to the additional role of Chief
Financial Officer in February 2003. In November 2003, Mr. Bartlett
transitioned to his current role as Chief Operating Officer.
(7) Mr. Harguindeguy earned $155,563 in commissions paid in 2003. Mr.
Harguindeguy also received a one-time payment of $300,000 in connection with
a substantial modification of his title, duties and responsibilities at the
company.
28
THE RIGHTS OFFERING
REASONS FOR THE RIGHTS OFFERING
On November 18, 2003, we entered into an agreement with the General
Atlantic Investors and the Cheung Kong Investors pursuant to which, among other
things, we issued $10 million in convertible notes to the General Atlantic
Investors and, subject to shareholder approval, we agreed to convert the $10
million note issued to the General Atlantic Investors, plus $1 million in
accrued interest, into 7.3 million shares of Series E preferred stock, upon
shareholder approval. We also agreed to exchange $32.8 million in face value of
our 5 3/4% convertible subordinated notes held by the Cheung Kong Investors for
21.9 million shares of Series E preferred stock, upon shareholder approval. On
January 16, 2004, we issued $15 million in principal amount of 10% convertible
secured notes to the January 2004 Investors. Our primary purposes for the rights
offering are to raise capital necessary for us to continue our operations and to
allow the holders of our common stock an opportunity to further invest in
Critical Path and restore a portion, although not all, of their proportionate
interest in our capital stock at the same price per share of Series E preferred
stock that was established under the agreements with the General Atlantic
Investors, the Cheung Kong Investors and the January 2004 Investors.
THE SUBSCRIPTION RIGHTS
We will distribute to the holders of record of our common stock on [RECORD
DATE], the record date, at no charge, subscription rights to purchase our Series
E preferred stock, up to a total of 14,000,000 subscription rights. The
subscription rights will be evidenced by transferable subscription rights
certificates.
The subscription rights will be distributed to our holders of common stock
based on their percentage ownership of our outstanding common stock on the
record date. As the subscription certificates are transferable, any person who
acquires subscription certificates before the expiration date may exercise the
rights represented thereby. Accordingly, holders of common stock on the record
date will receive two subscription rights for every three shares of common stock
held. We will not be issuing fractional shares of Series E preferred stock
pursuant to the exercise of subscription rights. We will accept any inadvertent
subscription indicating a purchase of fractional shares by rounding down to the
nearest whole share number and, as soon as practicable, refunding without
interest any payment received for a fractional share. You are not required to
exercise any or all of your subscription rights. Any subscription rights you
receive based on shares of our common stock held by you on the record date may
be retained by you, and exercised or transferred prior to the expiration of the
rights offering, notwithstanding any subsequent transfer of your shares of
common stock. We will deliver to you certificates representing the shares which
you purchased with your subscription rights as soon as practicable after the
rights offering has expired. Each subscription right entitles you to a basic
subscription right and an over-subscription right.
BASIC SUBSCRIPTION RIGHT
With each basic subscription right, you may purchase one share of our
Series E preferred stock per subscription right, upon delivery of the required
documents and payment of the subscription price of $1.50 per share. You are not
required to exercise all of your subscription rights unless you wish to purchase
shares under your over-subscription right. We will deliver to the record holders
who purchase shares in this rights offering certificates representing the shares
purchased with a holder's basic subscription right as soon as practicable after
this rights offering has expired.
OVER-SUBSCRIPTION RIGHT
In addition to your basic subscription right, you may subscribe for
additional shares of our Series E preferred stock upon delivery of the required
documents and payment of the subscription price of $1.50 per share, at the same
time you exercise your basic subscription right before the expiration of this
rights
29
offering. You may only exercise your over-subscription right if you exercised
your basic subscription right in full and other holders of subscription rights
do not exercise their basic subscription rights in full.
PRO RATA ALLOCATION
If there are not enough shares of our Series E preferred stock to satisfy
all subscriptions made under the over-subscription right, we will allocate the
remaining shares of our Series E preferred stock pro rata, after eliminating all
fractional shares, among those over-subscribing rights holders. "Pro rata" means
in proportion to the amount of subscription price tendered by each subscription
rights holder who wishes to exercise his or her over-subscription rights prior
to the expiration date. If there is a pro rata allocation of the remaining
shares of our Series E preferred stock and you receive an allocation of a
greater number of shares than you subscribed for under your over-subscription
right, then we will allocate to you only the number of shares for which you
subscribed. We will allocate the remaining shares among all other holders
exercising their over-subscription rights.
FULL EXERCISE OF BASIC SUBSCRIPTION RIGHT
You may exercise your over-subscription right only if you exercise your
basic subscription right in full. To determine if you have fully exercised your
basic subscription right, we will consider only the basic subscription rights
held by you in the same capacity. For example, suppose that you were granted
subscription rights for shares of our common stock that you own individually and
shares of our common stock that you own collectively with your spouse. If you
wish to exercise your over-subscription right with respect to the subscription
rights you own individually, but not with respect to the subscription rights you
own collectively with your spouse, you only need to fully exercise your basic
subscription right with respect to your individually owned subscription rights.
You do not have to subscribe for any shares under the basic subscription right
owned collectively with your spouse to exercise your individual
over-subscription right.
When you complete the portion of your subscription rights certificate to
exercise your over-subscription right, you will be representing and certifying
that you have fully exercised your basic subscription rights granted pursuant to
this prospectus. You must exercise your over-subscription rights at the same
time you exercise your basic subscription rights in full which must be prior to
the expiration time.
RETURN OF EXCESS PAYMENT
If you exercised your over-subscription right and are allocated less than
all of the shares of our Series E preferred stock for which you wished to
subscribe, your excess payment for shares that were not allocated to you will be
returned to you by mail, without interest or deduction, as soon as practicable
after the expiration date of this rights offering. We will deliver to the record
holders who purchase shares in this rights offering certificates representing
the shares of our Series E preferred stock that you purchased as soon as
practicable after the expiration date of this rights offering and after all pro
rata allocations and adjustments have been completed. However, we will not be
able to begin calculations for any pro rata allocations and adjustments until
three days after the expiration date, which is the latest date for our
shareholders to deliver the subscription rights certificate according to the
guaranteed delivery procedures.
TERMS OF THE SERIES E PREFERRED STOCK
Dividends. The shares of Series E preferred stock rank senior to all
capital stock of Critical Path with respect to the payment of dividends.
Dividends on the shares of Series E preferred stock accrue at a simple annual
rate of 5 3/4% whether or not our board of directors declares them. Dividends in
respect of the Series E preferred stock will not be paid in cash but will be
added to the value of the Series E preferred stock and will be taken into
account for purposes of determining the liquidation preference, conversion rate,
dividends and voting rights. We must declare or pay dividends on the Series E
preferred stock when we declare or pay dividends to the holders of common stock.
Except for dividends accruing to
30
the Series D preferred stock, we may make no dividends or distribution with
respect to any shares of capital stock unless all dividends accruing to the
Series E preferred stock have already been paid.
Liquidation or Change of Control. In the event of a liquidation or change
of control, we will pay each share of Series E preferred stock, prior to the
payment of any other equity securities, an amount equal to the greater of the
purchase price of the Series E preferred stock plus all accrued dividends or the
value that would be paid to the holder of the number of shares of common stock
into which such shares of Series E preferred stock are convertible immediately
prior to the closing of such liquidation or change of control. A change of
control includes, among others, any merger consolidation or other business
combination transaction in which the shareholders owning a majority of our
voting securities do not own a majority of our voting securities of the
surviving entity, any tender, exchange or other offer whereby any person obtains
a majority of the voting securities, any proxy contest in which a majority of
the board of directors prior to such contest do not constitute a majority of the
board of directors after such contest, any sale of all or substantially all of
our assets or any other transaction that triggers the issuance of rights
pursuant to our Shareholder Rights Plan (which issuance is not waived by the
board of directors).
Calls for Redemption. All, but not less than all, of the shares of Series
E preferred stock may be called for redemption, at our option, after the third
anniversary of the date shares of Series E preferred stock are first issued if
on any date the average closing price per share of the common stock equals or
exceeds four hundred percent (400%) of the sum of the per share purchase price
of the Series E preferred stock and all accrued dividends through the most
recent dividend accrual date for any 60 consecutive trading day period. We must
provide notice of any such call for redemption within 30 days of such period and
not less than 10 nor more than 30 days prior to the date set for redemption. The
shares of Series E preferred stock must be called for redemption on the fourth
anniversary of the date shares of Series E preferred stock are first issued.
Notice of the mandatory call for redemption must be given not less than 30 nor
more than 60 days prior to the date set for redemption. In the case of any call
for redemption, we must pay the applicable redemption price by wire transfer of
immediately available funds or check within seven days after we receive
surrendered certificates representing the shares of Series E preferred stock
called for redemption. If we do not have sufficient funds available by law to
redeem the Series E preferred stock on the date set for the mandatory call, the
holders of shares of Series E preferred stock will share ratably any funds
available by law for redemption. Any shares of Series E preferred stock that
remain outstanding following the mandatory redemption date will thereafter
continue to accrue dividends until redeemed. Any additional funds available by
law for redemption will be used to redeem the balance or a portion of the
balance of any shares as soon as practicable.
Voting. Each share of Series E preferred stock entitles its holder to vote
at any shareholders' meeting, on any matter entitled to be voted on by holders
of our common stock, voting together as a single class with other shares
entitled to vote on such matters. In order to comply with voting rule 4351 of
the National Association of Securities Dealers, Inc. (referred to as the NASD),
which prohibits issuers from creating a new class of securities that votes at a
higher rate than an existing class of securities based on the relative
investment in the issuer made by the new security holders, the voting power of
the Series E preferred stock may be impaired. The voting formula for each share
of Series E preferred stock will be the sum of $1.50 plus all accrued dividends
for such share divided by the "voting conversion amount." The voting conversion
amount will be equal to the lower of (i) $1.70, (ii) the most recent closing bid
price of the common stock as of the date the Series E preferred stock is first
issued and (iii) the average closing bid prices for the five trading days prior
to the date the Series E preferred stock is first issued; provided, however, the
voting conversion amount will not be less than $1.50. The voting conversion
amount will be determined on the date the Series E preferred stock is first
issued and, once determined, will remain the same (subject to adjustment for
stock splits, subdivisions, reclassifications, distributions and similar
transactions).
31
In addition, holders of a majority of the outstanding shares of Series E
preferred stock must approve:
- Any amendment to the terms of the Series E preferred stock;
- Any amendment to the number of authorized shares of Series E preferred
stock and any issuance of shares of equity securities ranking senior to
the Series E preferred stock; or
- The redemption of any junior equity securities or the payment of
dividends to junior equity holders.
Conversion. Each share of Series E preferred stock will be convertible at
any time at the option of the holder into the number of shares of common stock
derived by dividing the purchase price of the Series E preferred stock plus all
accrued dividends from the date of issuance through the most recent semi-annual
dividend accrual date by $1.50, subject to certain antidilution provisions. The
terms of the Series E preferred stock contain protection against dilution if
Critical Path effects a subdivision or combination of common stock or in the
event of a reclassification, recapitalization, stock split, stock dividend or
other distribution payable in securities of Critical Path or any other person.
EXPIRATION OF THE RIGHTS OFFERING
You may exercise your subscription privilege at any time before 5:00 p.m.,
New York City time, on , 2004, the expiration time for the rights
offering. If you do not exercise your subscription rights before the expiration
time, your unexercised subscription rights will be null and void. We will not be
obligated to honor your exercise of subscription rights if the subscription
agent receives the documents relating to your exercise after the rights offering
expires, regardless of when you transmitted the documents, except when you have
timely transmitted the documents under the guaranteed delivery procedures
described below. We, with the consent of the General Atlantic Investors and the
Cheung Kong Investors, may extend the expiration date by giving oral or written
notice to the subscription agent on or before the scheduled expiration date. If
we elect to extend the expiration of the rights offering, we will issue a press
release announcing the extension no later than 9:00 a.m., New York City time, on
the next business day after the most recently announced expiration date,
provided the expiration date will in no event be later than , 2004.
UNEXERCISED SUBSCRIPTION RIGHTS
In the event all or any portion of the subscription rights are not
exercised by the holders of common stock prior to the expiration of the rights
offering, including through the exercise of over-subscription rights, the
General Atlantic Investors have the option, but not the obligation, to purchase
up to 55% of the unexercised subscription rights and the Cheung Kong Investors
have the option, but not the obligation, to purchase up to 45% of the
unexercised subscription rights. In addition, the General Atlantic Investors and
the Cheung Kong Investors have the option, but not the obligation, to purchase
any or all of the subscription rights not exercised by the other group of
investors, if any. Following the execution of the convertible note purchase and
exchange agreement, the Cheung Kong Investors granted us the option, which we
may exercise in our sole discretion, to repurchase up to approximately 10.9
million shares of their Series E preferred stock.
METHOD OF TRANSFERRING RIGHTS
The rights evidenced by a single subscription certificate may be
transferred in whole by endorsing the subscription certificate for transfer in
accordance with the accompanying instructions. A portion of the rights evidenced
by a single subscription certificate may be transferred by delivering to the
subscription agent a subscription certificate properly endorsed for transfer,
with instructions to register such portion of the rights evidenced thereby in
the name of the transferee (and to issue a new subscription certificate to the
transferee evidencing such transferred rights). In such event, a new
subscription certificate evidencing the balance of the rights will be issued to
the rights holder or, if the rights holder so instructs, to one or more
additional transferees. To transfer rights to any person, signatures on the
subscription certificate must be guaranteed by an eligible institution, as
described below.
Holders wishing to transfer all or a portion of their rights should allow a
sufficient amount of time prior to the expiration date for the transfer
instructions to be received and processed by the subscription
32
agent, a new subscription certificate to be issued and transmitted to the
transferee or transferees with respect to transferred rights and to the
transferor with respect to retained rights, if any, and the rights evidenced by
such new subscription certificates to be exercised or sold by the recipients
thereof. Neither we nor the subscription agent will have any liability to a
transferee or transferor of rights if subscription certificates are not received
in time for exercise or sale prior to the expiration date.
CONDITIONS TO THE RIGHTS OFFERING
The closing of the rights offering is conditioned on the consummation of
the transactions contemplated by the convertible note purchase and exchange
agreement. We have called a special meeting of shareholders to be held on
, 2004 at which we will ask shareholders to approve, among other
matters, the issuance of the Series E preferred stock to the General Atlantic
Investors, the Cheung Kong Investors and the January 2004 Investors upon
conversion of their notes, and amendments to our articles of incorporation to
increase the number of shares of common stock and preferred stock that we are
authorized to issue. We will not complete the rights offering unless our
shareholders approve each of the proposals and the amendments to our articles of
incorporation (and the certificates of determination relating to the Series E
preferred stock and the amended terms of the Series D preferred stock) have been
filed. For a more complete description of the matters being submitted to a vote
of our shareholders at the special meeting, see the discussion under "Recent
Developments" beginning on page 21 of this prospectus.
TERMINATION OF THE RIGHTS OFFERING
We may elect to terminate this rights offering at any time prior to
consummation of the offering. We do not have any obligation with respect to the
subscription rights except to return, without interest or deduction, any
subscription payments we received from you. The subscription agent estimates it
will take approximately two business days following termination of the rights
offering and clearance of subscription payments in the subscription agent's
account (which may take up to 10 business days) to return the subscription
payments.
METHOD OF SUBSCRIPTION -- EXERCISE OF SUBSCRIPTION RIGHTS
You may exercise your subscription rights by delivering (or causing to be
delivered) the following to the subscription agent, at or prior to 5:00 p.m.,
New York City time, on , 2004, the date on which the subscription rights
expire:
- your properly completed and executed rights certificate with any required
signature guarantees or other supplemental documentation; and
- your full subscription price payment for each share subscribed for.
METHOD OF PAYMENT
Your payment of the subscription price must be made in U.S. dollars for the
full number of shares of Series E preferred stock you are subscribing for by:
- check or bank draft drawn upon a U.S. bank or postal, telegraphic or
express money order payable to the subscription agent; or
- wire transfer of immediately available funds, to subscription account
maintained by the subscription agent.
If you decide to pay by check, your check must clear by the expiration time
or we will reject your exercise of subscription rights. See "Clearance of
Uncertified Checks" below.
RECEIPT OF PAYMENT
Your payment will be considered received by the subscription agent only
upon:
- clearance of any uncertified check;
- receipt by the subscription agent of any certified check or bank draft
drawn upon a U.S. bank or of any postal, telegraphic or express money
order; or
33
- receipt of collected funds in the subscription account designated above.
CLEARANCE OF UNCERTIFIED CHECKS
If you are paying by uncertified personal check, please note that
uncertified checks may take five business days or more to clear. If you wish to
pay the subscription price by uncertified personal check, we urge you to make
payment sufficiently in advance of the time this rights offering expires to
ensure that your payment is received by the subscription agent and clears by the
rights offering expiration time. We urge you to consider using a certified or
cashier's check, money order or wire transfer of funds to avoid missing the
opportunity to invest in our Series E preferred stock should you decide to
exercise your subscription rights.
DELIVERY OF SUBSCRIPTION MATERIALS AND PAYMENT
You must deliver your rights certificate and payment of the subscription
price or, if applicable, notices of guaranteed delivery, to the subscription
agent by one of the methods described below:
For delivery by mail:
Computershare Trust Company
P.O. Box 1596
Denver, Colorado 80201-1596
By hand delivery or overnight courier:
Computershare Trust Company
350 Indiana Street, Suite 800
Golden, Colorado 80401
Your delivery to an address other than the address set forth above will not
constitute valid delivery. For assistance call the subscription agent at (303)
262-0600 ext. 4732.
CALCULATION OF SUBSCRIPTION RIGHTS EXERCISED
If you do not indicate the number of subscription rights being exercised,
or do not forward full payment of the total subscription price for the number of
subscription rights that you indicate are being exercised, then you will be
deemed to have exercised your subscription right with respect to the maximum
number of subscription rights that may be exercised with the aggregate
subscription price payment you delivered to the subscription agent. If we do not
apply your full subscription price payment to your purchase of shares of our
Series E preferred stock, we will return the excess amount to you by mail
without interest or deduction as soon as practicable after the expiration date
of the rights offering.
YOUR FUNDS WILL BE HELD BY THE SUBSCRIPTION AGENT UNTIL SHARES OF SERIES E
PREFERRED STOCK ARE ISSUED
The subscription agent will hold your payment of the subscription price
payment in a segregated account with other payments received from other rights
holders until we issue your shares to you upon consummation of the rights
offering.
SIGNATURE GUARANTEE MAY BE REQUIRED
Your signature on each subscription rights certificate must be guaranteed
by an eligible institution, such as a member firm of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
34
correspondent in the United States, subject to standards and procedures adopted
by the subscription agent, unless:
- your subscription rights certificate provides that shares are to be
delivered to you as record holder of those subscription rights; or
- you are an eligible institution.
NOTICE TO RECORD HOLDERS HOLDING ON BEHALF OF BENEFICIAL OWNERS
If you are a broker, a trustee or a depositary for securities who holds
shares of our common stock for the account of others on [RECORD DATE], the
record date for the rights offering, you should notify the respective beneficial
owners of such shares of the rights offering as soon as possible to find out
their intentions with respect to exercising their subscription rights. You
should obtain instructions from the beneficial owner with respect to their
subscription rights, as set forth in the instructions we have provided to you
for your distribution to beneficial owners. If the beneficial owner so
instructs, you should complete the appropriate subscription rights certificates
and submit them to the subscription agent with the proper payment. If you hold
shares of our common stock for the account(s) of more than one beneficial owner,
you may exercise the number of subscription rights to which all such beneficial
owners in the aggregate otherwise would have been entitled had they been direct
record holders of our common stock on the record date for the rights offering,
provided that, you, as a nominee record holder, make a proper showing to the
subscription agent by submitting the form entitled "Nominee Holder
Certification" which we will provide to you with your rights offering materials.
If you did not receive this form, you should contact our information agent at
(212) 440-9000 to request a copy.
BENEFICIAL OWNERS
If you are a beneficial owner of shares of our common stock or will receive
your subscription rights through a broker, custodian bank or other nominee, we
will ask your broker, custodian bank or other nominee to notify you of this
rights offering. If you wish to exercise your subscription rights, only your
broker, custodian bank or other nominee can act for you. If you hold
certificates of our common stock directly and would prefer to have your broker,
custodian bank or other nominee exercise your subscription rights, you should
contact your nominee and request it to effect the transaction for you. To
indicate your decision with respect to your subscription rights, you should
complete and return to your broker, custodian bank or other nominee the form
entitled "Beneficial Owners Election Form." You should receive this form from
your broker, custodian bank or other nominee with the other rights offering
materials. If you wish to obtain a separate rights certificate, you should
contact the nominee as soon as possible and request that a separate rights
certificate be issued to you. You should contact your broker, custodian bank or
other nominee if you do not receive this form, but believe that you are entitled
to participate in the rights offering. We are not responsible if you do not
receive the form from your broker, custodian bank or nominee or if you receive
it without sufficient time to respond.
INSTRUCTIONS FOR COMPLETING YOUR RIGHTS CERTIFICATE
You should read and follow the instructions accompanying the rights
certificate(s) carefully. If you want to exercise your subscription rights, you
should send your rights certificate(s) with your subscription price payment to
the subscription agent. Do not send your rights certificate(s) and subscription
price payment to us.
You are responsible for the method of delivery of your rights
certificate(s) with your subscription price payment to the subscription agent.
If you send your rights certificate(s) and subscription price payment by mail,
we recommend that you send them by registered mail, properly insured, with
return receipt requested. You should allow a sufficient number of days to ensure
delivery to the subscription agent prior to the time the rights offering
expires. Because uncertified personal checks may take at least five business
days to clear, you are strongly urged to pay, or arrange for payment, by means
of a certified or cashier's check, money order or wire transfer of funds.
35
DETERMINATIONS REGARDING THE EXERCISE OF YOUR SUBSCRIPTION RIGHTS
We will decide all questions concerning the timeliness, validity, form and
eligibility of your exercise of your subscription rights and our determinations
will be final and binding. We, in our sole discretion, may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as we may determine. We may reject the exercise of any of your subscription
rights because of any defect or irregularity. We will not be obligated to make
uniform determinations in all cases. We will not receive or accept any
subscription until all irregularities have been waived by us or cured by you
within such time as we decide, in our sole discretion.
Neither we nor the subscription agent will be under any duty to notify you
of any defect or irregularity in connection with your submission of subscription
rights certificates and we will not be liable for failure to notify you of any
defect or irregularity. We reserve the right to reject your exercise of
subscription rights if your exercise is not in accordance with the terms of the
rights offering or in proper form. We will also not accept your exercise of
subscription rights if our issuance of shares of our Series E preferred stock to
you could be deemed unlawful under applicable law.
GUARANTEED DELIVERY PROCEDURES
If you wish to exercise your subscription rights, but you do not have
sufficient time to deliver the rights certificate evidencing your subscription
rights to the subscription agent on or before the time your subscription rights
expire, you may exercise your subscription rights by the following guaranteed
delivery procedures:
- deliver to the subscription agent on or prior to the expiration time your
subscription price payment in full for each share you subscribed for
under your subscription privileges in the manner set forth under "Method
of Payment" on page 32;
- deliver to the subscription agent at or prior to the expiration time the
form entitled "Notice of Guaranteed Delivery," substantially in the form
provided with the "Instructions as to Use of Critical Path Subscription
Rights Certificates" distributed with your rights certificates; and
- deliver the properly completed rights certificate evidencing your rights
being exercised and the related nominee holder certification, if
applicable, with any required signatures guaranteed, to the subscription
agent within three business days following the date of your Notice of
Guaranteed Delivery.
Your Notice of Guaranteed Delivery must be delivered in substantially the
same form provided with the Instructions as to Use of Critical Path Subscription
Rights Certificates, which will be distributed to you with your subscription
rights certificate. Your Notice of Guaranteed Delivery must come from an
eligible institution, or other eligible guarantee institutions which are members
of, or participants in, a signature guarantee program acceptable to the
subscription agent.
In your Notice of Guaranteed Delivery, you must state:
- your name and address;
- the certificate number of the subscription rights certificate relating to
the subscription rights you are exercising;
- the number of subscription rights represented by your subscription rights
certificates and the number of shares of our Series E preferred stock you
are subscribing for; and
- the institution's guarantee that you will deliver to the subscription
agent any subscription rights certificates evidencing the subscription
rights you are exercising within three business days following the date
the subscription agent receives your Notice of Guaranteed Delivery.
You may deliver your Notice of Guaranteed Delivery to the subscription
agent in the same manner as your rights certificates at the address set forth
above under "Delivery of Subscription Materials and
36
Payment" on page 33. An eligible institution may alternatively transmit its
Notice of Guaranteed Delivery to the subscription agent by facsimile
transmission (Facsimile No.: (303) 262-0606). To confirm facsimile deliveries,
eligible institutions may call (303) 262-0600 ext. 4732.
Georgeson Shareholder Communications Inc., the information agent, will send
you additional copies of the form of Notice of Guaranteed Delivery if you need
them. Shareholders may call (800) 843-1451 (toll free) and banks and brokerage
firms may call (212) 440-9000 to request any copies of the form of Notice of
Guaranteed Delivery.
QUESTIONS ABOUT EXERCISING SUBSCRIPTION RIGHTS
If you have any questions or require assistance regarding the method of
exercising your subscription rights or requests for additional copies of this
prospectus, the Instructions as to the Use of Critical Path Rights Certificates
or the Notice of Guaranteed Delivery, you should contact the information agent
at the foregoing telephone number.
SUBSCRIPTION AGENT
We have appointed Computershare Trust Company to act as subscription agent
for the rights offering. We will pay all fees and expenses of the subscription
agent related to the rights offering and we have also agreed to indemnify the
subscription agent from liabilities which it may incur in connection with the
rights offering.
NO REVOCATION
Once you have exercised your subscription privileges, you may not revoke
your exercise. Subscription rights not exercised prior to the expiration date of
the rights offering will expire.
PROCEDURES FOR DTC PARTICIPANTS
We expect that your exercise of your subscription rights may be made
through the facilities of The Depository Trust Company. If your subscription
rights are held of record through DTC, you may exercise your basic subscription
right and your over-subscription right by instructing DTC to transfer your
subscription rights from your account to the account of the subscription agent,
together with certification as to the aggregate number of subscription rights
you are exercising and the number of shares of our Series E preferred stock you
are subscribing for, and your subscription price payment for each share you
subscribed for.
No change will be made to the cash subscription price by reason of changes
in the trading price of our common stock prior to the closing of the rights
offering.
FOREIGN AND OTHER SHAREHOLDERS
Rights certificates will be mailed to rights holders whose addresses are
outside the United States or who have an Army Post Office or Fleet Post Office
address. To exercise such subscription rights, you must notify the subscription
agent, and take all other steps which are necessary to exercise your
subscription rights on or prior to the expiration date of the rights offering.
If the procedures set forth in the preceding sentence are not followed prior to
the expiration time, your subscription rights will expire.
EXPIRATION TIME, EXTENSIONS AND TERMINATION
We may, with the consent of the General Atlantic Investors and the Cheung
Kong Investors pursuant to our convertible note purchase and exchange agreement,
extend the rights offering and the period for exercising your rights. The rights
will expire at 5:00 p.m., New York City time, on , 2004, the expected
expiration time of the rights offering. We may decide to extend the expiration
date but the expiration date will not be later than , 2004. If
the commencement of the rights offering is delayed, the expiration date will be
similarly extended. If you do not exercise your subscription rights
37
prior to that time, your subscription rights will be null and void. We will not
be required to issue shares of our Series E preferred stock to you if the
subscription agent receives your subscription certificate or your payment after
that time, regardless of when you sent the subscription certificate and payment,
unless you send the documents in compliance with the guaranteed delivery
procedures described above. See also "The Rights Offering -- Conditions to the
Rights Offering" on page 32. We may cancel the rights offering at any time prior
to the issuance of the shares of our Series E Preferred Stock in our sole
discretion, in which event we will return your subscription payment, without
interest.
NO BOARD RECOMMENDATION
An investment in shares of our Series E preferred stock must be made
according to each investor's evaluation of its own best interests. Accordingly,
our board of directors makes no recommendation to rights holders regarding
whether they should exercise their rights.
TRADING AND LISTING OF THE SERIES E PREFERRED STOCK
The shares of Series E preferred stock will not be listed on any securities
exchange or the Nasdaq National Market or included in any automated quotation
system. We know of no party that currently intends to make a market in the
Series E preferred stock. An active trading market for the Series E preferred
stock may not develop or be sustained. If there is no active trading market, or
the trading market is not sustained, you may be unable to sell your shares of
Series E preferred stock or unable to sell your shares at a price that is
satisfactory to you.
SHARES OF SERIES E PREFERRED STOCK OUTSTANDING AFTER THE RIGHTS OFFERING
Assuming the conversion of the $11 million in principal plus interest
amount of convertible secured notes held by the General Atlantic Investors, the
exchange of $32.8 million in face value of our 5 3/4% of our convertible notes
held by the Cheung Kong Investors, the conversion of $15 million in principal
plus interest amount of convertible secured notes held by the January 2004
Investors and the exercise of all the subscription rights, either by holders of
our common stock on the record date or by the General Atlantic Investors and the
Cheung Kong Investors, or a combination thereof, approximately 54 million shares
of our Series E preferred stock will be issued and outstanding after the rights
offering.
EFFECTS OF RIGHTS OFFERING ON THE OWNERSHIP OF THE GENERAL ATLANTIC INVESTORS
AND THE CHEUNG KONG INVESTORS
Set forth below, for illustrative purposes only, are two scenarios which
indicate the effect the rights offering and related share issuance could have on
the relative voting and economic interest of the General Atlantic Investors and
the Cheung Kong Investors. As of February 1, 2004, assuming the conversion of
$11 million in principal and interest amount of convertible secured notes into
approximately 7.3 million shares of Series E preferred stock held by the General
Atlantic Investors, approximately $32.8 million in face value of our 5 3/4% of
our convertible notes for approximately 21.9 million shares of Series E
preferred stock held by the Cheung Kong Investors, the conversion of
approximately $15 million in principal and interest amount of convertible
secured notes into approximately 10 million shares of Series E preferred stock
and the amendment of the rights, preferences and privileges of the Series D
preferred stock as set forth in our , 2004 special meeting proxy
statement, the General Atlantic Investors beneficially own approximately 33.4%
of our outstanding securities and the Cheung Kong Investors own approximately
29.5% of our outstanding securities.
SCENARIO A -- All shares of Series E preferred stock offered in the rights
offering are fully subscribed by the holders of our common stock and the General
Atlantic Investors and the Cheung Kong Investors do not acquire any shares of
Series E preferred stock in the rights offering.
SCENARIO B -- The General Atlantic Investors acquire 55% and the Cheung
Kong Investors acquire 45% of all the shares of our Series E preferred stock
offered pursuant to the rights offering.
38
<Table>
<Caption>
TOTAL SHARES OF TOTAL SHARES OF
TOTAL SHARES OF SERIES E PREFERRED SERIES E PREFERRED
SERIES E PREFERRED STOCK ISSUED TO STOCK ISSUED TO
STOCK HELD BY THE HOLDERS OF THE GENERAL
GENERAL ATLANTIC COMMON STOCK ATLANTIC INVESTORS GENERAL ATLANTIC CHEUNG KONG
INVESTORS AND THE AND SPECIAL AND THE CHEUNG INVESTORS INVESTORS
CHEUNG KONG VOTING STOCK IN KONG INVESTORS IN BENEFICIAL BENEFICIAL
INVESTORS PRIOR TO THE THE RIGHTS THE RIGHTS OWNERSHIP OWNERSHIP
SCENARIO RIGHTS OFFERING OFFERING OFFERING(A) PERCENTAGE(B)(C) PERCENTAGE(B)(C)
- -------- ---------------------- ------------------- ------------------- ---------------- ----------------
29,196,663 33.4% 29.5%
A... 14,000,000 -- 29.5% 26.0%
B... -- 14,000,000 35.9% 31.3%
</Table>
- ---------------
(a) Assumes the amendment of the terms of the Series D preferred stock as
provided in the convertible note purchase and exchange agreement.
(b) Assumes exercise in full of warrants to purchase common stock, as amended
pursuant to the convertible note purchase and exchange agreement.
RIGHT TO BLOCK EXERCISE DUE TO REGULATORY ISSUE
We reserve the right to refuse the exercise of all of the rights, or some
of the rights, by any holder of rights where, in our opinion, we or the holder
would be required to obtain prior clearance or approval from any state, federal
or foreign regulatory authorities or from our shareholders for the exercise of
rights or ownership of shares of preferred stock based on any state, federal or
foreign laws, rules or regulations if, at the expiration time, this clearance or
approval has not been obtained. Examples of such regulations include federal,
state or foreign securities laws and the NASD rules, to which we are subject. We
will exercise this right if we become aware that any such exercise, or partial
exercise, may violate any regulation to which we are, or may become, subject. We
are not undertaking to advise you of any such required clearance or approval, to
obtain any clearance or approval or pay for any expenses incurred in seeking
that clearance or approval.
We are not making this rights offering in any state or other jurisdiction
in which it is unlawful to do so, nor are we selling or accepting any offers to
purchase any shares of our common stock from rights holders who are residents of
those states or other jurisdictions. We may delay the commencement of the rights
offering in those states or other jurisdictions, or change the terms of the
rights offering, in order to comply with the securities law requirements of
those states or other jurisdictions. We may decline to make modifications to the
terms of the rights offering requested by those states or other jurisdictions,
in which case, if you are a resident in those states or jurisdictions or, if you
are otherwise prohibited by federal or state laws or regulations from accepting
or exercising the subscription rights you will not be eligible to participate in
the rights offering.
DESCRIPTION OF CAPITAL STOCK
As of February 1, 2004, our authorized capital stock consisted of
125,000,000 shares of common stock, par value $0.001 per share, and 5,000,000
shares of preferred stock, par value $0.001 per share, of which 75,000 shares
have been designated as Series C Participating preferred stock and of which
4,188,587 shares have been designated as Series D Cumulative Redeemable
Convertible Participating preferred stock. As of that date, we had 20,968,319
shares of common stock outstanding and 4,188,587 shares Series D preferred stock
outstanding. As of that date, there was also one issued and outstanding share of
Special Voting Stock, par value $0.001 per share. If the proposal to adopt
amended and restated articles of incorporation is adopted by our shareholders
and effected by us, then our authorized capital stock will consist of
200,000,000 shares of common stock and 75,000,000 shares of preferred stock.
The following is a summary of the material terms of our capital stock
assuming our shareholders adopt the proposals to amend and restate our articles
of incorporation and the certificate of determination
39
for our Series D preferred stock. We must obtain shareholder approval of these
proposals and file these documents with the appropriate governmental authorities
prior to consummating the rights offering.
This summary does not purport to be complete or to contain all the
information that may be important to you. For a complete summary of the terms of
our capital stock you should read the amended and restated articles of
incorporation, the amended and restated certificate of determination for our
Series D preferred stock and our certificate of determination for our Series E
preferred stock (forms of which are filed as exhibits to the registration
statement on Form S-3 of which this prospectus is a part), and our bylaws,
certificate of determination for our Special Voting Stock and our certificate of
determination for our Series C Participating preferred stock, each of which we
have previously filed with the Securities and Exchange Commission.
COMMON STOCK
As of February 1, 2004, there were 21,078,569 shares of common stock
outstanding (including 110,250 shares of Class A non-voting preference shares of
our Nova Scotia subsidiary Critical Path Messaging Co. which may be exchanged at
any time for our common stock upon the election of the holder). The common stock
has a par value of $0.001 per share.
Dividends. Subject to the prior rights of the holders of our preferred
stock, holders of common stock are entitled to receive such dividends and other
distributions in cash, stock or property of Critical Path as may be declared by
our board of directors from time to time, out of assets or funds legally
available for dividends, provided that in the case of cash dividends or
dividends of assets, we are required to declare and pay to the holders of our
preferred stock on an as-converted basis any dividends declared or paid on the
common stock.
Voting Rights. Each share of common stock is entitled to one vote per
share on all matters submitted to our shareholders, including the election of
directors. The holders of common stock generally vote together with the holders
of our preferred stock as a single class.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up of the affairs of Critical Path, after payment or provision for
payment of our debts and other liabilities and any amounts to which the holders
of our preferred stock are entitled, our remaining assets and funds will be
divided among the holders of the common stock.
Listing and Transfer Agent. Our common stock is listed on The Nasdaq
National Market under the symbol "CPTH." Computershare Trust Company Inc. is the
transfer agent and registrar for our Common Stock.
BLANK CHECK PREFERRED STOCK
Our articles of incorporation authorize us to issue preferred in one or
more series having designations, rights, and preferences determined from time to
time by our board of directors. Accordingly, subject to applicable stock
exchange rules and the terms of existing preferred stock, our board of directors
is empowered, without the approval of the holders of common stock, to issue
shares of preferred stock with dividend, liquidation, conversion, voting, or
other rights that could adversely affect the voting power or other rights of the
holders of common stock that are outstanding or proposed to be issued. In some
cases, the issuance of preferred stock could delay a change of control or make
it harder to remove present management. In addition, the voting and conversion
rights of a series of preferred stock could adversely affect the voting power of
our common shareholders. Preferred stock could also restrict dividend payments
to holders of our common stock. Subject to the rights of holders of our existing
preferred stock we could create any new series or issue any additional shares of
preferred stock.
SERIES E REDEEMABLE CONVERTIBLE PREFERRED STOCK
There are currently no shares of Series E preferred stock outstanding.
Immediately prior to consummation of the rights offering there will be
approximately 40 million shares of Series E preferred
40
stock outstanding. For a description of the rights, preferences and privileges
of the Series E preferred stock, see the discussion under the heading "The
Rights Offering -- Terms of Series E Preferred Stock."
Computershare Trust Company Inc. will be the transfer agent and registrar
for our Series E preferred stock.
SERIES D CUMULATIVE REDEEMABLE CONVERTIBLE PREFERRED STOCK
Dividends. Subject to the rights and preferences of the Series E preferred
stock, the shares of Series D preferred stock rank senior to all capital stock
of Critical Path with respect to the payment of dividends. Dividends on these
shares of Series D preferred stock will accrue at a simple annual rate of 5 3/4%
whether or not declared by our board of directors. Dividends in respect of the
Series D preferred stock will not be paid in cash but will be added to the value
of the Series D preferred stock and will be taken into account for purposes of
determining the liquidation preference, conversion rate, dividends and voting
rights. We must declare or pay dividends on the Series D preferred stock when we
declare or pay dividends to the holders of common stock. Except for dividends
accruing to the Series E preferred stock, no dividends or distribution with
respect to any shares of capital stock may be made unless all dividends accruing
to the Series D preferred stock have been paid.
Liquidation. In the event of a liquidation, each share of Series D
preferred stock will be paid, prior to the payment of any other equity
securities (except for the Series E preferred stock), payments equal to the
greater of (a) the accreted value of the Series D preferred stock plus all
accrued dividends, (b) 1.6 times the original purchase price of the Series D
preferred stock ($22), or (c) the amount that would be paid to the holder of the
number of shares of common stock into which such shares of Series D preferred
stock are convertible immediately prior to the closing of such liquidation.
Change of Control. In the event of a change of control, each share of
Series D preferred stock will be paid, prior to the payment of any other equity
securities (except for the Series E preferred stock), payments equal to the
greater of (a) the sum of (i) the accreted value per share of the Series D
preferred stock, (ii) all accrued dividends, plus (iii) all dividends that would
have accrued through the fourth anniversary of the date shares of Series E
preferred stock are first issued, (b) 1.6 times the original purchase price of
the Series D preferred stock ($22), or (c) the amount that would be paid to the
holder of the number of shares of common stock into which such shares of Series
D preferred stock are convertible immediately prior to the closing of such
change in control. A change of control includes, among others, any merger
consolidation or other business combination transaction in which the
shareholders owning a majority of our voting securities do not own a majority of
our voting securities of the surviving entity, any tender, exchange or other
offer whereby any person obtains a majority of the voting securities, any proxy
contest in which a majority of the board of directors prior to such contest do
not constitute a majority of the board of directors after such contest, any sale
of all or substantially all of our assets or any other transaction that triggers
the issuance of rights pursuant to our Shareholder Rights Plan (which issuance
is not waived by the board of directors).
Redemption. If, on any date after the third anniversary of the date shares
of Series E preferred stock are first issued, the average closing price per
share of our common stock for any consecutive 60 trading days after the third
anniversary date, equals or exceeds 400% of the sum of the purchase price per
share of the Series D preferred stock plus all dividends that would have accrued
through the fourth anniversary of the date shares of Series E preferred stock
are first issued, we may call for redemption all, but not less than all, of the
outstanding shares of Series D preferred stock. The shares Series D preferred
stock must be called for redemption on the fourth anniversary of the date shares
of Series E preferred stock are first issued. Any call for redemption of the
Series D preferred stock is subject to the prior redemption of all the
outstanding shares of Series E preferred stock and must be paid in cash at a
price per share equal to the purchase price of the Series D preferred stock plus
all dividends that have accrued or would have accrued through the fourth
anniversary of the date shares of Series E preferred stock was first issued.
Voting. The holders of Series D preferred stock are entitled to elect one
member to our board of directors. In addition, each share of Series D preferred
stock entitles its holder to vote at any shareholders
41
meeting, on any matter entitled to be voted on by holders of our common stock,
voting together as a single class with other shares entitled to vote on such
matters. In that event, each share of Series D preferred stock entitles its
holder to cast that number of votes as is equal to the sum of the purchase price
for such share plus all accrued dividends with respect to such share divided by
$4.20.
In addition, holders of a majority of the outstanding shares of Series D
preferred stock must approve:
- Any amendment to our amended and restated articles of incorporation or
bylaws;
- Any issuance or authorization of shares of equity securities ranking
senior to the Series E preferred stock or any amendment to the number of
authorized shares of Series D preferred stock;
- The redemption of any junior equity securities or the payment of
dividends to junior equity holders; or
- The incurrence of any indebtedness, subject to certain exceptions.
Conversion. Each share of Series D preferred stock is convertible at any
time at the option of the holder into the number of shares of common stock
derived by dividing the accreted value of the Series D preferred stock plus all
accrued dividends by $1.50, subject to certain antidilution provisions. The
terms of the Series D preferred stock contain protection against dilution if
Critical Path effects a subdivision or combination of common stock or in the
event of a reclassification, recapitalization, stock split, stock dividend or
other distribution payable in securities of Critical Path or any other person.
Listing and Transfer Agent. Critical Path is the transfer agent and
registrar for our Series D preferred stock.
SPECIAL VOTING STOCK
There is one share of special voting stock, par value $0.001 per share,
outstanding which represents, as of February 1, 2004, 110,250 outstanding shares
of Class A non-voting preferred shares of Critical Path Messaging Co, an
unlimited liability company formed under the laws of Nova Scotia, and our wholly
owned subsidiary (referred to herein as our Subsidiary). Each "exchangeable
share" can be exchanged at any time for one share of our common stock upon the
election of the holder. The holders of these shares are entitled to vote by
directing the holder of the share of our special voting stock, which has one
vote for each share of Class A non-voting preference shares outstanding and held
by non-affiliates. Because the holders of exchangeable shares were not given the
opportunity to participate in the rights offering, they are entitled to receive
the economic equivalent to the rights issued to the holders of common stock in
the rights offering. As a result, we intend to cause our Subsidiary to issue to
holders of exchangeable shares additional exchangeable shares (or fractions of
additional shares) for each exchangeable share outstanding on the record date
equal in value to the rights issued to holders of common stock in the rights
offering. The number of exchangeable shares that will be issued will depend on
the fair market value of the rights determined during the offering period. The
special voting stock is not entitled to any dividends. Upon any liquidation,
winding-up or dissolution, the special voting stock is entitled to receive out
of the assets available for distribution an amount equal to $0.001. The
liquidation preference of the special voting stock ranks senior to our common
stock and junior to all other outstanding classes and series of our preferred
stock. The special voting stock is not subject to redemption but will
automatically be redeemed and cancelled for an amount equal to $0.001 when there
are no Class A non-voting preference shares outstanding.
Critical Path is the transfer agent and registrar for our special voting
stock.
SERIES C PARTICIPATING PREFERRED STOCK
See the discussion of our Series C participating preferred stock under the
heading "Anti-Takeover Provisions" below.
42
OPTIONS
As of February 1, 2004, there were outstanding options to purchase
12,685,237 shares of our common stock at a weighted average exercise price of
$17.42 per share.
WARRANTS
As of February 1, 2004, there were outstanding warrants to purchase
2,049,350 shares of our common stock. These warrants are exercisable at prices
that range between $360 and $2.49 per share.
ANTI-TAKEOVER PROVISIONS
Shareholder Rights Plan. On March 19, 2001, we adopted a shareholder
rights plan pursuant to the terms of a Preferred Stock Rights Agreement entered
into with Computershare Trust Company, Inc., acting as the rights agent.
To effect the rights plan, our board of directors declared a dividend of
one right for each outstanding share of common stock and each exchangeable share
(described above) held of record at the close of business on May 15, 2001. Each
right, when exercisable, entitles the registered holder to purchase one
one-thousandth of a share of Series C participating preferred stock, at a
purchase price of $25.00, subject to adjustment for, among other things, stock
splits and combinations.
Initially, the rights are "attached" to the common stock and exchangeable
shares and trade with the common stock and exchangeable shares. The rights
separate from the common stock or exchangeable shares (i) the tenth day (or such
later date as may be determined by our board of directors) after a person or
affiliated or associated group of persons acquired, or obtained the right to
acquire 15% or more of the outstanding shares of common stock (subject to
exceptions contained in the rights agreement, as amended, for certain large
investors who have acquired stock directly from the company) or (ii) the tenth
business day (or such later date as may be determined by our board of
directors), following the public announcement of a tender offer or exchange
offer which would result in someone becoming the owner of 15% or more of the
outstanding common stock. Following a separation, the rights become exercisable,
are separately tradable and we will mail separate rights certificates to
shareholders. Previous acquisitions of our securities directly from us by the
General Atlantic Investors, the Cheung Kong Investors and the January 2004
Investors have been excluded from triggering the exercisability of the rights
under the rights plan.
The rights expire on the earliest of May 15, 2011, or the redemption or
exchange of the rights as described below.
The purchase price, the number of rights and the number of shares of Series
C participating preferred stock (or other securities) issuable upon exercise of
the rights are subject to adjustment upon a stock dividend, stock split, reverse
split or combination.
Unless the rights are earlier redeemed, in the event that, after an
acquiring person has acquired more than 15% of the common stock, we are
acquired, proper provision must be made such that the rights (other than the
rights held by the acquiring person) become exercisable for shares of common
stock of the acquiring company with a market value equal to two times the
purchase price of the rights. If there is merely an acquisition of at least 15%
of our common stock without such approval, each rights (other than the rights
held by the acquiring person) shall become exercisable for common stock with a
market value of two times the such right's purchase price.
Prior to a 15% acquisition or the expiration of the rights, we may redeem
the rights in whole, but not in part, at a price of $0.001 per right.
In addition, our board of directors may, after a 15% acquisition (but less
than a 50% acquisition), exchange the rights for shares of common stock on a one
for one basis or for cash or other assets or securities of ours.
43
If issued, the Series C participating preferred stock will be nonredeemable
and junior to any other series of preferred stock we may issue, but will have a
preferential quarterly dividend equal to 1,000 times the cash dividend, if any,
declared on each share of common stock and 1,000 times the non-cash dividend, if
any, declared on each share of common stock and, in the event of our
liquidation, a preferred liquidation preference equal to 1,000 times the payment
per share of common stock, plus accrued and unpaid dividends. Each share of
Series C participating preferred stock will have 1,000 votes and will vote
together with the common stock.
Until a right is exercised, the holder will have no rights as a shareholder
of ours. We and the rights agent have broad discretion to amend the rights plan;
however, following a separation, no amendment may adversely affect the rights
holders.
The rights approved by the Board are designed to protect and maximize the
value of the outstanding equity interests in the Company in the event of an
unsolicited attempt by an acquirer to take over the Company in a manner or on
terms not approved by the board of directors.
Takeover attempts frequently include coercive tactics to deprive the
company's board of directors and its shareholders of any real opportunity to
determine the destiny of the company. The rights have been declared by the board
in order to deter such tactics, including a gradual accumulation of shares in
the open market of 15% or greater position to be followed by a merger or a
partial or two-tier tender offer that does not treat all shareholders equally.
These tactics unfairly pressure shareholders, squeeze them out of their
investment without giving them any real choice and deprive them of the full
value of their shares.
The rights are not intended to prevent a takeover of the company and will
not do so. Subject to the restrictions described above, the rights may be
redeemed by the company at $0.001 per right at any time prior to the date the
rights are separated from the common stock and exchangeable shares. Accordingly,
the rights should not interfere with any merger or business combination approved
by the board of directors.
However, the rights may have the effect of rendering more difficult or
discouraging an acquisition of the company deemed undesirable by the board of
directors. The rights may cause substantial dilution to a person or group that
attempts to acquire the company on terms or in a manner not approved by the
company's board of directors, except pursuant to an offer conditioned upon the
negation, purchase or redemption of the rights.
Issuance of the rights does not in any way weaken the financial strength of
the company or interfere with its business plans. The issuance of the rights
themselves has no dilutive effect, will not affect reported earnings per share,
should not be taxable to the company or to its shareholders, and will not change
the way in which the company's shares are presently traded.
As of the date of this prospectus, no shares of Series C participating
preferred stock have been issued.
Charter and Bylaw Provisions. 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. Our board of directors can
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.
Further, our Articles of Incorporation requires that all shareholder action be
taken at a shareholders' meeting. Special meetings of the shareholders may be
called only by the board of directors, the chairman of the board, the chief
executive officer and president, or by shareholders holding at least 10% of the
outstanding common stock. We also have 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. Shareholder
amendments to our bylaws require a two-thirds vote.
The provisions described above, together with the rights, may have the
effect of deterring a hostile takeover or delaying a change in our control or
management. See "-- Shareholder Rights Plan."
44
PLAN OF DISTRIBUTION
We are offering shares of our Series E preferred stock directly to you
pursuant to this rights offering. We have not employed any brokers, dealers or
underwriters in connection with the solicitation for exercise of subscription
rights in this rights offering and no commissions, fees or discounts will be
paid in connection with it. Our executive officers may contact holders of common
stock by mail, telephone, facsimile and personal interview and may request
brokers, dealers and other nominee shareholders to forward material relating to
the offers to beneficial owners of common stock. These officers and other
employees will not receive any commissions or compensation in connection with
these activities other than their normal employment compensation. We will pay
the fees and expenses of Computershare Trust Company Inc., as subscription
agent, and Georgeson Shareholder Communications Inc., as information agent, and
we have agreed to indemnify the subscription agent and the information agent
from certain liabilities in connection with the offering. We will pay out-of
pocket expenses, including payments to legal advisors, accountants and
subscription agents, printing costs, mailing costs and filing fees estimated to
total approximately $550,000.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material federal income tax
consequences of the rights offering to holders of common stock that hold such
stock as a capital asset for federal income tax purposes. This discussion is
based on laws, regulations, rulings and decisions in effect on the date of this
prospectus, all of which are subject to change (possibly with retroactive
effect) and to differing interpretations. This discussion applies only to
holders that are U.S. persons, which is defined as a citizen or resident of the
United States, a domestic partnership, a domestic corporation, any estate (other
than a foreign estate), and any trust so long as a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more U.S. persons have the authority to control all substantial
decisions of the trust. Generally, for federal income tax purposes an estate is
classified as a "foreign estate" based on the location of the estate assets, the
country of the estate's domiciliary administration, and the nationality and
residency of the domiciliary personal representative.
This discussion does not address all aspects of federal income taxation
that may be relevant to holders in light of their particular circumstances or to
holders who may be subject to special tax treatment under the Internal Revenue
Code of 1986, as amended, including, but not limited to, holders who are subject
to the alternative minimum tax, holders who are dealers in securities or foreign
currency, foreign persons (defined as all persons other than U.S. persons),
insurance companies, tax-exempt organizations, banks, financial institutions,
broker-dealers, holders who hold common stock as part of a hedge, straddle,
conversion or other risk reduction transaction, or who acquired common stock
pursuant to the exercise of compensatory stock options or warrants or otherwise
as compensation.
We have not sought, and will not seek, a ruling from the Internal Revenue
Service regarding the federal income tax consequences of the rights offering or
the related share issuances. The following summary does not address the tax
consequences of the rights offering or the related share issuance under foreign,
state, or local tax laws. ACCORDINGLY, EACH RECIPIENT OF RIGHTS SHOULD CONSULT
ITS TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES OF THE RIGHTS
OFFERING OR THE RELATED SHARE ISSUANCES.
The federal income tax consequences for a U.S. person holding of common
stock on receipt of subscription rights under the rights offering should be as
follows:
SUBSCRIPTION RIGHTS
Receipt. The distribution by a corporation to the holders of its common
stock of rights to acquire its convertible preferred stock will be treated for
tax purposes as a distribution of the convertible preferred
45
stock itself. The distribution by a corporation of convertible preferred stock
to holders of its common stock will not be taxable unless the distribution of
such stock would result in a "disproportionate" distribution. In general, a
distribution of convertible preferred stock will be treated as disproportionate
when considering all relevant facts and circumstances such as the time within
which the conversion right must be exercised, the dividend rate, the
marketability of the stock and the conversion price, the distribution is likely
to result in some shareholders exercising their conversion rights and receiving
common stock and others receiving money or other property (e.g., the receipt by
non-converting shareholders of Series E preferred stock redemption proceeds).
According to applicable Department of Treasury regulations, a distribution of
convertible preferred stock is unlikely to result in a disproportionate
distribution under circumstances where (i) the conversion right may be exercised
over a long period (e.g., 20 years) and (ii) the dividend rate is consistent
with market conditions at the time the convertible preferred stock is
distributed. In contrast, Department of Treasury regulations provide that a
distribution of convertible preferred stock is likely to result in a
disproportionate distribution under circumstances where (i) the conversion right
must be exercised within a relatively short period (e.g., four months) and (ii)
taking into account additional factors such as the conversion price, dividend
rate, redemption provisions and marketability of the convertible preferred stock
it may be anticipated that some shareholders will exercise their conversion
right and some will not. Because the determination of whether a distribution of
convertible preferred stock will be treated as disproportionate or not is based
on all relevant facts and circumstances, and because the applicable Department
of Treasury regulations only provide specific guidance in the more extreme cases
referred to above, it is not possible to definitively conclude whether the
distribution of the Series E preferred stock to holders of common stock would be
considered to result in a "disproportionate" distribution. Nevertheless, while
the issue is not free from doubt, our position for information reporting and
other United States federal income tax purposes is that you should not recognize
taxable income for federal income tax purposes in connection with the receipt of
subscription rights in the rights offering. Based on relevant Department of
Treasury regulations, however, the Internal Revenue Service may assert that your
receipt of subscription rights is currently taxable, with the consequences
described below under the heading "Alternative Treatment of Subscription
Rights." It is uncertain whether our position would be sustained by a court if
challenged by the Internal Revenue Service. The remainder of the discussion
under this heading "Subscription Rights" assumes that the distribution of the
subscription rights in the rights offering will not result in a
"disproportionate" distribution.
Tax Basis and Holding Period. Except as provided in the following
sentence, the tax basis of the subscription rights received by a holder in the
rights offering will be zero. If either (a) the fair market value of the
subscription rights on the date such subscription rights are distributed is
equal to at least 15% of the fair market value on such date of the common stock
with respect to which the subscription rights are received or (b) you elect, by
attaching a statement to your federal income tax return for the taxable year in
which the subscription rights are received, to allocate part of your tax basis
of such common stock to the subscription rights, then upon exercise or transfer
of the subscription rights, your tax basis in the common stock will be allocated
between the common stock and the subscription rights in proportion to their
respective fair market values on the date the subscription rights are
distributed. Your holding period for the subscription rights received in the
rights offering will include your holding period for the common stock with
respect to which the subscription rights were received.
Expiration. You should not recognize any gain or loss if you allow the
subscription rights received in the rights offering to expire, and your tax
basis in the common stock with respect to which such subscription rights were
distributed will be equal to the tax basis of such common stock immediately
before the receipt of the subscription rights in the rights offering.
Transfer of Rights. If you sell or exchange subscription rights you will
generally recognize capital gain or loss equal to the difference between the
amount realized and the basis, if any, of the rights sold or exchanged.
Exercise; Tax Basis in and Holding Period of Series E Preferred Stock. You
should not recognize any gain or loss upon the exercise of the subscription
rights received in the rights offering. The tax basis of the Series E preferred
stock acquired through exercise of the subscription rights should equal the sum
of
46
the subscription price for the Series E preferred stock and your tax basis, if
any, in the subscription rights as described above. Your holding period for the
Series E preferred stock acquired through exercise of the subscription rights
should begin on the date the subscription rights are exercised.
ALTERNATIVE TREATMENT OF SUBSCRIPTION RIGHTS
Receipt of the Subscription Rights. If the Internal Revenue Service were
to successfully assert that the distribution of the subscription rights in the
rights offering resulted in a "disproportionate" distribution, each holder would
be considered to have received a distribution with respect to such holder's
common stock in an amount equal to the fair market value of the subscription
rights received by such holder on the date of the distribution. This
distribution generally would be taxed as dividend income to the extent of your
ratable share of our current and accumulated earnings and profits. We do not
have any positive accumulated earnings and profits as of September 30, 2003 and,
although no assurance can be given, do not anticipate having positive earnings
and profits during 2004. The amount of any distribution in excess of our
earnings and profits will be applied to reduce, but not below zero, your tax
basis in your common stock, and any excess generally will be taxable to you as
capital gain (long-term, if your holding period with respect to your common
stock is more than one year as of the date of distribution). Under current law,
so long as certain holding period requirements are satisfied, the maximum
federal income tax rate on most dividends received by individuals before January
1, 2009 is generally 15%. Your tax basis in the subscription rights received
pursuant to the rights offering would be equal to their fair market value on the
date of distribution and the holding period for the rights would begin upon
receipt. The remainder of the discussion under this heading "Alternative
Treatment of the Subscription Rights" assumes that a holder's receipt of
subscription rights in the rights offering is a taxable event.
Transfer of Rights. If you sell or exchange subscription rights you will
generally recognize capital gain or loss equal to the difference between the
amount realized and the basis of the rights sold or exchanged.
Expiration. If your subscription rights lapse without being exercised, you
will recognize a capital loss equal to your tax basis in such expired
subscription rights. The deductibility of capital losses is subject to
limitations.
Exercise; Tax Basis in and Holding Period of the Series E Preferred
Stock. You should not recognize any gain or loss upon the exercise of the
subscription rights received in the rights offering. The tax basis of the Series
E preferred stock acquired through exercise of the subscription rights should
equal the sum of the subscription price for the Series E preferred stock and
your tax basis in the subscription rights as described above. The holding period
for the Series E preferred stock acquired through exercise of the subscription
rights should begin on the date the subscription rights are exercised.
SERIES E PREFERRED STOCK
Dividends. Under applicable Department of Treasury regulations, dividends
that accrue with respect to your Series E preferred stock will generally be
treated as additional redemption price of such stock at the time that it is
redeemed. A portion of this additional redemption price will be treated as
having been distributed to you in each taxable year in which you hold the Series
E preferred stock under an economic accrual method that reflects the effect of
the compounding of this additional redemption price as it accrues. The amount
treated as having been distributed to you generally will be taxed as dividend
income to the extent of your ratable share of our current and accumulated
earnings and profits at the time of the distribution, and will increase your tax
basis in the Series E preferred stock. Distributions in excess of our earnings
and profits will be applied to reduce, but not below zero, your tax basis in the
Series E preferred stock, and any excess generally will be taxable as capital
gain to you (long-term if you held your Series E preferred stock for more than
one year at the time of the distribution). Under current law, so long as certain
holding period requirements are satisfied, the maximum federal income tax rate
on most dividends received by individuals before January 1, 2009 is generally
15%.
47
Adjustments. In general, anti-dilution adjustments do not result in
constructive distribution. However, in certain circumstances, an adjustment to
the conversion ratio of the Series E preferred stock, or the failure to make
such an adjustment, may result in constructive distributions taxable as
described in the preceding paragraph. In such event, your tax basis in the
Series E preferred stock would be increased by the amount of any such dividend.
Conversion. You should not recognize gain or loss upon the conversion of
shares of Series E preferred stock into shares of our common stock (except to
the extent of cash, if any, received in lieu of fractional shares of common
stock). Your tax basis in the shares of common stock should equal your tax basis
in the shares of Series E preferred stock exchanged therefore, and your holding
period with respect to the shares of common stock should include your holding
period for the shares of Series E preferred stock exchanged therefor. The
receipt of cash (if any) in lieu of a fractional interest in a share of common
stock should be taxed as if the fractional share of common stock had been issued
and then redeemed for cash. Accordingly, you should generally recognize gain or
loss in an amount equal to the difference between the amount of cash received
for the fractional interest and your tax basis in the fractional interest.
Disposition. The sale or other taxable disposition of shares of Series E
preferred stock will result in capital gain or loss equal to the difference
between the amount realized in the disposition and your tax basis in the Series
E preferred stock immediately before the disposition of Series E preferred
stock. Such capital gain or loss will be long-term if you held the Series E
preferred stock for more than one year. The maximum federal income tax rate on
net long-term capital gain recognized by individuals before January 1, 2009 is
15% under current law. The deductibility of capital losses is subject to
limitations.
Redemption. Under section 302 of the Code, a redemption of Series E
preferred stock generally will be treated as a sale or exchange if such
redemption completely terminates your entire actual and constructive stock
interest in our equity or is either "substantially disproportionate" or is "not
essentially equivalent to a dividend" with respect to you. In determining
whether any of these tests is met, you must take into account the shares of
stock actually owned by you as well as the shares of stock constructively owned
by you under the constructive ownership rules of section 318 of the Code. Under
these constructive ownership rules, you will be deemed to own any shares of our
capital stock that are owned, actually and in some cases constructively, by
certain related individuals or entities and any shares of our capital stock that
you have a right to acquire by exercise of any option or by conversion of
exchange of a security.
A redemption of shares of your Series E preferred stock will be treated as
"substantially disproportionate" if (i) your percentage ownership of our
outstanding voting stock (including all classes of stock that have voting
rights) is reduced immediately after the redemption to less than 80% of your
percentage interest in such stock immediately before the redemption, (ii) your
percentage ownership of our outstanding common stock (both voting and
non-voting) immediately after the redemption is reduced to less than 80% of such
percentage ownership immediately before the redemption, and (iii) you own,
immediately after the redemption, less than 50% of the total of combined voting
power of all classes of our stock entitled to vote.
A redemption of shares of your Series E preferred stock will be treated as
"not essentially equivalent to a dividend" if you experience a "meaningful
reduction" in your percentage interest in our equity as a result of the
redemption. Depending on your particular circumstances, taking into account
whether you are part of management or our board of directors, even a small
reduction in your stock ownership interest in us may satisfy this test.
If the redemption is treated as a sale or exchange, you will recognize
capital gain or loss equal to the difference between the amount received in the
redemption and your tax basis in the Series E preferred stock immediately before
the redemption. Such capital gain or loss will be long-term if you have held the
Series E preferred stock for more than one year. If the redemption does not
constitute a sale or exchange, the receipt of cash will be treated as a
distribution with respect to the Series E preferred stock.
48
TAX OPINION
We have received an opinion from Pillsbury Winthrop LLP that the foregoing
discussion accurately summarizes the U.S. federal income tax consequences
generally applicable to a holder of our common stock who receives subscription
rights pursuant to the rights offering.
LEGAL MATTERS
Selected legal matters with respect to the validity of the securities
offered by this prospectus and the tax discussion in this prospectus will be
passed upon for us by Pillsbury Winthrop LLP, San Francisco, California.
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference to Critical Path Inc.'s Current Report on Form 8-K dated December 24,
2003 have been so incorporated in reliance on the report (which contains an
explanatory paragraph relating to the Company's ability to continue as a going
concern as described in Note 22 to the consolidated financial statements) of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission, or the SEC. The SEC
allows us to "incorporate by reference" the information we file with it, which
means that we can disclose important information to you by referring you to
those documents. The information incorporated by reference into this prospectus
is an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information as well as the
information included in this prospectus. Specifically, we are incorporating by
reference the documents listed below and any future filings we will make with
the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934 (File No. 000-25331):
- Our Annual Report on Form 10-K for the year ended December 31, 2002, as
amended by our Forms 10-K/A dated April 30, 2003 and May 9, 2003, except
for Item 8., including Report of Independent Accountants, Consolidated
Financial Statements, Notes to Consolidated Financial Statements and
Financial Statement Schedule which are listed in the Index of
Consolidated Financial Statements and which appear beginning on page 70
of the Form 10-K and are incorporated into Item 8;
- Our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2003,
June 30, 2003, and September 30, 2003;
- Our Current Reports on Form 8-K filed with the SEC on January 2, 2003,
February 7, 2003, February 19, 2003, April 25, 2003, July 24, 2003,
November 20, 2003, December 24, 2003, January 21, 2004, February 4, 2004
and February 5, 2004; and
- The description of our Series C participating preferred stock, par value
$0.001 per share, set forth in the registration statement on Form 8-A
filed with the SEC on May 7, 2001, together with Amendment Nos. 1, 2 and
3 on Form 8-A/A filed with the SEC on January 21, 2004.
49
We will provide a copy of any document incorporated by reference into this
prospectus and any exhibit specifically incorporated by reference in those
documents, without charge, by request directed to us at the following address
and telephone number:
Critical Path, Inc.
350 The Embarcadero
San Francisco, CA 94105
Attention: Michael J. Zukerman, Corporate Secretary
(415) 541-2500
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements other
information with the SEC. You may read or copy any document we file at the
public reference room maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of this information may also be obtained by mail
from the SEC's Public Reference Branch at 450 Fifth Street, N.W., Washington,
D.C. 20549. In addition, our filings with the SEC are also available to the
public on the SEC's Internet Web site at www.sec.gov.
We have filed with the SEC a registration statement on Form S-3 under the
Securities Act of 1933 with respect to this rights offering. This prospectus
does not contain all of the information set forth in the registration statement
and its exhibits. Statements made by us in this prospectus as to the contents of
any contract, agreement or other document referred to in this prospectus are not
necessarily complete. For a more complete description of these contracts,
agreements or other documents, you should carefully read the exhibits to the
registration statement and the documents which we reference under the caption
"Incorporation of Certain Documents by Reference."
The registration statement, together with its exhibits and schedules, which
we filed with the SEC, may also be reviewed and copied at the public reference
facilities of the SEC located at the addresses set forth above. Please call the
SEC at 1-800-SEC-0330 for further information on its public reference
facilities.
This prospectus is part of a registration statement we filed with the SEC.
You should rely only on the information contained, or incorporated by reference
in, this prospectus. We have not authorized anyone to provide information
different from that contained in, or incorporated by reference in, this
prospectus. This prospectus is not an offer to sell or a solicitation of an
offer to buy these securities in any state where the offer or sale is not
permitted. This prospectus is not an offer to sell or a solicitation of an offer
to buy these securities in any circumstance under which the offer or
solicitation is not permitted. The information contained in this prospectus is
correct only as of the date of this prospectus, regardless of the time of the
delivery of this prospectus or any sale of these securities.
50
The Subscription Agent For the Rights Offering is:
Computershare Trust Company
By Mail:
Computershare Trust Company
P.O. Box 1596
Denver, Colorado
80201-1596
By Hand or Overnight Courier:
Computershare Trust Company
350 Indiana Street, Suite 800
Golden, Colorado
80401
Telephone Number for Confirmation: (303) 262-0600 Ext. 4732
The Information Agent for the Rights Offering is:
Georgeson Shareholder Communications Inc.
17 State Street, 10th Floor
New York, New York
10004
Banks and Brokerage Firms, please call: (212) 440-9000
Shareholders, please call toll free: (800) 843-1451
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
All fees and expenses other than the SEC registration fee are estimated.
The expenses listed below will be paid by the Company.
<Table>
<Caption>
Securities and Exchange Commission registration fee......... $ 1,700
Printing and engraving expenses............................. 70,000
Nasdaq National Market listing fee.......................... 45,000
Accounting fees and expenses................................ 175,000
Legal fees and expenses..................................... 200,000
Subscription Agent fees and expenses........................ 23,000
Information Agent fees and expenses......................... 15,000
Blue Sky filing fees........................................ 15,000
Miscellaneous............................................... 5,300
Total....................................................... $550,000
--------
</Table>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 317 of the California Corporations Code provides for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article V, Section B of our
articles of incorporation (Exhibit 3.1 hereto) provides for indemnification of
our directors, officers, employees and other agents to the extent and under the
circumstances permitted by the California Corporations Code. We have also
entered into agreements with our directors and officers that will require us,
among other things, to indemnify them against certain liabilities that may arise
by reason of their status or service as directors or officers to the fullest
extent permitted by law.
ITEM 16. EXHIBITS.
<Table>
3.1 Form of Certificate of Amendment to Amended and Restated
Articles of Incorporation
4.1 Form of Certificate of Determination of Preferences of
Series E Redeemable Convertible Preferred Stock
4.2 Form of Amended and Restated Certificate of Determination of
Preferences of Series D Cumulative Redeemable Convertible
Preferred Stock
4.3 Form of Subscription Rights Certificate
4.4 Form of Series E Convertible Preferred Stock Certificate
5.1 Opinion of Pillsbury Winthrop LLP
8.1 Opinion of Pillsbury Winthrop LLP regarding certain tax
matters
12.1 Statement Regarding Computation of Ratios
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2 Consent of Pillsbury Winthrop LLP (included in Exhibits 5.1
and 8.1)
24.1* Power of Attorney
99.1 Form of Instructions for Use of Critical Path Subscription
Rights Certificates
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Letter to Shareholders Who are Record Holders
</Table>
II-1
<Table>
99.4 Form of Letter to Shareholders Who are Not Beneficial Owners
99.5 Form of Letter to Client of Shareholders Who are Not
Beneficial Owners
99.6 Form of Nominee Holder Certification
99.7 Form of Beneficial Owner Election Form
</Table>
- ---------------
* Previously filed for Messrs. Dove, Ford and Springsteel (see page II-3 of Form
S-3 filed on December 24, 2003) and for Mr. Currie (see exhibit 24.1 of
Amendment No. 1 to Form S-3 filed on February 12, 2004).
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(a) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a) and (b) do not apply if the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d)
of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to any charter provision, by-law or
II-2
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Francisco, State of California, on March 4, 2004.
CRITICAL PATH, INC.
By: /s/ WILLIAM E. MCGLASHAN, JR.
------------------------------------
William E. McGlashan, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
<Table>
<Caption>
DATE SIGNATURE TITLE
---- --------- -----
March 4, 2004 /s/ WILLIAM E. MCGLASHAN, JR. Chairman of the Board; Director
-------------------------------------- and Chief Executive Officer
William E. McGlashan, Jr. (principal executive officer)
March 4, 2004 /s/ JAMES CLARK Executive Vice President and Chief
-------------------------------------- Financial Officer
James Clark (principal accounting officer)
March 4, 2004 * Director
--------------------------------------
Peter L. S. Currie
March 4, 2004 * Director
--------------------------------------
Ross Dove
March 4, 2004 * Director
--------------------------------------
William E. Ford
March 4, 2004 /s/ FROST R. R. PRIOLEAU Director
--------------------------------------
Frost R. R. Prioleau
March 4, 2004 * Director
--------------------------------------
Steven R. Springsteel
</Table>
*By: /s/ MICHAEL J. ZUKERMAN
------------------------------------------------
Michael J. Zukerman
As Attorney-In-Fact
II-4
EXHIBIT INDEX
<Table>
3.1 Form of Certificate of Amendment to Amended and Restated
Articles of Incorporation
4.1 Form of Certificate of Determination of Preferences of
Series E Redeemable Convertible Preferred Stock
4.2 Form of Amended and Restated Certificate of Determination of
Preferences of Series D Cumulative Redeemable Convertible
Preferred Stock
4.3 Form of Subscription Rights Certificate
4.4 Form of Series E Convertible Preferred Stock Certificate
5.1 Opinion of Pillsbury Winthrop LLP
8.1 Opinion of Pillsbury Winthrop LLP regarding certain tax
matters
12.1 Statement Regarding Computation of Ratios
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2 Consent of Pillsbury Winthrop LLP (included in Exhibits 5.1
and 8.1)
24.1* Power of Attorney
99.1 Form of Instructions for Use of Critical Path Subscription
Rights Certificates
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Letter to Shareholders Who are Record Holders
99.4 Form of Letter to Shareholders Who are Not Beneficial Owners
99.5 Form of Letter to Client of Shareholders Who are Not
Beneficial Owners
99.6 Form of Nominee Holder Certification
99.7 Form of Beneficial Owner Election Form
</Table>
- ---------------
* Previously filed for Messrs. Dove, Ford, and Springsteel (see page II-3 of
Form S-3 filed on December 24, 2003) and for Mr. Currie (see exhibit 24.1 of
Amendment No. 1 to Form S-3 filed on February 12, 2004).