<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended SEPTEMBER 30, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________.
Commission file number 0-25331
CRITICAL PATH, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 91-1788300
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
320 FIRST STREET, SAN FRANCISCO, CALIFORNIA 94105
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(Address of principal executive offices) (Zip code)
</TABLE>
415-808-8800
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date:
AS OF SEPTEMBER 30, 1999, THE COMPANY HAD OUTSTANDING 43,046,364 SHARES OF
COMMON STOCK, $ 0.001 PAR VALUE PER SHARE.
<PAGE> 2
CRITICAL PATH, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets: September 30, 1999 and
December 31, 1998 2
Condensed consolidated statements of operations: Three and
nine months ended September 30, 1999 and 1998 3
Condensed consolidated statements of cash flows: Nine months
ended September 30, 1999 and 1998 4
Notes to condensed consolidated financial statements 5
Item 2. Management's discussion and analysis of financial
condition and results of operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 38
Item 6. Exhibits and Reports on Form 8-K 39
Signature 40
</TABLE>
i
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PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
CRITICAL PATH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Sep. 30, 1999 Dec. 31, 1998
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 146,833 $ 14,791
Restricted cash 325 325
Accounts receivable, net 4,952 121
Prepaid expenses and other current assets 19,168 138
--------- ---------
Total current assets 171,278 15,375
Investments 11,514 --
Furniture and equipment, net 30,862 4,687
Intangible assets, net 278,487 --
Other assets 1,053 601
--------- ---------
$ 493,194 $ 20,663
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 8,332 $ 423
Accrued compensation and benefits 2,693 426
Deferred revenue, current 971 500
Capital lease obligations, current 3,686 1,502
--------- ---------
Total current liabilities 15,682 2,851
Deferred revenue, long-term 202 --
Capital lease obligations, long-term 4,664 2,454
--------- ---------
Total liabilities 20,548 5,305
--------- ---------
Contingencies (Note 8)
Shareholders' equity:
Series A Convertible Preferred Stock,
$0.001 par value, 13,288 shares authorized,
12,725 shares issued and outstanding -- 13
Series B Convertible Preferred Stock,
$0.001 par value, 10,000 shares authorized,
3,637 shares issued and outstanding -- 4
Common Stock, $0.001 par value, 150,000 and
38,636 shares authorized; 43,046 shares
issued and outstanding (net of 134 treasury
shares at a cost of $229) at September 30,
1999; 8,294 shares issued and outstanding
at December 31, 1998 43 8
Additional paid-in capital 612,898 46,390
Notes receivable from shareholders (1,107) (1,151)
Unearned compensation (75,427) (17,371)
Unrealized gain on investment 7,014 --
Accumulated deficit (70,775) (12,535)
--------- ---------
Total shareholders' equity 472,646 15,358
--------- ---------
$ 493,194 $ 20,663
========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 4
CRITICAL PATH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues(1) $ 4,913 $ 156 $ 7,968 $ 292
Cost of net revenues(2) (7,523) (941) (13,860) (1,253)
-------- -------- -------- --------
Gross profit (loss) (2,610) (785) (5,892) (961)
-------- -------- -------- --------
Operating expenses:
Sales and marketing 3,557 558 8,760 836
Research and development 1,895 560 4,705 1,237
General and administrative 3,678 895 7,919 2,088
Acquisition-related bonus compensation 570 -- 570 --
Amortization of intangibles 9,263 -- 9,813 --
Stock-based expenses 5,425 224 25,244 868
-------- -------- -------- --------
Total operating expenses 24,388 2,237 57,011 5,029
-------- -------- -------- --------
Loss from operations (26,998) (3,022) (62,903) (5,990)
Other income (expense):
Interest income 2,841 48 5,074 120
Interest expense(3) (167) (87) (411) (262)
-------- -------- -------- --------
Net loss $(24,324) $ (3,061) $(58,240) $ (6,132)
======== ======== ======== ========
Other comprehensive income, before tax:
Unrealized gain (loss) on investment $ (7,475) $ -- $ 7,014 $ --
-------- -------- -------- --------
Other comprehensive income (loss), before tax (7,475) -- 7,014 --
Income tax effect -- -- -- --
-------- -------- -------- --------
Other comprehensive income (loss), net of tax $ (7,475) -- $ 7,014 --
-------- -------- -------- --------
Comprehensive loss $(31,799) $ (3,061) $(51,226) $ (6,132)
======== ======== ======== ========
Net loss per share (basic and diluted) $ (0.65) $ (0.74) $ (2.26) $ (1.78)
======== ======== ======== ========
Weighted average shares (basic and diluted) 37,158 4,118 25,715 3,445
======== ======== ======== ========
Acquisition-related bonus charges included in:
(2) Cost of net revenues $ 130 -- $ 130 --
Stock-based charges included in:
(1) Net revenues $ -- $ 82 $ 106 $ 102
(2) Cost of net revenues $ 2,712 $ 45 $ 3,901 $ 66
(3) Interest expense $ (16) $ (16) $ (48) $ (145)
</TABLE>
See accompanying notes.
3
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CRITICAL PATH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
Sep. 30, Sep. 30,
1999 1998
--------- ---------
<S> <C> <C>
Operating activities:
Net loss $ (58,240) $ (6,132)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts 135 --
Depreciation and amortization 14,017 597
Amortization of warrants and stock purchase rights 14,006 329
Amortization of unearned compensation 15,293 852
Changes in assets and liabilities,
net of amounts acquired:
Accounts receivable, net (1,562) (232)
Prepaid expenses and other assets (3,997) (27)
Accounts payable and accrued liabilities 2,928 (389)
Accrued compensation and benefits 2,018 60
Deferred revenue (438) 1,100
--------- ---------
Net cash used in operating activities (15,840) (3,842)
--------- ---------
Cash flows from investing activities:
Purchases of furniture and equipment (21,843) (491)
Purchases of investments (4,500) --
Payments for acquisitions, net of cash acquired (78,223) --
Loans to third parties (15,000) --
Notes receivable from officers (122) --
--------- ---------
Net cash used in investing activities (119,688) (491)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of convertible preferred
stock, net 12,496 23,445
Proceeds from issuance of common stock, net 257,372 5
Proceeds from equipment lease line -- 198
Proceeds from convertible promissory notes payable -- 500
Repayment of convertible promissory notes payable -- (227)
Proceeds from payments of shareholder notes receivable 97 --
Principal payments on capital lease obligations (2,166) (489)
Purchase of common stock (229) --
--------- ---------
Net cash provided by financing activities 267,570 23,432
--------- ---------
Net increase in cash and cash equivalents 132,042 19,099
Cash and cash equivalents at beginning of period 14,791 1
========= =========
Cash and cash equivalents at end of period $ 146,833 $ 19,100
========= =========
Supplemental cash flow disclosure:
Cash paid for interest $ 363 $ 117
Non-cash investing and financing activities:
Property and equipment acquired through
capital leases $ 5,863 $ 4,152
Common stock issued for notes receivable $ 29 $ 85
Conversion of notes payable into Convertible
Preferred Stock $ -- $ 1,120
Unrealized gain on investment $ 7,014 --
Common stock and options issued for acquisitions $ 209,489 --
</TABLE>
See accompanying notes.
4
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CRITICAL PATH, INC.
Notes to Condensed Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial information is unaudited but reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the consolidated financial
position and results of operations for the interim periods. The consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto, together with management's discussion
and analysis of financial condition and results of operations, for the fiscal
year ended December 31, 1998 as presented in Critical Path, Inc.'s (the
"Company") Form S-1 Registration Statement filed on June 1, 1999. The results of
operations for the nine months ended September 30, 1999 are not necessarily
indicative of the results to be expected for the entire fiscal year.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 133, as amended by SFAS 137, is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000, with
earlier application encouraged. Critical Path does not currently use derivative
instruments.
NOTE 3 - NET LOSS PER SHARE
Net loss per share is calculated in accordance with SFAS No. 128, "Earnings per
Share" and Securities and Exchange Commission ("SEC") Staff Accounting Bulletin
No. 98 ("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98, basic net
loss per share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
and potential common shares outstanding during the period if their effect is
dilutive. Potential common shares are composed of restricted common stock and
incremental common and preferred shares issuable upon the exercise of stock
options and warrants. At September 30, 1999 and 1998, 19,182,785 and 6,460,319
potential common shares, respectively, were excluded from the determination of
diluted net loss per share as the effect of such shares is anti-dilutive.
NOTE 4 - COMMON STOCK WARRANT ISSUED FOR SERVICES
In January 1999, the Company entered into an agreement with ICQ, Inc. ("ICQ") ,
a subsidiary of America Online, Inc., pursuant to which it will provide email
hosting services that will be integrated with ICQ's instant messaging service
provided to ICQ's customers. The ICQ instant messaging service is designed to
allow users to communicate in real time over the Internet. As part of the
agreement, ICQ agreed to provide sub-branded advertising for the Company in
exchange for a warrant to purchase 2,442,766 shares of common stock, issuable
upon attainment
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of each of five milestones. The following table summarizes the shares underlying
each milestone and the related exercise price:
<TABLE>
<CAPTION>
Shares
Underlying Exercise
Warrant Price
---------- --------
<S> <C> <C>
Milestone 1............................................. 814,254 $ 4.26
Milestone 2............................................. 407,128 $ 5.50
Milestone 3............................................. 407,128 $ 6.60
Milestone 4............................................. 407,128 $ 8.80
Milestone 5............................................. 407,128 $ 11.00
---------
Totals................................................ 2,442,766
=========
</TABLE>
In the quarter ended June 30, 1999, the Company amended the vesting terms of its
agreement with ICQ. The revised vesting terms did not impact the shares
underlying the first milestone, which vested immediately upon the execution of
the agreement. The shares underlying the remaining milestones vest on the date
in a quarter in which ICQ completes a minimum registration of 100,000
sub-branded ICQ mailboxes, compared to 250,000 sub-branded ICQ mailboxes as
provided in the terms of the original agreement. The amended agreement also
provides that only one milestone may be achieved on a quarterly basis.
Using the Black-Scholes option pricing model and assuming a term of seven years
and expected volatility of 90%, the initial fair value of the warrant on the
effective date of the agreement approximated $16.5 million. The shares
underlying the second through fifth milestones will be remeasured at each
subsequent reporting date until each sub-branded ICQ mailbox registration
threshold is achieved and the related warrant shares vest. In the event such
remeasurement results in increases or decreases from the initial fair value,
which could be substantial, these increases or decreases will be recognized
immediately, in the event the fair value of the shares underlying the milestone
has been previously recognized, or over the remaining term.
At March 31, 1999, none of the registration milestones specified within the ICQ
warrant had been achieved. Therefore, the shares underlying the second through
the fifth milestones of the ICQ warrant were remeasured using the closing price
of the Company's common stock on March 31, 1999 of $77.00 per share. This
remeasurement resulted in an increase to the fair value of the warrant of $109.4
million, bringing the total fair value of the warrant to $125.9 million as of
March 31, 1999.
At June 30, 1999, none of the registration milestones specified within the ICQ
warrant agreement had been achieved. Therefore, the shares underlying the second
through the fifth milestones of the ICQ warrant were remeasured using the
closing price of the Company's common stock on June 30, 1999 of $55.3125 per
share. This remeasurement resulted in a decrease to the fair value of the
warrant of $35.0 million compared to the fair value of the warrant on March 31,
1999, bringing the total fair value of the warrant to $90.9 million as of June
30, 1999.
At September 30, 1999, the second milestone specified within the ICQ warrant
agreement had been achieved. The shares underlying this milestone were
remeasured using the closing price of the Company's common stock on August 19,
1999, the date on which the milestone was achieved. The closing price of the
Company's common stock on August 19, 1999 was $36.6875.
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<PAGE> 8
The shares underlying the third through the fifth milestones of the ICQ warrant
were remeasured using the closing price of our common stock on September 30,
1999 of $40.34375. Together, these remeasurement calculations resulted in a
decrease to the fair value of the warrant of $26.0 million compared to the fair
value of the warrant on June 30, 1999, bringing the total fair value of the
warrant to $64.9 million as of September 30, 1999.
The revised fair value continues to be amortized ratably over the remainder of
the four-year term of the agreement, resulting in a quarterly amortization
charge to advertising expense in the amount of $4.1 million. Based on the
revised fair value of the warrant, the resulting cumulative amortization charge
totaled $12.2 million for the nine months ended September 30, 1999. As an
amortization charge of $11.4 million had been recognized during the six months
ended June 30, 1999, the difference of approximately $800,000 was recognized as
advertising expense in the quarter ended September 30, 1999.
As of September 30, 1999, only two of the five milestones had been attained. The
Company expects that future changes in the trading price of our common stock at
the end of each quarter, and at the time certain milestones are achieved, will
cause additional substantial changes in the ultimate amount of the related
stock-based charges.
NOTE 5 - INITIAL AND SECONDARY PUBLIC OFFERING OF COMMON STOCK
On March 29, 1999, the Company completed its initial public offering of
5,175,000 shares of common stock (including the exercise of the underwriters'
overallotment option) and realized net proceeds of $114.1 million.
On June 2, 1999, the Company completed its secondary public offering of
3,000,000 shares of common stock and realized net proceeds of $140.7 million.
NOTE 6 - ACQUISITIONS
On May 26, 1999, the Company acquired substantially all the operating assets of
the Connect Service business of Fabrik Communications ("Fabrik"). The
acquisition has been accounted for using the purchase method of accounting and,
accordingly, the net assets and results of operations Fabrik's Connect Service
have been included in the Company's consolidated financial statements since the
acquisition date. The purchase price has been allocated to the tangible and
intangible net assets acquired on the basis of their respective fair values on
the date of acquisition. The total purchase price was $20.1 million, consisting
of $12.0 million cash, common stock valued at $8.0 million, and other
acquisition-related expenses of approximately $100,000. Of the total purchase
price, approximately $500,000 was allocated to property and equipment, and the
remainder was allocated to intangible assets, including customer list ($2.1
million), assembled workforce ($400,000) and goodwill ($17.1 million). The
acquired intangible assets will be amortized over their estimated useful lives
of two to three years. Goodwill will be amortized using the straight-line method
over three years, resulting in a quarterly charge of approximately $1.4 million
during the amortization period.
On July 21, 1999, the Company acquired dotOne Corporation ("dotOne"), a leading
corporate email messaging service provider. The acquisition has been accounted
for using the purchase method of accounting and, accordingly, the net assets and
results of operations of dotOne have been included in the Company's consolidated
financial statements since the acquisition date. The purchase price has been
allocated to the tangible net liabilities and intangible net assets acquired on
the basis of their respective fair values on the date of acquisition. The total
purchase
7
<PAGE> 9
price was $57.0 million, consisting of $17.5 million cash, common stock valued
at $35.0 million, assumed stock options with an estimated fair market value of
$3.2 million, and other acquisition-related expenses of approximately $1.3
million. Of the total purchase price, approximately $1.7 million was allocated
to net tangible liabilities, and the remainder was allocated to intangible
assets, including customer list ($4.6 million), assembled workforce ($1.5
million), existing technology ($600,000), and goodwill ($52.0 million). The
acquired intangible assets will be amortized over their estimated useful lives
of three to five years. Goodwill will be amortized using the straight-line
method over three years, resulting in a quarterly charge of $4.3 million during
the amortization period.
The following cash and non-cash entries were recorded in connection with the
dotOne acquisition:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Fair value of assets acquired $ 60,484
Liabilities assumed 3,497
Fair value of common stock and options issued 38,200
---------
Cash paid, including acquisition costs 18,787
Less: cash acquired 419
---------
Net cash paid $ 18,368
=========
</TABLE>
On August 31, 1999, the Company acquired Amplitude Software Corporation
("Amplitude"), a leading provider of Internet calendaring and resource
scheduling solutions. The acquisition has been accounted for using the purchase
method of accounting and, accordingly, the net assets and results of operations
of Amplitude have been included in the Company's consolidated financial
statements since the acquisition date. The purchase price has been allocated to
the tangible and intangible net assets acquired on the basis of their respective
fair values on the date of acquisition. The total purchase price was $214.4
million, consisting of $45.0 million cash, common stock valued at $141.3
million, assumed stock options with an estimated fair market value of $22.0
million, and other acquisition-related expenses of approximately $6.1 million.
Of the total purchase price, approximately $4.4 million was allocated to net
tangible assets, and the remainder was allocated to intangible assets, including
customer list ($600,000), assembled workforce ($3.8 million), existing
technology ($4.1 million), and goodwill ($201.5 million). The acquired
intangible assets will be amortized over their estimated useful lives of two to
four years. Goodwill will be amortized using the straight-line method over four
years, resulting in a quarterly charge of approximately $12.6 million during the
amortization period.
The following cash and non-cash entries were recorded in connection with the
Amplitude acquisition:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Fair value of assets acquired $ 217,916
Liabilities assumed 3,536
Fair value of common stock and options issued 163,289
---------
Cash paid, including acquisition costs 51,091
Less: cash acquired 3,337
---------
Net cash paid $ 47,754
=========
</TABLE>
The following unaudited pro forma summary presents the Company's consolidated
results of operations for the nine months ended September 30, 1999 and 1998 as
if the acquisitions had been consummated at the beginning of each period. The
pro forma consolidated results of
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operations include certain pro forma adjustments, including the amortization of
intangible assets, the reduction of interest income for lower cash balances as a
result of the elimination of the Fabrik cash balance which was not acquired by
the Company.
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1999 1998
---- ----
<S> <C> <C>
Net revenues $ 19,573 $ 14,275
Net loss (114,949) (70,683)
Net loss per share:
Basic and diluted ( 3.84) ( 8.51)
</TABLE>
The pro forma results are not necessarily indicative of those that would have
actually occurred had the acquisitions taken place at the beginning of the
periods presented.
On October 21, 1999, the Company announced that it had signed a definitive
agreement to acquire all outstanding shares of Isocor, a provider of
standards-based messaging and directory software products and services. On
November 3, 1999, the Company announced that it had signed a definitive
agreement to acquire all outstanding shares in FaxNet ("FaxNet"), a supplier of
fax and integrated messaging solutions. On November 4, 1999, the Company
announced that it had signed a definitive agreement to acquire all outstanding
shares in The DocSpace Company, Inc. ("DocSpace"), a provider of secure file
delivery and storage services. The closing of these transactions is contingent
upon approval by the companies' shareholders, approval by regulatory agencies,
and other provisions within the agreements. Should these acquisitions close, the
Company intends to account for each of them using the purchase method of
accounting and, accordingly, the respective purchase prices will be allocated to
the tangible and intangible net assets acquired on the basis of their respective
fair values on the date of the respective acquisitions.
NOTE 7 - ACQUISITION-RELATED BONUS PROGRAM
In connection with its acquisition of Amplitude, the Company established a bonus
program in the aggregate amount of $10 million to provide incentive for former
Amplitude employees to continue their employment with Critical Path. Payment of
bonuses to the listed employees will occur one year following the date of
acquisition, unless the listed employees voluntarily terminate their employment
with the Company prior to August 31, 2000. The aggregate amount of the eligible
bonus is adjusted downward at each point that a former Amplitude employee
chooses to terminate his or her employment with the Company. The amount of any
such downward adjustment corresponds to the amount that the terminating employee
would have received had he or she elected to continue employment with the
Company. A ratable share of the adjusted eligible bonus amount will be accrued
and charged to compensation expense over the 12 months ending August 31, 2000.
As of September 30, 1999, the adjusted eligible bonus amount was $8.4 million,
and the ratable charge to compensation expense was $700,000. Based on the
functions of the employees scheduled to receive acquisition bonuses, $130,000 of
the compensation charge was allocated to cost of net revenues and $570,000 was
allocated to operating expenses.
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<PAGE> 11
NOTE 8 - CONTINGENCIES
The Company is party to various legal proceedings in the ordinary course of its
business. The Company believes that the ultimate outcome of these matters will
not have a material adverse impact on its financial position, results of
operations, or operating cash flow.
10
<PAGE> 12
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
report, as well as the Company's Registration Statements on Form S-1. The
following discussion contains forward-looking statements. Critical Path's actual
results may differ significantly from those projected in the forward-looking
statements. Factors that might cause future results to differ materially from
those projected in the forward-looking statements include, but are not limited
to, future enhancements of our service offering, potential expansion of our
employee base and operating assets, acquisitions, competition, development of
new strategic relationships, opening of new data centers and sales offices,
additional investments in technology, impact of Year 2000 issues, and those
discussed in "Additional Factors That May Affect Future Operating Results" and
elsewhere in this report. Readers are cautioned not to place undue reliance on
these forward-looking statements. The Company has no obligation to publicly
release the results of any revisions to these forward-looking statements to
reflect events or circumstances after the date of this filing.
Overview
Critical Path was founded in February 1997 to deliver email hosting solutions to
Internet service providers, web hosting companies, web portals and corporations.
From its inception to October 1997, Critical Path's operating activities related
primarily to the planning and development of our proprietary technological
solution, recruitment of personnel, raising of capital and purchase of operating
assets. Critical Path initiated its email hosting service in October 1997. We
have continued to make investments to improve the quality of our service. In
December 1997, we enhanced our initial service offering, a hosting service based
on Post Office Protocol 3, with the addition of a web mail interface. Post
Office Protocol 3 is a standard protocol for receiving email commonly referred
to as "POP3". In January 1999, we further enhanced our service with the addition
of an offering based on the Lightweight Directory Access Protocol, or "LDAP," a
directory software protocol.
In May of 1999, we acquired substantially all the operating assets of the
Connect Service business of Fabrik Communications, Inc. We purchased the ongoing
business operations as well as nearly 500 customer relationships of Fabrik. The
acquisition has been accounted for using the purchase method of accounting and,
accordingly, the purchase price has been allocated to the net assets acquired on
the basis of their respective fair values on the date of acquisition. The total
purchase price of $20.1 million consisted of $12.0 million cash, common stock
valued at $8.0 million, and other acquisition costs of approximately $100,000.
Of the total purchase price, approximately $500,000 was allocated to property
and equipment, and the remainder was allocated to intangible assets, including
customer list ($2.1 million), assembled workforce ($400,000), and goodwill
($17.1 million). The acquired intangible assets will be amortized over their
estimated useful lives of two to three years. Goodwill will be amortized using
the straight-line method over three years, resulting in a quarterly charge of
$1.4 million during the amortization period. At September 30, 1999, cumulative
amortization of intangibles totaled $2.2 million.
In July of 1999, we acquired all outstanding shares of dotOne Corporation, a
leading provider of corporate email and messaging services. The acquisition has
been accounted for using the
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<PAGE> 13
purchase method of accounting and, accordingly, the purchase price has been
allocated to the tangible net liabilities and intangible net assets acquired on
the basis of their respective fair values on the date of the acquisition. The
total purchase price of $57.0 million consisted of $17.5 million cash, common
stock valued at $35.0 million, assumed stock options with an estimated fair
market value of $3.2 million, and other acquisition costs of approximately $1.3
million. Of the total purchase price, approximately $1.7 million was allocated
net tangible liabilities, and the remainder was allocated to intangible assets,
including customer list ($4.6 million), assembled workforce ($1.5 million),
existing technology ($600,000), and goodwill ($52.0 million). The acquired
intangible assets will be amortized over their estimated useful lives of three
to five years. Goodwill will be amortized using the straight-line method over
three years, resulting in a quarterly charge of $4.3 million during the
amortization period. At September 30, 1999, cumulative amortization of
intangibles totaled $3.2 million.
In August of 1999, we acquired all outstanding shares of Amplitude Software
Corporation, a leading provider of internet calendaring and resource scheduling
solutions. The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired on the basis of their respective fair
values on the date of the acquisition. The total purchase price of $214.4
million consisted of $45.0 million cash, common stock valued at $141.3 million,
assumed stock options with an estimated fair market value of $22.0 million, and
other acquisition costs of approximately $6.1 million. Of the total purchase
price, approximately $4.4 million was allocated to net tangible assets and the
remainder was allocated to intangible assets, including customer list
($600,000), assembled workforce ($3.8 million), existing technology ($4.1
million), and goodwill ($201.5 million). The acquired intangible assets will be
amortized over their estimated useful lives of three to five years. Goodwill
will be amortized using the straight-line method over four years, resulting in a
quarterly charge of $12.6 million during the amortization period. At September
30, 1999, cumulative amortization of intangibles totaled $4.4 million.
We continue to derive most of our revenues through our email hosting services.
Our service revenues are derived primarily from contractual relationships which
provide for revenues on a per mailbox and per message basis. These contracts are
typically one to three years in length. Revenues based upon a percentage of the
email advertising revenues generated by customers are recognized when those
revenues are earned and reported by the customer. We also derive email hosting
revenue by providing users of LAN email systems a universal bridge to send
messages outside their network. We charge message fees in addition to monthly
service fees for this bridge, and recognize revenue in the period such services
are provided. Other set-up fees are comprised of customized installation of
email services. Payments are based on a contractual fee for the customization,
and revenue is recognized upon completion of the work. Consulting revenues are
billed and recognized on a monthly basis as the service is performed. Revenues
for software licenses for which collection of the resulting receivable is deemed
probable are recognized upon delivery of the licensed software. Revenues from
software maintenance are recognized ratably over the maintenance term.
Agreements with some of our customers require minimum performance standards
regarding the availability and response time of our email services. If we fail
to meet these standards our customers could terminate their relationships with
us and we could be subject to contractual monetary penalties.
We expect to expand our operations and employee base, including our sales,
marketing, technical, operational and customer support resources. In particular,
we intend to expand our sales force to deliver our email outsourcing services to
customers in our four target markets: ISPs, web hosting companies, web portals
and corporations. We also intend to further develop new and existing strategic
relationships to expand our distribution channels and to undertake joint product
development and marketing efforts.
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<PAGE> 14
We intend to develop worldwide sales offices and data centers. We currently have
sales offices in the United States, Germany, Great Britain, and France, and data
centers in the United States, Germany, and Great Britain. We expect to open
additional data centers within the next 12 months.
Future investments in technology may involve the development, acquisition or
licensing of technologies that complement or augment our existing services and
technologies.
During 1998, we recorded aggregate unearned compensation totaling approximately
$19.9 million in connection with certain sales of stock and the grant of certain
options to employees, directors and consultants. This amount is being amortized
over the four-year vesting period of the related options. These options were
issued to create incentives for continued performance. Of the total unearned
compensation, approximately $448,000, $217,000, $269,000 and $1.7 million were
amortized in the quarters ended March 31, June 30, September 30, and December
31, 1998, respectively. In January and March 1999, we granted options resulting
in an additional $18.1 million of unearned compensation. Amortization of
unearned compensation was approximately $3.7 million during the three months
ended March 31, 1999, approximately $4.9 million during the three months ended
June 30, 1999, and approximately $4.8 million during the three months ended
September 30, 1999. We expect aggregate per quarter amortization related to
unearned compensation of between $4.9 million and $4.0 million during 1999,
between $3.2 million and $2.1 million during 2000, between $1.7 million and $1.0
million during 2001, and between $742,000 and $331,000 during 2002.
In January 1999, we entered into an agreement with ICQ, a subsidiary of America
Online, Inc., pursuant to which we will provide email hosting services that will
be integrated with ICQ's instant messaging service provided to ICQ's customers.
The ICQ instant messaging service is designed to allow users to communicate in
real time over the Internet. As part of the agreement, ICQ agreed to provide
sub-branded advertising for Critical Path in exchange for a warrant to purchase
2,442,766 shares of common stock, issuable upon attainment of each of five
milestones. We believe that this agreement will have a significant current and
potential future impact on our results of operations. The following table
summarizes the shares underlying each milestone and the related exercise price:
<TABLE>
<CAPTION>
Shares
Underlying Exercise
Warrant Price
---------- --------
<S> <C> <C>
Milestone 1............................................. 814,254 $ 4.26
Milestone 2............................................. 407,128 $ 5.50
Milestone 3............................................. 407,128 $ 6.60
Milestone 4............................................. 407,128 $ 8.80
Milestone 5............................................. 407,128 $ 11.00
---------
Totals................................................. 2,442,766
=========
</TABLE>
In the quarter ended June 30, 1999, we amended the vesting terms of its
agreement with ICQ. The revised vesting terms did not impact the shares
underlying the first milestone, which vested immediately upon the execution of
the agreement. The shares underlying the remaining milestones vest on the date
in a quarter in which ICQ completes a minimum registration of 100,000
sub-branded ICQ mailboxes, compared to 250,000 sub-branded ICQ mailboxes as
13
<PAGE> 15
provided in the terms of the original agreement. The amended agreement also
provides that only one milestone may be achieved on a quarterly basis.
Using the Black-Scholes option pricing model and assuming a term of seven years
and expected volatility of 90%, the initial fair value of the warrant on the
effective date of the agreement approximated $16.5 million. The shares
underlying the second through fifth milestones will be remeasured at each
subsequent reporting date until each sub-branded ICQ mailbox registration
threshold is achieved and the related warrant shares vest. In the event such
remeasurement results in increases or decreases from the initial fair value,
which could be substantial, these increases or decreases will be recognized
immediately, if the fair value of the shares underlying the milestone has been
previously recognized, or over the remaining term, if not.
At March 31, 1999, none of the registration milestones specified within the ICQ
warrant had been achieved. Therefore, the shares underlying the second through
the fifth milestones of the ICQ warrant were remeasured using the closing price
of our common stock on March 31, 1999 of $77 per share. This remeasurement
resulted in an increase to the fair value of the warrant of $109.4 million,
bringing the total fair value of the warrant to $125.9 million as of March 31,
1999.
At June 30, 1999, none of the registration milestones specified within the ICQ
warrant agreement had been achieved. Therefore, the shares underlying the second
through the fifth milestones of the ICQ warrant were remeasured using the
closing price of our common stock on June 30, 1999 of $55.3125 per share. This
remeasurement resulted in a decrease to the fair value of the warrant of $35.0
million compared to the fair value of the warrant on March 31, 1999, bringing
the total fair value of the warrant to $90.9 million as of June 30, 1999.
At September 30, 1999, one of the registration milestones specified within the
ICQ warrant agreement had been achieved. The shares underlying this milestone
were remeasured using the closing price of our common stock on August 19, 1999,
the date on which the milestone was achieved. The closing price of our common
stock on August 19, 1999 was $36.6875. The shares underlying the third through
the fifth milestones of the ICQ warrant were remeasured using the closing price
of our common stock on September 30, 1999 of $40.34375. Together, these
remeasurement calculations resulted in a decrease to the fair value of the
warrant of $26.0 million compared to the fair value of the warrant on June 30,
1999, bringing the total fair value of the warrant to $64.9 million as of
September 30, 1999.
The revised fair value will be amortized ratably over the remainder of the
four-year term of the agreement, resulting in a quarterly amortization charge to
advertising expense in the amount of $4.1 million. Based on the revised fair
value of the warrant, the resulting cumulative amortization charge totaled $12.2
million for the nine months ended September 30, 1999. As an amortization charge
of $11.4 million had been recognized during the six months ended June 30, 1999,
the difference of approximately $800,000 was recognized as advertising expense
in the quarter ended September 30, 1999.
As of September 30, 1999, only two of the five milestones had been attained. We
expect that future changes in the trading price of our common stock at the end
of each quarter, and at the time certain milestones are achieved, will cause
additional substantial changes in the ultimate amount of the related stock-based
compensation.
We have incurred significant losses since our inception, and as of September 30,
1999 had an accumulated deficit of approximately $70.8 million. We intend to
invest heavily in sales and marketing, continued development of our network
infrastructure, and continued technology
14
<PAGE> 16
enhancements. We expect to continue to incur substantial operating losses for
the foreseeable future.
In view of the rapidly evolving nature of our business, our recent acquisitions,
and our limited operating history, we believe that period-to-period comparisons
of our revenues and operating results, including our gross profit margin and
operating expenses as a percentage of total net revenues, are not meaningful and
should not be relied upon as indications of future performance. At September 30,
1999, we had 369 employees, in comparison with 58 employees at September 30,
1998. We do not believe that our historical growth rates for revenue, expenses,
or personnel are indicative of future results.
15
<PAGE> 17
Results of Operations
The following tables set forth the historical results of our operations,
expressed in absolute dollars and as a percentage of revenues, for the three
months and nine months ended September 30, 1999 and 1998, respectively.
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Absolute Dollars Percentage of Revenues
----------------------- -----------------------
Three Months Ended Three Months Ended
----------------------- -----------------------
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
1999 1998 1999 1998
-------- -------- ------- ---------
<S> <C> <C> <C> <C>
Net revenues(1) $ 4,913 $ 156 100.0 100.0
Cost of net revenues(2) (7,523) (941) 153.1 603.2
-------- -------- ------- ---------
Gross profit (loss) (2,610) (785) 53.1 503.2
-------- -------- ------- ---------
Operating expenses:
Sales and marketing 3,557 558 72.4 357.7
Research and development 1,895 560 38.6 359.0
General and administrative 3,678 895 74.9 573.7
Acquisition-related bonus compensation 570 -- 11.6 --
Amortization of intangibles 9,263 -- 188.6 --
Stock-based expenses 5,425 224 110.4 143.6
-------- -------- ------- ---------
Total operating expenses 24,388 2,237 496.4 1,434.0
-------- -------- ------- ---------
Loss from operations (26,998) (3,022) 549.5 1,937.2
Other income (expense):
Interest and other income 2,841 48 57.8 30.8
Interest expense (3) (167) (87) 3.4 55.8
-------- -------- ------- ---------
Net loss $(24,324) $ (3,061) 495.1 1,962.2
======== ======== ======= =========
Net loss per share (basic and diluted) $ (0.65) $ (0.74)
======== ========
Weighted average shares (basic and diluted) 37,158 4,118
======== ========
Acquisition-related bonus charges included in:
(2) Cost of net revenues $ 130 $ --
Stock-based charges included in:
(1) Net revenues $ -- $ 82
(2) Cost of net revenues $ 2,712 $ 45
(3) Interest expense $ (16) $ (16)
</TABLE>
16
<PAGE> 18
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Absolute Dollars Percentage of Revenues
----------------------- -----------------------
Nine Months Ended Nine Months Ended
----------------------- -----------------------
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
1999 1998 1999 1998
-------- -------- ------- ---------
<S> <C> <C> <C> <C>
Net revenues(1) $ 7,968 $ 292 100.0 100.0
Cost of net revenues(2) (13,860) (1,253) 173.9 429.1
-------- -------- ------- ---------
Gross profit (loss) (5,892) (961) 73.9 329.1
-------- -------- ------- ---------
Operating expenses:
Sales and marketing 8,760 836 109.9 286.3
Research and development 4,705 1,237 59.0 423.6
General and administrative 7,919 2,088 99.4 715.1
Acquisition-related bonus compensation 570 -- 7.2 --
Amortization of intangibles 9,813 -- 123.2 --
Stock-based expenses 25,244 868 316.8 297.3
-------- -------- ------- ---------
Total operating expenses 57,011 5,029 715.5 1,722.3
-------- -------- ------- ---------
Loss from operations (62,903) (5,990) 789.4 2,051.4
Other income (expense):
Interest and other income 5,074 120 63.7 41.1
Interest expense(3) (411) (262) 5.2 89.7
-------- -------- ------- ---------
Net loss $(58,240) $ (6,132) 730.9 2,100.0
======== ======== ======= =========
Net loss per share (basic and diluted) $ (2.26) $ (1.78)
======== ========
Weighted average shares (basic and diluted) 25,715 3,445
======== ========
Acquisition-related bonus charges included in:
(2) Cost of net revenues $ 130 $ --
Stock-based charges included in:
(1) Net revenues $ 106 $ 102
(2) Cost of net revenues $ 3,901 $ 66
(3) Interest expense $ (48) $ (145)
</TABLE>
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<PAGE> 19
Net Revenues
Revenues. We continue to derive most of our revenues through our email hosting
services. Our service revenues are derived primarily from contractual
relationships which provide for revenues on a per mailbox and per message basis.
These contracts are typically one to three years in length. Revenues based upon
a percentage of the email advertising revenues generated by customers are
recognized when those revenues are earned and reported by the customer. We also
derive email hosting revenue by providing users of LAN email systems a universal
bridge to send messages outside their network. We charge message fees in
addition to monthly service fees for this bridge, and recognize revenue in the
period such services are provided. Other set-up fees are comprised of customized
installation of email services. Payments are based on a contractual fee for the
customization, and revenue is recognized upon completion of the work. Consulting
revenues are billed and recognized on a monthly basis as the service is
performed. Revenues for software licenses for which collection of the resulting
receivable is deemed probable are recognized upon delivery of the licensed
software. Revenues from software maintenance are recognized ratably over the
maintenance term. Agreements with some of our customers require minimum
performance standards regarding the availability and response time of our email
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.
During the quarter ended September 30, 1999, our revenues were $4,913,000, an
increase of $4,757,000 over the corresponding quarter of 1998. For the nine
months ended September 30, 1999, our revenues increased to $7,968,000 from
$292,000 in the corresponding period of the previous fiscal year. These
increases in revenue resulted primarily from a substantial increase in the
number of mailboxes we hosted during the current fiscal year in comparison with
the corresponding periods of the previous fiscal year, as well as from the
contribution to current revenues of acquired companies' revenue streams. At
September 30, 1999, we hosted 6.7 million active mailboxes. At September 30,
1998, by comparison, we hosted approximately 255,000 mailboxes. For the quarter
ended September 30, 1999, we earned revenues of $ 0.30 per mailbox for the
weighted average of active mailboxes hosted during the quarter.
In connection with certain customer contracts executed in 1998, we granted
warrants or options to purchase Series B Convertible Preferred Stock. The fair
value of these warrants or options, determined using the Black-Scholes option
pricing model, has been recognized ratably as a sales discount over the terms of
the respective agreements. Amortization of this discount amounted to $106,000
and $102,000 for the nine months ended September 30, 1999 and 1998,
respectively, and zero and $82,000 during the quarters ended September 30, 1999
and 1998, respectively.
In early 1998, we executed agreements with E*TRADE, an on-line brokerage
services company, and Verio, a web hosting organization, pursuant to which we
derive revenue for providing email services. During the nine months ended
September 30, 1999, E*TRADE and Verio accounted for approximately 23% and 7%,
respectively, of our net revenues, excluding the value of stock purchase rights
received by customers. For the entirety of 1998, E*TRADE and Verio accounted for
approximately 62% and 30%, respectively, of our net revenues excluding the value
of stock purchase rights received by customers.
Cost of Net Revenues
Cost of net revenues consists principally of costs incurred in the delivery and
support of our email services, including depreciation of capital equipment used
in our network infrastructure and personnel costs in our operations and customer
support functions. During the quarter ended September 30, 1999, these costs were
$7,523,000, or 153% of net revenues, in comparison with costs of $941,000, or
603% of net revenues, for the corresponding quarter of 1998. For the nine
18
<PAGE> 20
months ended September 30, 1999, cost of net revenues was $13,860,000, or 174%
of net revenues, in comparison with costs of $1,253,000, or 429% of net
revenues, for the corresponding period of 1998. We have made significant
acquisitions of equipment for our data centers over the past 12 months, and as a
result our depreciation expense of networking equipment during 1999 has
increased substantially in comparison with the corresponding periods of the
previous fiscal year. Additionally, we incurred $600,000 of consulting and
outside contractor charges during the quarter ended September 30, 1999 as we
continued our efforts to enhance our network and migrate to a new storage
platform. We have also increased our staffing significantly in operations and
customer support over the past year, and consequently compensation and other
personnel costs have been higher in the current fiscal year. From January 1,
1999 to September 30, 1999, our operations and customer support staff increased
from 25 employees to 102 employees. At September 30, 1998, we had 19 employees
on staff in operations and customer support functions.
During the three months ended September 30, 1999, the Company also incurred a
one-time stock-based charge of approximately $2 million in connection with a
severance agreement for a terminated employee. This expense was charged to cost
of net revenues, based on the functions and duties previously performed by the
terminated employee.
Operating Expenses
Sales and Marketing. Our sales and marketing expenses consist principally of
compensation for our sales and marketing personnel, advertising, public
relations, other promotional costs, and, to a lesser extent, related overhead.
Sales and marketing expenses during the quarter ended September 30, 1999,
amounted to $3,557,000, or 72% of net revenue, in comparison with $558,000, or
358%, during the corresponding quarter of the previous fiscal year. For the nine
months ended September 30, 1999, sales and marketing expenses came to
$8,760,000, or 110% of net revenues, in comparison with $836,000, or 286% of net
revenues, for the corresponding period of the previous fiscal year. Increases in
marketing and promotional expenses, incentive compensation payments to sales
personnel, and increases in compensation associated with additional headcount
accounted for the increase in sales and marketing expenses during 1999. From
January 1, 1999 to September 30, 1999, our sales and marketing staff increased
from 30 employees to 120 employees. At September 30, 1998, we had 12 employees
on staff in sales and marketing functions.
Research and Development. Our research and development expenses consist
principally of compensation for our technical staff, payments to outside
contractors, and, to a lesser extent, related overhead. We expense research and
development expenses as they are incurred. Research and development expenses
amounted to $1,895,000, or 39% of net revenues, during the quarter ended
September 30, 1999, in comparison with $560,000, or 359% of net revenues, for
the corresponding quarter of the previous fiscal year. For the nine months ended
September 30, 1999, research and development expenses were $4,705,000, or 59% of
net revenues, in comparison with $1,237,000, or 424% of net revenues, for the
corresponding period of the previous fiscal year. These significant dollar
increases resulted primarily from increases in personnel and use of outside
contractors. From January 1, 1999 to September 30, 1999, our research and
development staff increased from 27 employees to 109 employees. At September 30,
1998, we had 20 employees on staff in research and development functions.
General and Administrative. Our general and administrative expenses consist
principally of compensation for personnel, fees for outside professional
services, occupancy costs and, to a lesser extent, related overhead. General and
administrative expenses amounted to $3,678,000, or 75% of net revenues, during
the quarter ended September 30, 1999, in comparison with $895,000
19
<PAGE> 21
or 574% of net revenues, during the corresponding quarter of the previous fiscal
year. For the nine months ended September 30, 1999, general and administrative
expenses came to $7,919,000 or 99% of net revenues, in comparison with
$2,088,000, or 715% of net revenues, for the corresponding period of the
previous fiscal year. These increases were attributable primarily to increases
in compensation associated with additional headcount, higher fees for outside
professional services, and higher occupancy costs. From January 1, 1999 to
September 30, 1999, our general and administrative staff increased from 11
employees to 38 employees. At September 30, 1998, we had seven employees on
staff in general and administrative functions.
Acquisition-Related Bonus Program
In connection with its acquisition of Amplitude, the Company established a bonus
program in the aggregate amount of $10 million to provide incentive for former
Amplitude employees to continue their employment with Critical Path. Payment of
bonuses to the listed employees will occur one year following the date of
acquisition, unless the listed employees voluntarily terminate their employment
with the Company prior to August 31, 2000. The aggregate amount of the eligible
bonus is adjusted downward at each point that a former Amplitude employee
chooses to terminate his or her employment with the Company. The amount of any
such downward adjustment corresponds to the amount that the terminating employee
would have received had he or she elected to continue employment with the
Company. A ratable share of the adjusted eligible bonus amount will be accrued
and charged to compensation expense over the 12 months ending August 31, 2000.
As of September 30, 1999, the adjusted eligible bonus amount was $8.4 million,
and the ratable charge to compensation expense was $700,000. Based on the
functions of the employees scheduled to receive acquisition bonuses, $130,000 of
the compensation charge was allocated to cost of net revenues and $570,000 was
allocated to operating expenses.
Stock-Based Expenses
During 1998, we recorded aggregate unearned compensation in the amount of $19.9
million in connection with the grant of certain stock options during 1998. In
the first quarter of 1999, we recorded an additional $18.1 million of unearned
compensation related to the grant of stock options in the months of January 1999
and March 1999. Amortization of such unearned compensation amounted to
approximately $4.8 million for the three months ended September 30, 1999, in
comparison with $269,000 for the three months ended September 30, 1998.
Approximately $741,000 and $45,000 of amortized unearned compensation was
allocated to cost of net revenues, and the remaining $4.1 million and $224,000
was amortized to operating expenses for the three months ended September 30,
1999 and 1998, respectively. During the three months ended September 30, 1999,
the Company also incurred a one-time stock-based charge of approximately $2
million in connection with a severance agreement for a terminated employee. This
expense was charged to cost of net revenues. For the nine months ended September
30, 1999 and 1998, the Company amortized $29.1 million and $934,000 of unearned
compensation, respectively, relating to the grant of stock options and stock
warrants. Of this amortized unearned compensation, approximately $3.9 million
and $66,000 was allocated to cost of net revenues and approximately $25.2
million and $868,000 was allocated to operating expenses for the nine months
ended September 30, 1999 and 1998, respectively.
We incurred stock-based expenses for warrants we granted to ICQ, a subsidiary of
AOL, and to one other strategic partner. Amortization of the fair value of these
warrants resulted in stock-based expenses of approximately $1.4 million for the
quarter ended September 30, 1999, and $13.9 million for the nine months ended
September 30, 1999. As stated in Note 4 to the
20
<PAGE> 22
Condensed Consolidated Financial Statements, quarterly amortization associated
with the ICQ warrant is subject to substantial increase or decrease in future
quarters based upon changes in the trading price of our common stock.
Interest and Other Income and Interest Expense
Interest and other income consists primarily of interest earnings on our cash
and cash equivalents. Interest and other income amounted to $2,841,000 during
the quarter ended September 30, 1999, and $5,074,000 for the nine months ended
September 30, 1999. We completed private placements of equity securities in
April 1998, September 1998, and January 1999, and closed public offerings of
common stock in April 1999 and June 1999. As a result, interest income increased
significantly during 1999 in comparison with corresponding periods in 1998 due
to higher cash balances available for investing. During the nine months ended
September 30, 1999, we incurred interest expense on capital lease obligations
and stock- based charges in the amount of $411,000, of which $48,000 related to
the amortization of stock-based charges and the remainder to interest payments
on capital lease obligations. In the corresponding period of 1998, we incurred
interest expense of $262,000, of which $145,000 related to the amortization of
stock-based charges and the remainder to interest payments on notes payable and
capital lease obligations.
Income Taxes
No provision for federal or state income taxes has been recorded as we have
incurred net operating losses from inception through September 30, 1999. As of
December 31, 1998, we had approximately $8.8 million of federal and state net
operating loss carryforwards, which expire in varying amounts beginning in 2012,
available to offset future taxable income. Under the Tax Reform Act of 1986, the
amounts of and benefits from net operating loss carryforwards may be impaired or
limited in certain circumstances. For example, the amount of net operating
losses that we may utilize in any one year would be limited in the presence of a
cumulative ownership change of more than 50% over a three year period. Because
there is significant doubt as to whether we will realize any benefit from this
deferred tax asset, we have established a full valuation allowance as of
December 31, 1998.
Liquidity and Capital Resources
Our cash and cash equivalents increased by approximately $132.0 million during
the nine months ended September 30, 1999. This net change occurred as we raised
approximately $269.9 million in proceeds from the sale of equity securities, net
of issuance costs, used $15.8 million in cash to fund operating activities, paid
$78.2 million (net of cash acquired) to consummate acquisitions, advanced $15.0
million to third parties pursuant to promissory notes, invested $4.5 million to
obtain equity positions in strategic partners, disbursed $21.8 million to
purchase property and equipment, and paid $2.4 million to retire principal on
capital lease obligations and acquire treasury shares. Installation of network
infrastructure equipment in our data centers, license of new software platforms,
purchases of furniture and equipment for new employees, and leasehold
improvements related to expansion of our facilities accounted for the
significant increase in capital expenditures. We expect that our investment in
property and equipment will continue to grow as we seek to increase our capacity
to provide email hosting and additional services.
We have a credit agreement with a bank which provides a line of credit for
working capital advances of up to $1.0 million. There were no borrowings under
this line of credit as of
21
<PAGE> 23
September 30, 1999. Outstanding borrowings accrue interest at a rate equal to
the bank's prime rate plus 2.0%. Capital lease obligations, including both
short-term and long-term portions, increased approximately $4.4 million, net of
principal repayments, during the nine months ended September 30, 1999 as we
secured financing for a substantial share of our additions to property and
equipment. Our line of credit and capital lease obligations contain no
provisions that would limit our future borrowing ability. Deferred revenue,
excluding balances acquired through acquisitions, decreased $438,000 during the
nine months ended September 30, 1999 as we recognized into revenue a payment we
had previously received from a customer as an advance for future services.
In January 1999 we completed the second round of the Series B Convertible
Preferred Stock financing through the issuance of approximately 3.2 million
shares, including 454,544 shares issued pursuant to outstanding stock purchase
rights, for net proceeds of $12.5 million. Also in January 1999, we sold
1,090,909 shares of common stock for net proceeds of $2.4 million. In April
1999, we received approximately $114.1 million in net proceeds upon the closing
of our initial public offering of common stock. In June 1999, we received
approximately $140.7 million in net proceeds upon the closing of our secondary
public offering of common stock.
In May 1999 we made a minority investment of $3 million in the common stock of
Starmedia Network, Inc. Based on the closing price of Starmedia stock at
September 30, 1999, the fair value of the Company's investment was $10.0 million
and is recorded as an investment in the assets section of the Company's balance
sheet. The excess of the investment's carrying value over its cost is recorded
as an unrealized gain on investments and included in the equity section of the
Company's balance sheet.
In July 1999, we advanced $10 million to a privately-held company pursuant to a
promissory note. The note bears interest at the prime rate of interest as
stipulated in the Wall Street Journal. The amount was advanced in connection
with the Company's evaluation of the obligor for potential acquisition. Under
the terms of the note, all principal and accrued interest is repayable within 90
days of written demand by the holder. Upon the decision by the Company not to
proceed with an acquisition of the obligor, the Company presented a demand
notice for repayment on August 18, 1999. All amounts owed the company pursuant
to this note are due to be paid not later than November 16, 1999.
In August 1999, we advanced $5 million to DocSpace pursuant to a promissory
note. The note bears interest at a rate equal to 8% per annum simple interest.
The amount was advanced in connection with the Company's evaluation of DocSpace
for potential acquisition. Under the terms of the note, any portion of the
principal and/or interest outstanding on the note may be converted into common
stock at the election of DocSpace. On November 4, 1999, the Company announced a
definitive agreement to acquire all outstanding common stock of DocSpace.
We believe that our current cash balances are sufficient to meet our working
capital and capital expenditure requirements for at least the next 12 months. We
anticipate that further expansion of our operations will cause us to incur
negative cash flows on a short-term basis, and therefore require us to consume
our cash and other liquid resources to support our growth in operations.
We believe that our current cash balances will be sufficient to meet our working
capital and capital requirements beyond the next 12 months. However, our
operating and investing activities on a long-term basis may require us to obtain
additional equity or debt financing. In addition, we may, from time to time,
evaluate potential acquisitions of other businesses, products, and technologies.
In May 1999 we acquired substantially all the operating assets of Fabrik Connect
Service, and in July 1999 we completed the acquisition of dotOne Corporation. In
connection with these transactions, we disbursed $17.0 million in cash of June
30, 1999, and an additional
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$12.5 million in July 1999. In August 1999, we completed the acquisition of
Amplitude Software Corporation and disbursed $45.0 million in cash
consideration. An additional $7.5 million in transaction fees was disbursed
during 1999 to consummate these acquisitions. We expect that future acquisitions
of businesses and other strategic assets, including our pending acquisitions of
Isocor, Docspace, and FaxNet, will require considerable outlays of capital. In
order to consummate potential acquisitions, we may need additional equity or
debt financings in the future.
Year 2000 Issues
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations causing disruptions of operations for any
company using these computer programs or hardware, including, among other
things, a temporary inability to process transactions, send invoices or engage
in normal business activities. As a result, many companies' computer systems may
need to be upgraded or replaced in order to avoid "Year 2000" issues.
We are a comparatively new enterprise, and, accordingly, the software and
hardware we use to manage our business has all been purchased or developed
internally within the past 30 months. While this fact pattern does not uniformly
protect us against Year 2000 exposure, we believe we gain some mitigation from
the fact that the information technology ("IT") we use to manage our business is
not based upon "legacy" hardware and software systems. "Legacy system" is a term
often used to describe hardware and software systems which were developed in
previous decades when there was less awareness of Year 2000 issues. Generally,
hardware and software design within the current decade and the past several
years in particular has given greater consideration to Year 2000 issues. All of
the software code we have internally developed to manage our network traffic,
for example, is written with four digits to define the applicable year.
We are in the process of testing our internal IT and non-IT systems, including
the systems of those companies we have recently acquired. Prior to September
1999, all of the testing we had completed was performed by our own personnel. In
September 1999, we engaged an outside consultant to document our compliance
procedures and prepare a Statement of Readiness addressing the Year 2000
compliance of our IT software and hardware. Under the present schedule, the
consultant's review and delivery of the Statement of Readiness should be
completed by December 1999. Based on the internal testing we have performed to
date and the interim results from our consultant's review, we believe that any
modifications necessary to make our IT systems Year 2000 compliant will be
minor.
In addition to our internally developed software, we use software and hardware
developed by third parties both for our network and internal information
systems. We have begun to test such third-party software and hardware in an
effort to assess Year 2000 compliance. We have also obtained documentation from
key suppliers of hardware and networking equipment for our data centers which
indicates that this hardware and networking equipment is Year 2000 compliant.
Based upon an evaluation of our broader list of software and hardware providers,
we are aware that all of these providers are in the process of reviewing and
implementing their own Year 2000 compliance programs. We will work with these
providers to address any Year 2000 issues and obtain the necessary enhancements
and documentation from them to ensure that their products are Year 2000
compliant.
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In addition, we rely on third party network infrastructure providers to gain
access to the Internet. If these providers experience business interruptions as
a result of their failure to achieve Year 2000 compliance, our ability to
provide Internet connectivity could be impaired, which could have a material
adverse effect on our business, results of operations and financial condition.
Our customers' success in maintaining Year 2000 compliance is also significant
to our ability to generate revenues. We currently derive revenue by managing
customers' email and messaging activities across our network. In all cases,
interruptions in our customers' services and on-line activities caused by Year
2000 problems could have a material adverse effect on our revenues to the extent
that these interruptions may limit or delay our customers' ability to expand
their base of email users.
We have incurred expenses to date for our outside consultants and Year 2000
assessment software. Additional costs for consultants and remediation efforts
will vary dependent upon the requirements we identify, but we do not anticipate
that any future costs associated with our Year 2000 remediation efforts will be
material. However, if we, our customers, our providers of hardware and software,
or our third party network providers fail to remedy any Year 2000 issues, our
service could be interrupted and we could experience a material loss of revenues
that could have a material adverse effect on our business, results of
operations, and financial condition. We would consider such an interruption to
be the most reasonably likely unfavorable result of any failure by us, or
failure by the third parties upon whom we rely, to achieve Year 2000 compliance.
Presently, we believe we are unable to reasonably estimate the duration and
extent of any possible interruption, or quantify the effect it may have on our
future revenues. We are currently in the process of developing a comprehensive
contingency plan to address the issues which could result from this type of
event.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 133, as amended by SFAS 137, is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000, with
earlier application encouraged. Critical Path does not currently use derivative
instruments.
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Additional Factors That May Affect Future Operating Results
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT IS DIFFICULT TO EVALUATE OUR
BUSINESS AND WE MAY FACE VARIOUS RISKS, EXPENSES AND DIFFICULTIES ASSOCIATED
WITH EARLY STAGE COMPANIES
Because we have only a limited operating history upon which you can evaluate our
business and prospects, you should consider the risks, expenses and difficulties
that we may encounter when making your investment decision. These risks include
our ability to:
- expand our sales and marketing activities;
- create and maintain strategic relationships;
- expand our customer base and retain key clients;
- introduce new services;
- manage growing operations;
- integrate new businesses and technologies;
- compete in a highly competitive market;
- upgrade our systems and infrastructure to handle any increases in
messaging traffic;
- reduce service interruptions; and
- recruit and retain key personnel.
WE EXPECT THAT OUR OPERATING EXPENSES WILL INCREASE AS WE SPEND RESOURCES ON
BUILDING OUR BUSINESS, AND THAT THIS INCREASE MAY HAVE A NEGATIVE EFFECT ON OUR
OPERATING RESULTS AND FINANCIAL CONDITION
We have spent heavily on technology and infrastructure development. We expect to
continue to spend substantial financial and other resources on developing and
introducing new email service offerings, and expanding 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 and customer support expenses, and
depreciation and amortization expenses will continue to increase in absolute
dollars and may increase as a percent of revenues. If our revenues do not
correspondingly increase, our operating results and financial condition could be
negatively affected.
WE HAVE A HISTORY OF LOSSES, EXPECT CONTINUING LOSSES AND MAY NEVER ACHIEVE
PROFITABILITY
We incurred net losses of approximately $1.1 million for the period from
February 19, 1997 (inception) through December 31, 1997, $11.5 million for the
year ended December 31, 1998, and $58.2 million for the period from January 1,
1999 to September 30, 1999. As of September
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30, 1999, we had an accumulated deficit of approximately $70.8 million. We have
not achieved profitability in any period, and we expect to continue to incur net
losses for the foreseeable future. Should we continue to incur net losses in
future periods, we may not be able to increase our number of employees or our
investment in capital equipment, sales and marketing programs, and research and
development in accordance with our present plans. Continuation of our net losses
may also require us to secure additional financing sooner than anticipated. Such
financing may not be available in sufficient amounts, or on terms acceptable to
us, and may dilute existing shareholders. We may never obtain sufficient
revenues to achieve profitability. If we do achieve profitability, we may not
sustain or increase profitability in the future. This may, in turn, cause our
stock price to decline.
DUE TO OUR LIMITED OPERATING HISTORY AND THE EMERGING NATURE OF THE EMAIL
SERVICES MARKET, OUR FUTURE REVENUES ARE UNPREDICTABLE, AND OUR QUARTERLY
OPERATING RESULTS MAY FLUCTUATE
We cannot accurately forecast our revenues as a result of our limited operating
history and the emerging nature of the Internet-based email services market. Our
revenues could fall short of our 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 our operating results, including, but not limited to:
- continued growth of the Internet in general and of email usage in
particular;
- demand for outsourced email services;
- our ability to attract and retain customers and maintain customer
satisfaction;
- our ability to upgrade, develop and maintain our systems and infrastructure;
- the amount and timing of operating costs and capital expenditures relating
to expansion of our business and infrastructure;
- technical difficulties or system outages;
- the announcement or introduction of new or enhanced services by our
competitors;
- our ability to attract and retain qualified personnel with Internet industry
expertise, particularly sales and marketing personnel;
- the pricing policies of our competitors;
- our ability to integrate operations, technology, and personnel of acquired
companies;
- our failure to increase our international sales; and
- governmental regulation surrounding the Internet and email in particular.
In addition to the factors set forth above, our operating results will be
impacted to the extent we incur non-cash charges associated with stock-based
arrangements with employees and non-employees. In particular, we expect to incur
substantial non-cash charges associated with the grant of a warrant to America
Online, Inc. In addition to the amortization of the fair value of this warrant,
which totaled $64.9 million at September 30, 1999, we expect that future changes
in the
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trading price of our common stock at the end of each quarter, and at the date
certain milestones are achieved, will cause additional substantial changes in
the fair value of this warrant.
Due to lead times required to purchase, install and test equipment, we typically
need to purchase equipment well in advance of the receipt of any expected
revenues. Delays in obtaining this equipment could result in unexpected revenue
shortfalls. Small variations in the timing of the recognition of specific
revenues could cause significant variations in operating results from quarter to
quarter.
Period-to-period comparisons of our operating results are not a good indication
of our future performance. It is likely that our operating results in some
quarters will be below market expectations. In this event, the price of our
common stock is likely to decline.
IF WE FAIL TO EXPAND OUR SALES AND MARKETING ACTIVITIES, WE MAY BE UNABLE TO
EXPAND OUR BUSINESS
Our ability to increase our revenues will depend on our ability to successfully
recruit, train and retain sales and marketing personnel. As of September 30,
1999, we had 120 sales and marketing personnel. We plan to continue to invest
significant resources to expand our sales and marketing organizations.
Competition for additional qualified personnel is intense and we may not be able
to hire and retain personnel with relevant experience. We have hired most of our
sales and marketing personnel within the last 12 months, including our Vice
President of Sales, who joined us in November 1998.
The complexity and implementation of our Internet messaging services require
highly trained sales and marketing personnel to educate prospective customers
regarding the use and benefits of our services. Our current and prospective
customers, in turn, must be able to educate their end-users. With our relatively
brief operating history and our plans for expansion, we have considerable need
to recruit, train, and retain qualified staff. Any delays or difficulties we
encounter in these staffing efforts would impair our ability to attract new
customers and to enhance our relationships with existing customers. This in turn
would adversely impact the timing and extent of our revenues. Because the
majority of our sales and marketing personnel have recently joined Critical Path
and have limited experience working together, our sales and marketing
organizations may not be able to compete successfully against bigger and more
experienced sales and marketing organizations of our competitors. If we do not
successfully expand our sales and marketing activities, our business could
suffer and our stock price could decline.
UNPLANNED SYSTEM INTERRUPTIONS AND CAPACITY CONSTRAINTS COULD REDUCE OUR ABILITY
TO PROVIDE EMAIL SERVICES AND COULD HARM OUR BUSINESS AND OUR REPUTATION
Our customers have in the past experienced some interruptions in our email
service. We believe that these interruptions will continue to occur from time to
time. These interruptions are due to hardware failures, unsolicited bulk email,
or "spam," attacks and operating system failures. For example, in May 1999 our
customers experienced an interruption in service due to the failure of a
hardware component of our network. Our revenues depend on the number of
end-users who use our email services. Our business will suffer if we experience
frequent or long system interruptions that result in the unavailability or
reduced performance of our systems or networks or reduce our ability to provide
email services. We expect to experience occasional temporary capacity
constraints due to sharply increased traffic, which may cause unanticipated
system
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disruptions, slower response times, impaired quality and degradation in levels
of customer service. If this were to continue to happen, our business and
reputation could suffer dramatically.
We have entered into service agreements with some of our customers that require
certain minimum performance standards, including standards regarding the
availability and response time of our email 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. Any unplanned interruption
of services may adversely affect our ability to attract and retain customers.
OUR FAILURE TO ACQUIRE OR SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES OR
TECHNOLOGIES COULD HARM OUR OPERATING RESULTS AND OUR BUSINESS
We expect that we will continue to acquire or invest in businesses, products,
services and technologies that complement or augment our current business and
service offerings. To implement our growth strategy, we must identify new
businesses and technologies that are complementary to our own and integrate
these business and technologies. Integrating any newly acquired businesses or
technologies may be expensive, time-consuming and may strain our resources. We
may not be successful in integrating acquired businesses or technologies and may
not achieve anticipated revenue and cost benefits. We cannot guarantee that
these acquisitions will result in sufficient revenues or earnings to justify our
investment in, or expenses related to, these acquisitions or that any synergies
will develop. If we fail to successfully integrate these businesses, our
business, financial condition and results of operations could be materially
adversely affected.
To finance additional acquisitions, it may be necessary for us to raise
additional funds through public or private financings, which may be on terms
that are not favorable to us. In addition, we intend to pay for some of our
acquisitions by issuing additional common stock and this would dilute our
stockholders. Finally, we may be required to amortize significant amounts of
goodwill and other intangible assets in connection with future acquisitions,
which could materially increase our operating expenses.
WE HAVE EXPERIENCED RAPID GROWTH WHICH HAS PLACED A STRAIN ON OUR RESOURCES, AND
OUR FAILURE TO MANAGE OUR GROWTH COULD CAUSE OUR BUSINESS TO SUFFER
We recently began to expand our operations rapidly and intend to continue this
expansion. The number of our employees increased from 17 on December 31, 1997 to
93 on December 31, 1998 and to 369 employees on September 30, 1999. This
expansion has placed, and is expected to continue to place, a significant strain
on our managerial, operational and financial resources. To manage any further
growth, we will need to improve or replace our existing operational, customer
service and financial systems, procedures and controls. Any failure by us to
properly manage these system and procedural transitions could impair our ability
to attract and service customers, and could cause us to incur higher operating
costs and delays in the execution of our business plan. We will also need to
continue the expansion of our operations and employee base. Our management may
not be able to hire, train, retain, motivate and manage required personnel. In
addition, our management may not be able to successfully identify, manage and
exploit existing and potential market opportunities. If we cannot manage growth
effectively, our business and operating results could suffer.
WE DEPEND ON STRATEGIC RELATIONSHIPS AND OTHER SALES CHANNELS AND THE LOSS OF
ANY OF OUR STRATEGIC RELATIONSHIPS COULD HARM OUR BUSINESS AND HAVE AN ADVERSE
IMPACT ON OUR REVENUE
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We depend on our strategic relationships to expand our distribution channels and
to undertake joint product development and marketing efforts. Our ability to
increase revenues depends upon marketing our services through new and existing
strategic relationships. We have entered into written agreements with ICQ, a
subsidiary of America Online, Inc., E*TRADE Group, Inc., Network Solutions,
Inc., Sprint Communications Company L.P. and US West Communications Services,
Inc., among others. We depend on a broad acceptance of outsourced email services
on the part of potential partners and acceptance of us as the supplier for these
outsourced email services. We also depend on joint marketing and product
development through our strategic relationships to achieve market acceptance and
brand recognition. For example, through our relationship with E*TRADE, we can
conduct shared advertising campaigns and include our messaging services in
E*TRADE's international strategic relationships. Our agreements with our
strategic partners typically do not restrict them from introducing competing
services and may be terminated by either party without cause. These agreements
typically are for terms of one to three years, and automatically renew for
additional one-year periods unless either party gives prior notice of its
intention to terminate the agreement. In addition, these agreements are
terminable by our partners without cause, and some agreements are terminable by
us, upon 30-120 days' notice. Most of the agreements also provide for the
partial refund of fees paid or other monetary penalties in the event that our
services fail to meet defined minimum performance standards. Distribution
partners may choose not to renew existing arrangements on commercially
acceptable terms, or at all. If we lose any of our strategic relationships, fail
to renew these agreements or relationships, or fail to develop new strategic
relationships, our business will suffer. The loss of any of our key strategic
relationships would have an adverse impact on our current and future revenue.
For example, E*TRADE accounted for approximately 62% of our 1998 net revenues,
excluding the value of stock purchase rights received by E*TRADE, and TABNet, a
wholly owned subsidiary of Verio, accounted for approximately 30% of our 1998
net revenues. In addition to our strategic relationships, we also depend on the
ability of our customers to sell and market our services to their end-users.
WE MAY NOT BE ABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE OF THE INTERNET
MESSAGING INDUSTRY
The Internet messaging industry is characterized by rapid technological change,
changes in user and customer requirements and preferences and the emergence of
new industry standards and practices that could render our existing services,
proprietary technology and systems obsolete. We must continually improve the
performance, features and reliability of our services, particularly in response
to competitive offerings. Our success depends, in part, on our ability to
enhance our existing email and messaging services and to develop new services,
functionality and technology that address the increasingly sophisticated and
varied needs of our prospective customers. If we don't properly identify the
feature preferences of prospective customers, or if we fail to deliver email
features which meet the standards of these customers, our ability to market our
service successfully and to increase our revenues could be impaired. The
development of proprietary technology and necessary service enhancements entail
significant technical and business risks and require substantial expenditures
and lead-time. We may not be able to keep pace with the latest technological
developments. We may also not be able to use new technologies effectively or
adapt our services to customer requirements or emerging industry standards. If
we cannot, for technical, legal, financial or other reasons, adapt or respond in
a cost-effective and timely manner to changing market conditions or customer
requirements, our business and operating results would suffer.
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IF OUR SYSTEM SECURITY IS BREACHED, OUR BUSINESS AND REPUTATION COULD SUFFER
A fundamental requirement for online communications is the secure transmission
of confidential information over public networks. Third parties may attempt to
breach our security or that of our customers. If they are successful, they could
obtain our customers' confidential information, including our customers'
profiles, passwords, financial account information, credit card numbers or other
personal information. We may be liable to our customers for any breach in our
security and any breach could harm our reputation. We rely on encryption
technology licensed from third parties. Although we have implemented network
security measures, our servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to interruptions,
delays or loss of data. We may be required to expend significant capital and
other resources to license encryption technology and additional technologies to
protect against security breaches or to alleviate problems caused by any breach.
Our failure to prevent security breaches may have a material adverse effect on
our business and operating results.
WE DEPEND ON BROAD MARKET ACCEPTANCE FOR OUTSOURCED INTERNET-BASED EMAIL SERVICE
The market for outsourced Internet-based email service is new and rapidly
evolving. Concerns over the security of online services and the privacy of users
may inhibit the growth of the Internet and commercial online services. We cannot
estimate the size or growth rate of the potential market for our service
offerings, and we do not know whether our service will achieve broad market
acceptance. To date, substantially all of our revenues have been derived from
sales of our email service offerings and we currently expect that our email
service offerings will account for substantially all of our revenues for the
foreseeable future. We depend on the widespread acceptance and use of
outsourcing as an effective solution for email. If the market for outsourced
email fails to grow or grows more slowly than we currently anticipate, our
business would suffer dramatically.
WE EXPECT THE EMAIL SERVICES MARKET WILL BE VERY COMPETITIVE AND WE WILL NEED TO
COMPETE SUCCESSFULLY IN THIS MARKET
We expect that the market for Internet-based email service will be intensely
competitive. In addition to competing with companies that develop and maintain
in-house solutions, we compete with email service providers, such as USA.NET,
Inc., and iName, and with product-based companies, such as Software.com, Inc.
and Lotus Development Corporation. We believe that competition will increase and
that companies such as Microsoft Corporation and Netscape Communications Corp.,
which currently offer email products primarily to Internet service providers who
provide access to the Internet, web hosting companies, World Wide Web sites
intended to be major starting site for users when they connect to the Internet,
commonly referred to as web portals, and corporations, may leverage their
existing relationships and capabilities to offer email services.
We believe competition will increase as our current competitors increase the
sophistication of their offerings and as new participants enter the market. Many
of our current and potential competitors have longer operating histories, larger
customer bases, greater brand recognition and significantly greater financial,
marketing and other resources than we do and may enter into strategic or
commercial relationships with larger, more established and better-financed
companies. Further, any delays in the general market acceptance of the email
hosting concept would likely harm our competitive position. Any such delay would
allow our competitors additional time to approve their service or product
offerings, and also provide time for new competitors to develop email service
solutions and solicit prospective customers within our target
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markets. Increased competition could result in pricing pressures, reduced
operating margins and loss of market share, any of which could cause our
business to suffer.
A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF OUR REVENUES, AND
THE LOSS OF A MAJOR CUSTOMER OR FAILURE TO ATTRACT NEW CUSTOMERS COULD HARM OUR
BUSINESS
In 1998, E*TRADE accounted for approximately 62% and TABNet, a wholly owned
subsidiary of Verio, accounted for approximately 30% of our net revenues,
excluding the value of stock purchase rights received by customers. During the
first nine months of 1999, E*TRADE accounted for approximately 23% and Verio
accounted for approximately 7% of our net revenues, excluding the value of stock
purchase rights received by customers. We expect that sales of our services to a
limited number of customers will continue to account for a high percentage of
our revenue for the foreseeable future. Our future success depends on our
ability to retain our current customers and attract new customers in our target
markets. The loss of a major customer or our inability to attract new customers
could have a material adverse effect on our business. Our agreements with our
customers have terms of one to three years with automatic one-year renewals and
can be terminated without cause upon 30-120 days' notice.
IF WE DO NOT SUCCESSFULLY ADDRESS SERVICE DESIGN RISKS, OUR REPUTATION COULD BE
DAMAGED AND OUR BUSINESS AND OPERATING RESULTS COULD SUFFER
We must accurately forecast the features and functionality required by target
customers. In addition, we must design and implement service enhancements that
meet customer requirements in a timely and efficient manner. We may not
successfully determine customer requirements and we may be unable to satisfy
customer demands. Furthermore, we may not be able to design and implement a
service incorporating desired features in a timely and efficient manner. In
addition, if any new service we launch is not favorably received by customers
and end-users, our reputation could be damaged. If we fail to accurately
determine customer feature requirements or service enhancements or to market
services containing such features or enhancements in a timely and efficient
manner, our business and operating results could suffer materially.
WE NEED TO UPGRADE OUR SYSTEMS AND INFRASTRUCTURE TO ACCOMMODATE INCREASES IN
EMAIL TRAFFIC
We must continue to expand and adapt our network infrastructure as the number of
users and the amount of information they wish to transmit increases, and as
their requirements change. The expansion and adaptation of our network
infrastructure will require substantial financial, operational and management
resources. Due to the limited deployment of our services to date, the ability of
our network to connect and manage a substantially larger number of customers at
high transmission speeds is unknown, and we face risks related to the network's
ability to operate with higher customer levels while maintaining expected
performance.
As the frequency and complexity of messaging increases, we will need to make
additional investments in our infrastructure, which may be expensive. In
addition, we may not be able to accurately project the rate or timing of email
traffic increases or upgrade our systems and infrastructure to accommodate
future traffic levels. We may also not be able to achieve or maintain a
sufficiently high capacity of data transmission as customer usage increases.
Customer demand for our services could be greatly reduced if we fail to maintain
high capacity data transmission. In addition, as we upgrade our network
infrastructure to increase capacity available to our customers, we are likely to
encounter equipment or software incompatibility which may
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cause delays in implementations, as well as increased costs. For example, during
the quarter ended September 30, 1999, we incurred $600,000 in additional
consulting and outside contractor charges to migrate our network to a new
storage platform. We may not be able to expand or adapt our network
infrastructure to meet additional demand or our customers' changing requirements
in a timely manner or at all. If we fail to do so, our business and operating
results could suffer materially.
IF WE DO NOT SUCCESSFULLY ADDRESS THE RISKS INHERENT IN THE EXPANSION OF OUR
INTERNATIONAL OPERATIONS, OUR BUSINESS COULD SUFFER
We intend to continue to expand into international markets and to spend
significant financial and managerial resources to do so. If our revenues from
international operations do not exceed the expense of establishing and
maintaining these operations, our business, financial condition and operating
results will suffer. At present, we have subsidiaries in Germany and the United
Kingdom, and we are in the process of incorporating a subsidiary in France. We
have limited experience in international operations and may not be able to
compete effectively in international markets. We face certain risks inherent in
conducting business internationally, such as:
- unexpected changes in regulatory requirements;
- difficulties and costs of staffing and managing international operations;
- differing technology standards;
- difficulties in collecting accounts receivable and longer collection
periods;
- political and economic instability;
- fluctuations in currency exchange rates;
- imposition of currency exchange controls;
- potentially adverse tax consequences; and
- reduced protection for intellectual property rights in certain countries.
Any of these factors could adversely affect our international operations and,
consequently, our business and operating results. Specifically, failure by us to
successfully manage our 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.
BECAUSE WE PROVIDE OUR EMAIL MESSAGING SERVICES OVER THE INTERNET, OUR BUSINESS
COULD SUFFER IF EFFICIENT TRANSMISSION OF DATA OVER THE INTERNET IS INTERRUPTED
The recent growth in the use of the Internet has caused frequent interruptions
and delays in accessing the Internet and transmitting data over the Internet. To
date we have not experienced a significant adverse effect from these
interruptions. However, because we provide email messaging services over the
Internet, interruptions or delays in Internet transmissions will adversely
affect our customers' ability to send or receive their email messages. We rely
on the speed and reliability of the networks operated by third parties.
Therefore, our market depends on
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improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion.
We depend on telecommunications network suppliers such as MCI WorldCom and
Sprint to transmit email messages across their networks. In addition, to deliver
our services, we rely on a number of public and private peering
interconnections, which are arrangements among access providers to carry each
other's traffic. If these providers were to discontinue these arrangements, and
alternative providers did not emerge or were to increase the cost of providing
access, our ability to transmit our email traffic would be reduced. If we were
to increase our current prices to accommodate any increase in the cost of
providing access, it could negatively impact our sales. If we did not increase
our prices in response to rising access costs, our margins would be negatively
affected. Furthermore, if additional capacity is not added as traffic increases,
our ability to distribute content rapidly and reliably through these networks
will be adversely affected.
IF WE ENCOUNTER SYSTEM FAILURE, WE MAY NOT BE ABLE TO PROVIDE ADEQUATE SERVICE
AND OUR BUSINESS AND REPUTATION COULD BE DAMAGED
Our ability to successfully receive and send email messages and provide
acceptable levels of customer service largely depends on the efficient and
uninterrupted operation of our computer and communications hardware and network
systems. Substantially all of our computer and communications systems are
located in Palo Alto (California), San Francisco (California), Sterling
(Virginia), Munich (Germany), and London (United Kingdom). Our systems and
operations are vulnerable to damage or interruption from fire, flood,
earthquake, power loss, telecommunications failure and similar events. The
occurrence of any of the foregoing risks could subject us to contractual
monetary penalties if we fail to meet our minimum performance standards, and
could have a material adverse effect on our business and operating results and
damage our reputation.
WE MUST RECRUIT AND RETAIN OUR KEY EMPLOYEES TO EXPAND OUR BUSINESS
Our success depends on the skills, experience and performance of our senior
management and other key personnel, many of whom have worked together for only a
short period of time. For example, our Chief Executive Officer, Chief Financial
Officer, Vice President of Sales, and Chief Information Officer have joined us
within the past year. The loss of the services of any of our senior management
or other key personnel, including our founder, David Hayden, and our President
and Chief Executive Officer, Douglas Hickey, could materially and adversely
affect our business. We do not have long-term employment agreements with any of
our senior management and other key personnel. Our success also depends on our
ability to recruit, retain and motivate other highly skilled sales and
marketing, technical and managerial personnel. Competition for these people is
intense, and we may not be able to successfully recruit, train or retain
qualified personnel. In particular, we may not be able to hire a sufficient
number of qualified software developers for our email services. If we fail to
retain and recruit necessary sales and marketing, technical and managerial
personnel, our business and our ability to develop new services and to provide
acceptable levels of customer service could suffer.
UNKNOWN SOFTWARE DEFECTS COULD DISRUPT OUR SERVICES, WHICH COULD HARM OUR
BUSINESS AND REPUTATION
Our service offerings depend on complex software, both internally developed and
licensed from third parties. Complex software often contains defects,
particularly when first introduced or
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when new versions are released. Although we conduct extensive testing, we may
not discover software defects that affect our new or current services or
enhancements until after they are deployed. Although we have not experienced any
material software defects to date, it is possible that, despite testing by us,
defects may occur in the software. These defects could cause service
interruptions, which could damage our reputation or increase our service costs,
cause us to lose revenue, delay market acceptance or divert our development
resources, any of which could cause our business to suffer.
WE MAY NEED ADDITIONAL CAPITAL AND RAISING ADDITIONAL CAPITAL MAY DILUTE
EXISTING SHAREHOLDERS
We believe that our existing capital resources, including the anticipated
proceeds of our recent public offering of common stock, will enable us to
maintain our current and planned operations for at least the next 12 months.
However, we may be required to raise additional funds due to unforeseen
circumstances. If our capital requirements vary materially from those currently
planned, we may require additional financing sooner than anticipated. Such
financing may not be available in sufficient amounts or on terms acceptable to
us and may be dilutive to existing shareholders.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our copyrights, service marks, trademarks, trade secrets and similar
intellectual property as critical to our success, and rely on trademark and
copyright law, trade secret protection and confidentiality and/or license
agreements with our employees, customers and partners to protect our proprietary
rights. Despite our precautions, unauthorized third parties may copy certain
portions of our services or reverse engineer or obtain and use information that
we regard as proprietary. End-user license provisions protecting against
unauthorized use, copying, transfer and disclosure of the licensed program may
be unenforceable under the laws of certain jurisdictions and foreign countries.
The status of United States patent protection in the software industry is not
well defined and will evolve as the U.S. Patent and Trademark Office grants
additional patents. We have one patent pending in the United States and we may
seek additional patents in the future. We do not know if our patent application
or any future patent application will be issued with the scope of the claims we
seek, if at all, or whether any patents we receive will be challenged or
invalidated. In addition, the laws of some foreign countries do not protect
proprietary rights to the same extent as do the laws of the United States. Our
means of protecting our proprietary rights in the United States or abroad may
not be adequate and competitors may independently develop similar technology.
Third parties may infringe or misappropriate our copyrights, trademarks and
similar proprietary rights. In addition, other parties may assert infringement
claims against us. Although we have not received notice of any alleged
infringement, we cannot be certain that our products do not infringe issued
patents that may relate to our products. In addition, because patent
applications in the United States are not publicly disclosed until the patent is
issued, applications may have been filed which relate to our software products.
We may be subject to legal proceedings and claims from time to time in the
ordinary course of our business, including claims of alleged infringement of the
trademarks and other intellectual property rights of third parties. Intellectual
property litigation is expensive and time-consuming and could divert
management's attention away from running our business.
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WE MAY NEED TO LICENSE THIRD PARTY TECHNOLOGIES AND WE FACE RISKS IN DOING SO
We also intend to continue to license certain technology from third parties,
including our web server and encryption technology. The market is evolving and
we may need to license additional technologies to remain competitive. We may not
be able to license these technologies on commercially reasonable terms or at
all. In addition, we may fail to successfully integrate any licensed technology
into our services. These third-party in-licenses may expose us to increased
risks, including risks with the integration of new technology, the diversion of
resources from the development of our own proprietary technology, and our
inability to generate revenues from new technology sufficient to offset
associated acquisition and maintenance costs. Our inability to obtain any of
these licenses could delay product and service development until equivalent
technology can be identified, licensed and integrated. Any such delays in
services could cause our business and operating results to suffer.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES COULD IMPAIR THE GROWTH OF THE
INTERNET AND DECREASE DEMAND FOR OUR SERVICES OR INCREASE OUR COST OF DOING
BUSINESS
Although there are currently few laws and regulations directly applicable to the
Internet and commercial email services, a number of laws have been proposed
involving the Internet, including laws addressing user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality of
products and services. Further, the growth and development of the market for
online email may prompt calls for more stringent consumer protection laws that
may impose additional burdens on those companies conducting business online. The
adoption of any additional laws or regulations may impair the growth of the
Internet or commercial online services which could decrease the demand for our
services and increase our cost of doing business, or otherwise harm our business
and operating results. Moreover, the applicability to the Internet of existing
laws in various jurisdictions governing issues such as property ownership, sales
and other taxes, libel and personal privacy is uncertain and may take years to
resolve.
IF WE DO NOT ADEQUATELY ADDRESS "YEAR 2000" ISSUES, WE MAY INCUR SIGNIFICANT
COSTS AND OUR BUSINESS COULD SUFFER
The Year 2000 issue is the result of computer programs and embedded hardware
systems having been developed using two digits rather than four to define the
applicable year. These computer programs or hardware that have date-sensitive
software or embedded chips may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations including, among other things,
a temporary inability to process transactions, send invoices or engage in normal
business activities. As a result, many companies' computer systems may need to
be upgraded or replaced in order to comply with the "Year 2000." We are in the
process of testing our internally developed software. Many of our customers
maintain their Internet operations on commercially available operating systems,
which may be impacted by Year 2000 complications. In addition, we rely on
third-party vendors for certain software and hardware included within our
services, which may not be Year 2000 compliant. Failure of our internal computer
systems or third-party equipment or software, or of systems maintained by our
suppliers, to operate properly with regard to the year 2000 and thereafter could
require us to incur significant unanticipated expenses to remedy any problems
and could cause system interruptions and loss of data. Any of these events could
harm our reputation, business and operating results. We have yet to complete a
comprehensive contingency plan to address the issues that could result from Year
2000 complications. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Issues."
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WE MAY HAVE LIABILITY FOR INTERNET CONTENT, AND WE MAY NOT HAVE ADEQUATE
LIABILITY INSURANCE
As a provider of email 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 email. We do not and
cannot screen all of the content generated by our users, and we could be exposed
to liability with respect to this content. Furthermore, some foreign
governments, such as Germany, have enforced laws and regulations related to
content distributed over the Internet that are more strict than those currently
in place in the United States.
Although we carry general liability and umbrella liability insurance, our
insurance may not cover claims of these types or may not be adequate to
indemnify us for all liability that may be imposed. There is a risk that a
single claim or multiple claims, if successfully asserted against us, could
exceed the total of our coverage limits. There is also a risk that single claim
or multiple claims asserted against us may not qualify for coverage under our
insurance policies as a result of coverage exclusions that are contained within
these policies. Should either of these risks occur, capital contributed by our
shareholders may need to be used in order to settle claims. Any imposition of
liability, particularly liability that is not covered by insurance or is in
excess of insurance coverage, could have a material adverse effect on our
reputation and our business and operating results, or could result in the
imposition of criminal penalties.
OUR STOCK HAS BEEN PUBLICLY TRADED FOR ONLY A BRIEF PERIOD, AND AS A RESULT OUR
STOCK PRICE MAY BE VOLATILE
Our common stock began to trade publicly on March 29, 1999, and as a result has
only a brief history of trading. The trading price of our shares has proven to
be highly volatile during the period our shares have been publicly traded. We
believe the trading price of our common stock will remain highly volatile, and
may fluctuate substantially due to factors such as:
- actual or anticipated fluctuations in our results of operations;
- changes in or failure by us to meet securities analysts' expectations;
- announcements of technological innovations;
- introduction of new services by us or our competitors;
- developments with respect to intellectual property rights;
- conditions and trends in the Internet and other technology industries; and
- general market conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have affected the market prices for the
common stocks of technology companies, particularly Internet companies. These
broad market fluctuations may result in a material decline in the market price
of our common stock. In the past, following periods of volatility in the market
price of a particular company's securities, securities class action litigation
has often been brought against that company. We may become involved in this type
of litigation
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<PAGE> 38
in the future. Litigation is often expensive and diverts management's attention
and resources, which could have a material adverse effect upon our business and
operating results.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE
Upon the closing of our initial public offering of common stock, we had
approximately 34.1 million shares of common stock outstanding. All the 4.5
million shares sold in the offering are freely tradable. The remaining 29.6
million shares of common stock outstanding after the offering were subject to
lock-up agreements that prohibit the sale of the shares for 180 days after the
date public trading of our shares commenced. Immediately following the 180-day
lockup period, approximately 26.4 million shares which were outstanding at the
close of the offering became available for sale. The remaining shares of our
common stock will become available at various times thereafter upon the
expiration of one-year holding periods. Sales of a substantial number of shares
of common stock in the public market after the expiration of the lockup and the
holding periods could cause the market price of our common stock to decline.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its marketable securities in accordance with its investment
policy and maintains its portfolio in the form of managed investment accounts
comprised of money market accounts, corporate bonds, and government securities.
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The primary objectives of the
Company's portfolio are to preserve capital and maintain proper liquidity to
meet the operating needs of the business. The Company's cash policy specifies
credit quality standards for the Company's investments and limits the amount of
credit exposure to any single issue, issuer, or type of investment.
The Company's holdings are subject to interest rate risk and will fall in value
in the event market interest rates increase. However, the Company believes that
the market risk arising from its holdings of financial instruments is not
material.
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PART 2 -- OTHER INFORMATION
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 21, 1999, Critical Path completed its acquisition of dotOne Corporation
("dotOne") pursuant to the terms of the Agreement and Plan of Reorganization
dated July 15, 1999, among Critical Path, dotOne and dotOne Acquisition Corp., a
wholly-owned subsidiary of Critical Path ("Merger Sub"). Pursuant to the terms
of the Reorganization Agreement, dotOne merged with and into Merger Sub and
became a wholly-owned subsidiary of Critical Path (the "Merger"). In addition,
each issued and outstanding share of dotOne common stock was converted into the
right to receive shares of Critical Path common stock at an exchange ratio of
0.106770612. Critical Path assumed 586,980 outstanding options to acquire dotOne
common stock as options to acquire Critical Path common stock, on the same terms
as the original option, adjusted to reflect the exchange ratio of 0.130652227.
The holders of 107,520 options to acquire dotOne common stock elected to receive
$684,934 cash in exchange for the retirement of these options. Critical Path
issued 640,623 shares of Critical Path common stock in the merger and assumed
options that can be exercised for approximately 76,690 shares of Critical Path
common stock. The exchange ratio and option exchange ratio were determined
through negotiations between the managements of Critical Path and dotOne, and
were approved by their respective boards of directors on June 22, 1999. dotOne
shareholders approved the Merger through written consents to action in lieu of a
stockholder meeting dated as of July 20, 1999. The issuance of common stock in
this transaction was exempt from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act"), by virtue of the exemption from
registration contained in Section 4(2) thereof. An information statement
substantially in compliance with the information requirements under Rule 502
promulgated under the Securities Act (except for 502(b)(3)) relating to the
solicitation of the consent of the shareholders of the Company to the Merger was
mailed to the Company's shareholders. The issuance of options in this
transaction was exempt from the registration requirements of the Securities Act
pursuant to Rule 701 thereof. A "purchaser representative," as such term is
defined in Rule 501(h) under the Securities Act, was retained by the Company to
represent each Company shareholder who was not an "accredited investor" as
defined in Rule 501(a) under the Securities Act.
On August 31, 1999, Critical Path completed its acquisition of Amplitude
Software Corp. ("Amplitude") pursuant to the terms of the Agreement and Plan of
Reorganization dated June 22, 1999, among Critical Path, Amplitude and Apollo
Acquisition Corp., a wholly-owned subsidiary of Critical Path ("Amplitude Merger
Sub"). Pursuant to the terms of the Reorganization Agreement, Amplitude merged
with and into Amplitude Merger Sub and became a wholly-owned subsidiary of
Critical Path (the "Amplitude Merger"). In addition, each issued and outstanding
share of Amplitude common stock was converted into the right to receive shares
of Critical Path common stock at an exchange ratio of 0.135186988 and
$1.69856780 in cash. Each issued and outstanding share of Amplitude Series A
Preferred Stock was converted into the right to receive shares of Critical Path
common stock at an exchange ratio of 0.13685308 and $1.69856780 in cash. Each
issued and outstanding share of Amplitude Series B Preferred Stock was converted
into the right to receive shares of Critical Path common stock at an exchange
ratio of 0.14907106 and $1.69856780 in cash. Each issued
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<PAGE> 40
and outstanding share of Amplitude Series B-1 Preferred Stock was converted into
the right to receive shares of Critical Path common stock at an exchange ratio
of 0.15328904 and $1.69856780 in cash. Each issued and outstanding share of
Amplitude Series C Preferred Stock was converted into the right to receive
shares of Critical Path common stock at an exchange ratio of 0.16156672 and
$1.69856780 in cash. Each issued and outstanding share of Amplitude Series D
Preferred Stock was converted into the right to receive shares of Critical Path
common stock at an exchange ratio of 0.17767224 and $1.69856780 in cash.
Critical Path assumed 3,203,534 outstanding options to acquire Amplitude common
stock as options to acquire Critical Path common stock, on the same terms as the
original option, adjusted to reflect the option exchange ratio of
0.182353049339. Critical Path issued 4,107,310 shares of Critical Path common
stock in the merger and, in addition, assumed options that can be exercised for
approximately 584,174 shares of Critical Path common stock. The exchange ratios
were determined through negotiations between the managements of Critical Path
and Amplitude, and were approved by their respective boards of directors on June
22, 1999. Amplitude shareholders approved the Amplitude Merger through written
consents to action in lieu of a stockholder meeting dated as of August 27, 1999.
The issuance of common stock in this transaction was exempt from the
registration requirements of the Securities Act by virtue of the exemption from
registration contained in Section 3(a)(10) thereof. The issuance of options in
this transaction was exempt from the registration requirements of the Securities
Act pursuant to Rule 701 thereof. A permit from the California Commissioner of
Corporations pursuant to Section 25121 of the California Corporate Securities
Law of 1968 was obtained in order to facilitate said registration exemption.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27.1 Financial Data Schedule
b) Reports on Form 8-K
1. On August 2, 1999, the Company filed a report on Form 8-K
announcing the acquisition of dotOne Corporation.
2. On September 13, 1999, the Company filed a report on Form 8-K
announcing the acquisition of Amplitude Software Corporation.
3. On October 1, 1999, the Company filed a report on Form 8-K/A (as
an amendment to the Form 8-K filed on August 2, 1999) to report
the financial information required in connection with its
acquisition of dotOne Corporation.
4. On November 12, 1999 the Company filed a report on Form 8-K/A (as
an amendment to the Form 8-K) filed on September 13, 1999) to
report the financial information required in connection with its
acquisition of Amplitude Software Corporation.
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<PAGE> 41
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 15, 1999
CRITICAL PATH, INC.
by: /s/ David A. Thatcher
--------------------------------
David A. Thatcher
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
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<PAGE> 42
CRITICAL PATH, INC.
EXHIBITS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
41
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 147,158,000
<SECURITIES> 0
<RECEIVABLES> 5,530,000
<ALLOWANCES> (578,000)
<INVENTORY> 0
<CURRENT-ASSETS> 171,278,000
<PP&E> 36,885,000
<DEPRECIATION> (6,023,000)
<TOTAL-ASSETS> 493,194,000
<CURRENT-LIABILITIES> 15,682,000
<BONDS> 0
0
0
<COMMON> 611,833,000
<OTHER-SE> (139,187,000)
<TOTAL-LIABILITY-AND-EQUITY> 493,194,000
<SALES> 0
<TOTAL-REVENUES> 7,968,000
<CGS> 0
<TOTAL-COSTS> 13,860,000
<OTHER-EXPENSES> 57,011,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 411,000
<INCOME-PRETAX> (58,240,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (58,240,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (58,240,000)
<EPS-BASIC> (2.26)
<EPS-DILUTED> (2.26)
</TABLE>
