<PAGE>
As filed with the Securities and Exchange Commission on May 28, 1999
Registration No. 333-78197
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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CRITICAL PATH, INC.
(Exact name of registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
California 7389 91-1788300
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
320 1st Street
San Francisco, California 94105
(415) 808-8800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
DOUGLAS T. HICKEY
President and Chief Executive Officer
CRITICAL PATH, INC.
320 1st Street
San Francisco, California 94105
(415) 808-8800
(Name, address, including zip code, and telephone number, including area code,
of agent for service of process)
----------------
Copies to:
Alan K. Austin Kenneth L. Guernsey
Mark L. Reinstra Virginia C. Edwards
James C. Creigh John S. Wills
Clay B. Simpson Cooley Godward LLP
Wilson Sonsini Goodrich & Rosati One Maritime Plaza
650 Page Mill Road San Francisco, CA 94111
Palo Alto, CA 94304
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement numbers of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 28, 1999
[LOGO OF CRITICAL PATH APPEARS HERE]
4,000,000 Shares
Common Stock
Critical Path, Inc. is offering 3,000,000 shares of its common stock and the
selling shareholders are selling an additional 1,000,000 shares. Our common
stock is traded on the Nasdaq National Market under the symbol "CPTH." The last
reported sale price of our common stock on the Nasdaq National Market on May
26, 1999 was $58.00 per share.
--------------
Investing in the common stock involves risks.
See "Risk Factors" beginning on page 6.
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Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price................................... $ $
Underwriting Discounts and Commissions.................. $ $
Proceeds to Critical Path............................... $ $
Proceeds to the selling shareholders.................... $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
The selling shareholders have granted the underwriters a 30-day option to
purchase up to an additional 600,000 shares of common stock to cover over-
allotments.
--------------
BancBoston Robertson Stephens Hambrecht & Quist
--------------
Dain Rauscher Wessels FAC/Equities
a division of Dain Rauscher Incorporated
--------------
The date of this prospectus is , 1999.
<PAGE>
INSIDE FRONT COVER
EMAIL
Questions
Need
Answers
is your email always up
and running?
Can you upgrade your
email quickly and easily
to support additional users?
is your email operation the
most cost-effective?
Will you be able to keep up
with the internet messaging
demands of tomorrow?
[Logos of Strategic
partners appear here]
<PAGE>
GATEFOLD
Critical Path The email messaging service enterprise services
Software Solution future capabilities
including
Branding Service basic secure ecommerce unified messaging
email email services directions
24x7 hosting hosting
Scalable calendaring
spam SSL-based future
blocking messaging capabilities
including
anti-virus billing transactions
security
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock. In this prospectus, the
"Company," "Critical Path," "we," "us," and "our" refer to Critical Path,
Inc., a California corporation.
----------------
TABLE OF CONTENTS
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Page
----
<S> <C>
Summary................................................................. 4
Risk Factors............................................................ 6
Use of Proceeds......................................................... 19
Dividend Policy......................................................... 19
Price Range of Common Stock............................................. 19
Capitalization.......................................................... 20
Dilution................................................................ 21
Selected Consolidated Financial Information............................. 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 23
Business................................................................ 35
Management.............................................................. 54
Certain Transactions.................................................... 63
Principal Shareholders.................................................. 66
Description of Capital Stock............................................ 68
Shares Eligible for Future Sale......................................... 71
Underwriting............................................................ 73
Legal Matters........................................................... 76
Experts................................................................. 76
Where You Can Find More Information..................................... 76
Index to Consolidated Financial Statements.............................. F-1
</TABLE>
----------------
This prospectus contains trademarks and trade names of other companies.
3
<PAGE>
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus, including "Risk Factors" and the
Financial Statements, carefully before making an investment decision.
The Company
We are a leading provider of email hosting services designed to allow a wide
range of organizations, including Internet service providers, web hosting
companies, web portals and corporations, to reduce costs and improve customer
service by outsourcing their email systems. We believe we are a leading
provider of email hosting services because our services are designed to support
growth, enhance reliability, allow access to advanced technologies and provide
greater access with high levels of security. In addition, our service is
designed so that our customers can enhance their brand recognition by
maintaining their existing "look and feel" while improving the functionality of
their email service. We intend to build on our expertise in email services to
provide additional Internet messaging services in the future. We have
approximately 250 customers. We seek to establish strategic relationships with
entities that are both commercial partners and/or equity investors or with whom
we have contractualized reseller relationships. We have strategic relationships
with ICQ, a subsidiary of America Online, E*TRADE, Network Solutions, Sprint
and US West.
Email, one of the most popular Internet applications, has broadened from a
simple messaging tool to a widely accepted form of communication for both
personal and business use. According to Electronic Mail & Messaging Systems
("EMMS"), there were approximately 263 million electronic mailboxes worldwide
as of September 30, 1998. EMMS estimates that this number increased to 382
million electronic mailboxes worldwide as of March 31, 1999. According to the
Gartner Group, approximately 300 billion electronic mail messages were sent in
1998. In addition, the complexity of the individual messages is increasing,
allowing email to become a more functional communications tool for both
personal and business use. At the same time, we believe that customers are
increasingly expecting the same reliability from their email service that they
are accustomed to receiving from their telephone service, commonly referred to
as web-tone reliability. Due to this expectation and the expense and expertise
required to maintain a reliable email system, organizations are increasingly
seeking to outsource their email systems.
Our services provide the following benefits to our customers:
. reduced costs associated with acquiring and maintaining hardware and
software and with recruiting and retaining systems engineering and
administrative support;
. a scalable and reliable system architecture designed to support global
service over hundreds of millions of mailboxes across millions of domains
with web-tone reliability;
. access to advanced technologies based on our expertise in rapidly
deploying new technologies, combating system failures and maintaining
network and system security;
. easy access by customers and end-users by designing our services on open
Internet-based standards; and
. control over their own brand and functionality through customized web-
based email interfaces.
Recent Developments
Since our initial public offering, we have announced several strategic
contracts that help us to expand our customer base and broaden our global
reach. We have expanded our relationship with America Online so it now includes
ICQ, AOL Latin America and AOL Enterprise, which provides us with access to one
of the largest concentrated customer bases of e-mail users on the Internet. Our
relationship with Promus provides us with access to 1,362 hotels with more than
194,000 rooms in North and South America. Furthermore, we have significantly
expanded our international customer base to include Asiamail, Avantel, British
Telecom and o.tel.o. On May 26, 1999, we acquired certain assets and customer
relationships from Fabrik Communications, Inc. for cash and common stock valued
at $20 million.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by Critical Path.............. 3,000,000 shares
Common stock offered by selling shareholders....... 1,000,000 shares
Common stock to be outstanding after the offering.. 38,124,532 shares
Use of proceeds by Critical Path................... Acquisition of businesses
and technologies,
expansion of sales and
marketing activities, open
additional data centers,
expansion of international
operations and general
corporate purposes.
Nasdaq National Market symbol...................... CPTH
</TABLE>
Summary Consolidated Financial Data
(in thousands, except per share data)
Please see Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used in computing per
share data. The Pro Forma Consolidated Balance Sheet Data summarized below
reflects the application of the net proceeds from our initial public offering
of $115.5 million. The Pro Forma As Adjusted Consolidated Balance Sheet Data
reflects the sale of the 3,000,000 shares of common stock offered by Critical
Path in this offering at an assumed public offering price of $58.00 per share
and after deducting the estimated underwriting discounts and commissions and
our estimated offering expenses.
<TABLE>
<CAPTION>
Period from Three Months Ended
February 19, 1997 Year Ended March 31,
(Inception) to December 31, -------------------
December 31, 1997 1998 1998 1999
----------------- ------------ --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net revenues............... $ -- $ 897 $ 70 $ 1,049
Loss from operations....... (1,056) (11,448) (1,170) (17,881)
Net loss................... (1,074) (11,461) (1,320) (17,594)
Net loss per share -- basic
and diluted............... $ (0.54) $ (2.94) $ (0.49) $ (2.51)
Weighted average shares --
basic and diluted......... 1,994 3,889 2,687 7,011
Pro forma net loss per
share (unaudited):
Net loss per share --
basic and diluted....... $ (0.81) $ (0.68)
Weighted average shares
-- basic and diluted.... 14,194 26,018
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents......................... $22,506 $138,006 $304,546
Working capital................................... 18,851 134,351 300,891
Total assets...................................... 32,681 148,181 314,721
Capital lease obligations, long-term.............. 4,095 4,095 4,095
Shareholders' equity.............................. 23,440 138,940 305,480
</TABLE>
Our headquarters are located at 320 1st Street, San Francisco, California
94105 and our telephone number is (415) 808-8800. Our website address is
www.cp.net. The information on our website is not a part of this prospectus.
5
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to invest in shares of our common stock. Our business, operating
results and financial condition could be adversely affected by any of the
following risks. The trading price of our common stock could decline due to any
of these risks, and you could lose all or part of your investment. You should
also refer to the other information set forth in this prospectus, including our
financial statements and the related notes.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. These statements relate to our future plans, objectives,
expectations and intentions, and the assumptions underlying or relating to any
of these statements. These statements may be identified by the use of words
such as "expects," "anticipates," "intends," and "plans" and similar
expressions. Our actual results could differ materially from those discussed in
these statements. Factors that could contribute to such differences include,
but are not limited to, those discussed below and elsewhere in this prospectus.
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:
. acquire businesses and technologies;
. 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;
. 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.
6
<PAGE>
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 $17.6 million for the three months ended
March 31, 1999. As of March 31, 1999, we had an accumulated deficit of
approximately $30.1 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;
. 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 by the extent to which 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. In addition to amortization of the initial fair
value of this warrant, which totaled $16.5 million, we expect that future
changes in the 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 ultimate amount of such amortization. For example, we recognized
a $7.9 million non-cash charge to advertising expense during the first quarter
of 1999 in connection with the amortization of the America Online warrant.
7
<PAGE>
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.
Acquisitions could result in dilution, operating difficulties and other harmful
consequences
We expect that we will use a portion of the net proceeds to Critical Path of
this offering to acquire or invest in businesses, products, services and
technologies that complement or augment our service offerings and customer
base. On May 26, 1999, we acquired certain assets and customer relationships
from Fabrik Communications for cash and common stock valued at $20 million. We
are currently engaged in discussions with a number of companies regarding
strategic acquisitions or investments. Although these discussions are ongoing,
we have not signed any definitive agreements and we cannot assure you that any
of these discussions will result in actual acquisitions. To be successful, we
will need to identify suitable acquisition candidates, integrate disparate
technologies and corporate cultures and manage a geographically dispersed
company. We cannot assure you that we will be able to do this successfully.
Acquisitions could divert our attention from other business concerns and could
expose us to unforeseen liabilities. In addition, we may lose key employees
while integrating any new companies.
We expect that we will pay for some of our acquisitions by issuing additional
common stock and this would dilute our shareholders. We may also use cash to
make acquisitions. It may be necessary for us to raise additional funds through
public or private financings. We cannot assure you that we will be able to
raise additional funds at any particular point in the future or on terms that
are favorable to us. In addition, we may be required to amortize significant
amounts of goodwill and other intangible assets in connection with future
acquisitions, which would materially increase our operating expenses.
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
March 31, 1999, we had 61 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 recently
hired most of our sales and marketing personnel, 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
8
<PAGE>
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
October 1998, our customers experienced a four-hour service interruption due to
an operating system failure. 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 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.
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
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, E*TRADE, Network Solutions, Sprint and U S
WEST, 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. 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 and TABNet, a wholly
9
<PAGE>
owned subsidiary of Verio, accounted for approximately 30% of our 1998 net
revenues, excluding the value of stock purchase rights received by customers.
In the quarter ended March 31, 1999, E*TRADE accounted for approximately 48% of
our net revenues and TABNet accounted for 32% of our net revenue, excluding the
value of stock purchase rights received by customers. 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 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. As of March 31, 1999, we had 182 employees.
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 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.
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
10
<PAGE>
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 mail.com, 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, which currently offers 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 improve their service or
product offerings, and also provide time for new competitors to develop email
service solutions and solicit prospective customers within our target markets.
Increased competition could result in pricing pressures, reduced operating
margins and loss of market share, any of which could cause our business to
suffer.
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% of our net revenues and
TABNet accounted for approximately 30% of our net revenues, excluding the value
of stock purchase rights
11
<PAGE>
received by customers. In the quarter ended March 31, 1999, E*TRADE accounted
for approximately 48% of our net revenues and TABNet accounted for
approximately 32% 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 by either party 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 cause
delays in implementations. 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
12
<PAGE>
expense of establishing and maintaining these operations, our business,
financial condition and operating results will suffer. At present, we have
sales and operations subsidiaries in Germany and the United Kingdom. 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 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 one
another'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
13
<PAGE>
communications hardware and network systems. Substantially all of our computer
and communications systems are located in Palo Alto and San Francisco,
California and Laurel, Maryland. 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 Vice President and Chief
Information Officer have joined us within the past twelve months. 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 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 this offering, 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
14
<PAGE>
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 have asserted and may
assert infringement claims against us. For example, we recently received a
letter alleging that our name infringed the trade name of another company.
Although we have not received notice of any alleged patent infringement, we
cannot be certain that our products do not infringe issued patents that may
relate to our products. In addition, because patent applications in the United
States are not publicly disclosed until the patent is issued, applications may
have been filed which relate to our software products. 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.
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 related to 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.
Our stock price has been volatile and we expect that this volatility will
continue
Our stock price has been highly volatile since our initial public offering on
March 29, 1999. We expect that this volatility will continue in the future 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;
15
<PAGE>
. 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 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.
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 not yet developed 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."
16
<PAGE>
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.
Future sales of our common stock may depress our stock price
After this offering, we will have approximately 38.0 million shares of common
stock outstanding. All the shares sold in this offering will be freely
tradable. Approximately 28.6 million shares of common stock outstanding after
this offering are subject to lock-up agreements that prohibit the sale of such
shares until September 25, 1999. Immediately after the lockup period ends,
these shares will become available for sale at various times thereafter upon
the expiration, in some cases, of one-year holding periods. Sales of a
substantial number of shares of common stock in the public market after this
offering or after the expiration of the lockup and holding periods could cause
the market price of our common stock to decline.
Purchasers of our common stock will suffer immediate and substantial dilution
The public offering price is expected to be substantially higher than the pro
forma net tangible book value per share of our common stock. Some elements of
our market value do not originate from measurable transactions. Therefore,
there is not a corresponding rise in "book" or historical cost accounting value
for our rise in market value, if any. Examples of these elements include the
perceived value associated with our strategic relationships, perceived growth
prospects of our core commercial market and our perceived competitive position
within that market. Purchasers of our common stock in this offering will
experience immediate dilution of $50.27 in the pro forma net tangible book
value per share of common stock at an assumed public offering price of $58.00
per share. Purchasers will also experience additional dilution upon the
exercise of outstanding stock options and warrants.
Our directors, executive officers and principal shareholders will be able to
exert significant influence over us
After this offering, our directors, executive officers and our shareholders
who currently own over 5% of our common stock will beneficially own
approximately 61.2% of our outstanding common stock. These shareholders, if
they vote together, will be able to exercise significant influence over all
matters requiring shareholder approval, including the election of directors and
approval of
17
<PAGE>
significant corporate transactions. This concentration of ownership may also
delay or prevent a change in control of Critical Path.
Our articles of incorporation and bylaws contain provisions which could delay
or prevent a change in control
Our articles of incorporation and bylaws contain provisions that could delay
or prevent a change in control of Critical Path. These provisions could limit
the price that investors might be willing to pay in the future for shares of
our common stock. Some of these provisions:
. authorize the issuance of preferred stock which can be created and issued
by the board of directors without prior shareholder approval, commonly
referred to as "blank check" preferred stock, with rights senior to those
of common stock;
. prohibit shareholder action by written consent; and
. establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by shareholders at a meeting.
See "Description of Capital Stock" for additional discussion of these
provisions.
If we do not use the proceeds in a manner beneficial to us, our business could
suffer
We intend generally to use the net proceeds from this offering to acquire
businesses and technologies, expand our sales and marketing activities, open
additional data centers, expand our international operations and for general
corporate purposes, including working capital and strategic investments. We
have not yet determined the actual expected expenditures and thus cannot
estimate the amounts to be used for each specified purpose. The actual amounts
and timing of these expenditures will vary significantly depending on a number
of factors, including, but not limited to, the amount of cash generated by our
operations and the market response to the introduction of any new service
offerings. Depending on future developments and circumstances, we may use some
of the proceeds for uses other than those described above. Our management will
therefore have significant flexibility in applying the net proceeds of this
offering. If the proceeds are not used in a manner beneficial to Critical Path,
our business could suffer and our stock price could decline.
18
<PAGE>
USE OF PROCEEDS
We will receive approximately $166.5 million from the sale of the 3,000,000
shares offered by Critical Path, at an assumed public offering price of $58.00
per share, after deducting the estimated underwriting discounts and commissions
and the estimated offering expenses payable by us. We will not receive any of
the proceeds from the sale of common stock by the selling shareholders.
We generally intend to use the proceeds of this offering for the following:
. acquisition of businesses and technologies;
. expansion of our sales and marketing activities;
. opening of additional data centers;
. expansion of our international operations; and
. working capital and other general corporate purposes.
We have not yet determined the actual expected expenditures and thus cannot
estimate the amounts to be used for each purpose discussed above. The amounts
and timing of these expenditures will vary significantly depending on a number
of factors, including, but not limited to, the amount of cash generated by our
operations and the market response to the introduction of any new service
offerings.
We expect to use a portion of the net proceeds of this offering to acquire or
invest in businesses, products, services or technologies complementary to our
current business, through mergers, acquisitions, joint ventures or otherwise.
We are currently engaged in discussions with a number of companies regarding
strategic acquisitions or investments. Although these discussions are ongoing,
we have not signed any definitive agreements and we cannot assure you that any
of these discussions will result in actual acquisitions. We intend to invest
the net proceeds of this offering in short-term, interest-bearing investment
grade securities pending the foregoing uses.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock and do not
anticipate paying any dividends in the foreseeable future. We currently intend
to retain any future earnings for the expansion and operation of our business.
Furthermore, our bank line of credit agreement prohibits the payment of cash
dividends.
PRICE RANGE OF COMMON STOCK
Our common stock began trading publicly on the Nasdaq National Market on
March 29, 1999 and is traded under the symbol "CPTH." The following table shows
the high and low per share closing prices of the common stock, as reported by
the Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
1999
First Quarter (From March 29, 1999)......................... 77.00 65.88
Second Quarter (Through May 26, 1999)....................... 134.88 58.00
</TABLE>
On May 26, 1999, the closing price of the common stock on the Nasdaq National
Market was $58.00 per share, and there were approximately 106 holders of record
of the common stock.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Critical Path as of
March 31, 1999: (A) on an actual basis; (B) on a pro forma basis to reflect (1)
the receipt of net proceeds from our initial public offering of $115.5 million
and the exercise of the over-allotment option for 675,000 shares and (2) the
acquisition of certain assets and customer relationships from Fabrik
Communications as if such acquisition had occurred on March 31, 1999; and
(C) on a pro forma basis as adjusted to reflect the sale by Critical Path of
3,000,000 shares of common stock offered hereby at an assumed public offering
price of $58.00 per share and the receipt of the estimated net proceeds after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by Critical Path. See "Use of Proceeds."
<TABLE>
<CAPTION>
March 31, 1999
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Capital lease obligations, less current
portion..................................... $ 4,095 $ 4,095 $ 4,095
--------- --------- ---------
Shareholders' equity:
Preferred Stock, $0.001 par value;
5,000,000 shares authorized, no shares
issued and outstanding, actual; no shares
issued and outstanding, pro forma; no
shares issued and outstanding, pro forma
as adjusted............................... -- -- --
Common stock, $0.001 par value; 150,000,000
shares authorized; 34,308,817 shares
issued and outstanding, actual; 35,092,908
shares issued and outstanding, pro forma;
38,092,908 shares issued and outstanding
pro forma as adjusted..................... 34 35 38
Additional paid-in capital................. 306,629 329,688 496,225
Stock subscriptions receivable............. (100,440) -- --
Notes receivable from shareholders......... (1,180) (1,180) (1,180)
Unearned compensation...................... (151,474) (151,474) (151,474)
Accumulated deficit........................ (30,129) (30,129) (30,129)
--------- --------- ---------
Total shareholders' equity............... 23,440 146,940 313,480
--------- --------- ---------
Total capitalization................... $ 27,535 $ 151,035 $ 317,575
========= ========= =========
</TABLE>
- --------
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of March 31, 1999 and does
not include the following:
. 9,728,283 shares subject to options outstanding as of March 31, 1999 at a
weighted average exercise price of $3.50 per share;
. 70,401 additional shares that could be issued under our 1998 Stock Plan
as of March 31, 1999;
. 2,782,288 shares that could be issued upon exercise of outstanding
warrants as of March 31, 1999;
. 600,000 shares that could be issued under our Employee Stock Purchase
Plan; and
. 145,952 shares that could be issued upon exercise of options granted
subsequent to March 31, 1999.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was $127,340,000,
or $3.63 per share of common stock. Pro forma net tangible book value per share
is determined by dividing the amount of our total tangible assets less total
liabilities by the number of shares of common stock outstanding at that date,
including the effect of (1) shares issued and net proceeds of $115.5 million
from the initial public offering and exercise of the underwriters overallotment
option and (2) the acquisition of certain assets and customer relationships
from Fabrik Communications, Inc. as if the acquisition had occurred on March
31, 1999. Dilution in pro forma net tangible book value per share represents
the difference between the amount per share paid by purchasers of shares of
common stock in the offering made hereby and the net tangible book value per
share of common stock immediately after the completion of this offering. After
giving effect to the sale of the 3,000,000 shares of common stock offered by
Critical Path hereby (at an assumed public offering price of $58.00 per share
and after deducting the estimated underwriting discounts and commissions and
our estimated offering expenses), our pro forma as adjusted net tangible book
value at March 31, 1999 would have been $293,880,000 or $7.71 per share. This
represents an immediate increase in net tangible book value of $4.08 per share
to the existing shareholders and an immediate dilution of $50.29 per share to
new investors purchasing shares in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.......................... $58.00
------
Pro forma net tangible book value per share as of March 31,
1999............................................................ $3.63
Increase in net tangible book value per share attributable to
this offering................................................... 4.08
-----
Net tangible book value per share after the offering............. 7.71
------
Dilution per share to new investors.............................. $50.29
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
the total number of shares of common stock purchased from Critical Path, the
total consideration paid to Critical Path and the average price per share paid
by existing shareholders and by new investors purchasing shares in this
offering (based upon an assumed public offering price of $58.00 per share and
before deducting the estimated underwriting discounts and commissions and our
estimated offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders..... 35,092,908 92% $174,026,000 50% $ 4.96
New investors............. 3,000,000 8% 174,000,000 50% $58.00
---------- --- ------------ ---
Total................... 38,092,908 100% $348,000,000 100%
========== === ============ ===
</TABLE>
The foregoing table includes the effect of (1) shares issued and net proceeds
of $115.5 million from the initial public offering and exercise of the
underwriters overallotment option for 675,000 shares, (2) the acquisition of
certain assets and customer relationships from Fabrik Communications, Inc. as
if the acquisition had occurred on March 31, 1999 and assumes no exercise of
any outstanding stock options or warrants after March 31, 1999. As of March 31,
1999, there were outstanding options to purchase an aggregate of 9,728,283
shares of common stock at a weighted average exercise price of $3.50 per share
and warrants to purchase an aggregate of 2,782,288 shares at a weighted average
purchase price of $6.00 per share. To the extent any of these options or
warrants are exercised, there will be further dilution to new investors. See
"Management--1998 Stock Plan" and Notes 6, 7 and 8 of the Notes to Consolidated
Financial Statements.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated balance sheet data as of December 31, 1997 and 1998
and March 31, 1999 and the selected consolidated statement of operations data
for the period from February 19, 1997 (Inception) to December 31, 1997, for the
year ended December 31, 1998 and for the three months ended March 31, 1998 and
1999 have been derived from the Consolidated Financial Statements of Critical
Path included elsewhere in this prospectus. The data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and the Notes thereto included elsewhere in this prospectus (in thousands,
except per share data).
The unaudited pro forma consolidated statement of operations data for the
year ended December 31, 1998 and the three months ended March 31, 1999 reflect
the effect of the acquisition of certain assets and customer relationships from
Fabrik Communications, Inc. as if the acquisition had occurred on January 1,
1998. The unaudited pro forma balance sheet data reflects (i) the receipt of
net proceeds from our initial public offering of $115.5 million, which includes
the underwriter's over-allotment option and (ii) the acquisition of certain
assets and customer relationships from Fabrik Communications as if the
acquisition had occurred on March 31, 1999. See Pro Forma Condensed
Consolidated Financial Information.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Pro Forma
------------------- -------------------------
Period from Three Months
February 19, 1997 Year Ended Year Ended Ended
(Inception) to December 31, December 31, March 31,
December 31, 1997 1998 1998 1999 1998 1999
----------------- ------------ --------- --------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net revenues............ $ -- $ 897 $ 70 $ 1,049 $ 12,439 $ 4,122
Cost of net revenues.... -- (2,346) (82) (2,360) (6,686) (3,382)
------- -------- -------- --------- -------- --------
Gross profit (loss)... -- (1,449) (12) (1,311) 5,753 740
------- -------- -------- --------- -------- --------
Operating expenses:
Research and
development........... 454 2,098 273 1,379 4,537 1,653
Sales and marketing.... 244 1,687 135 1,984 5,781 3,005
General and
administrative........ 358 3,814 307 1,550 6,468 2,560
Amortization of
intangible assets..... -- -- -- -- 6,600 1,650
Stock-based expenses... -- 2,400 443 11,657 2,400 11,657
------- -------- -------- --------- -------- --------
Total operating
expenses............. 1,056 9,999 1,158 16,570 25,786 20,525
------- -------- -------- --------- -------- --------
Loss from operations.... (1,056) (11,448) (1,170) (17,881) (19,699) (19,785)
Interest and other
income, net............ (18) (13) (150) 287 (972) 49
------- -------- -------- --------- -------- --------
Net loss................ $(1,074) $(11,461) $ (1,320) $ (17,594) $(21,005) $(19,736)
======= ======== ======== ========= ======== ========
Net loss per share--
basic and diluted...... $(0.54) $ (2.94) $ (0.49) $ (2.51)
======= ======== ======== =========
Weighted average
shares--basic and
diluted................ 1,994 3,899 2,687 7,011
======= ======== ======== =========
Pro forma net loss per
share (unaudited):
Net loss per share--
basic and diluted.... $ (0.81) $ (0.68) $ (1.46) $ (0.75)
======== ========= ======== ========
Weighted average
shares--basic and
diluted.............. 14,194 26,018 14,303 26,127
======== ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31, 1999
---------------- -----------------------------
Pro Forma
1997 1998 Actual Pro Forma As Adjusted
------- ------- ------- --------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents...... $ 1 $14,791 $22,506 $125,906 $292,446
Working capital (deficit)...... (1,524) 12,524 18,851 122,251 288,791
Total assets................... 550 20,663 32,681 156,181 322,721
Capital lease obligations,
long-term..................... 42 2,454 4,095 4,095 4,095
Shareholders' equity
(deficit)..................... (1,021) 15,358 23,440 146,940 313,480
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this prospectus.
The following discussion contains forward-looking statements. Our 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, those discussed in "Risk Factors" and elsewhere in this prospectus.
Overview
Our company was founded in February 1997 to deliver email hosting solutions
to Internet service providers, web hosting companies, web portals and
corporations. From inception to October 1997, our 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. We began our email hosting service in October 1997. We have
since 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 "POP3". In January 1999, we enhanced service with the addition of
an offering based on the Lightweight Directory Access Protocol, or LDAP, a
directory software protocol. We intend to further enhance our service offering
with the inclusion of IMAP4. IMAP4 is a new hosting service based on the
Internet Message Access Protocol, a standard protocol for accessing and storing
email from a user's server. We have approximately 250 customers.
We derive substantially all of our revenues through the sale of email hosting
services. Our service revenues are derived primarily from contractual
relationships which provide for revenues on a per mailbox basis. These
contracts are typically one to three years in length. 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. Service revenues are recognized and
billed on a monthly basis as the service is performed.
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.
We intend to continue to develop worldwide sales offices and data centers. We
currently have sales and operations subsidiaries in Germany and the United
Kingdom, and we expect to open additional data centers in the United States and
Europe during the current fiscal year.
We expect that we will use a portion of the net proceeds to Critical Path of
this offering to acquire or invest in businesses, products, services and
technologies that complement or augment our service offerings and customer
base. On May 26, 1999, we acquired substantially all the operating assets of
the Connect Service business of Fabrik Communications. The acquisition has been
23
<PAGE>
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 acquisition date.
The total purchase price of $20.1 million consisted of $12.0 million cash and
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. We are
currently engaged in discussions with a number of companies regarding strategic
acquisitions or investments. Although these discussions are ongoing, we have
not signed any definitive agreements and we cannot assure you that any of these
discussions will result in actual acquisitions.
During 1998, we recorded aggregate unearned compensation totaling
approximately $19.9 million in connection with the 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 $366,000,
$217,000, $269,000 and $1.7 million were amortized in the quarters ended March
31, June 30, September 30, and December 31, 1998. In January and March 1999, we
granted options resulting in an additional $18.1 million of unearned
compensation. Amortization of unearned compensation for the first quarter of
1999 was approximately $3.7 million. 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, 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 us 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>
The shares underlying the first milestone were immediately vested on the
effective date of the agreement. The shares underlying the remaining milestones
vest on the dates that ICQ completes registration of the specified number of
sub-branded ICQ mailboxes applicable to each milestone.
24
<PAGE>
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, which is being
amortized to advertising expense using the straight-line method over four
years. 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. In the event such remeasurement results in
increases or decreases from the initial fair value, which could be substantial,
such 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. We expect to incur substantial non-cash
charges associated with the grant of the warrant to ICQ. In addition to
amortization of the initial fair value of this warrant, which totaled $16.5
million, we expect that future changes in the 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 ultimate amount of such
amortization. For example, we recognized a $7.9 million non-cash charge to
advertising expense at the end of the first quarter of 1999 in connection with
the amortization of the ICQ warrant.
At March 31, 1999, none of the registration milestones specified within the
ICQ warrant agreement had been achieved. Therefore, the shares underlying the
second through fifth milestones of the ICQ warrant were remeasured using the
closing price for 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. This revised fair value will be amortized ratably over
four years, resulting in a quarterly amortization charge to advertising expense
in the amount of $7.9 million beginning in the first quarter of 1999. As noted,
this charge is subject to substantial increase or decrease in future quarters
based upon future changes in the trading price of our common stock.
We have incurred significant losses since our inception, and as of March 31,
1999 had an accumulated deficit of approximately $30.1 million. We intend to
invest heavily to acquire new businesses and technologies, expand sales and
marketing, continue development of our network infrastructure and continue
technology developments. We expect to continue to incur substantial operating
losses for the foreseeable future.
In view of the rapidly evolving nature of our business 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 March 31, 1999, we had
182 employees, in comparison with 27 employees at March 31, 1998. We do not
believe that our historical growth rates for revenue, expenses, or personnel
are indicative of future results.
25
<PAGE>
Results of Operations
The following table sets forth financial data, expressed as a percentage of
net revenues, for the year ended December 31, 1998 and for the three months
ended March 31, 1998 and 1999. Data for the inception period are not presented
as Critical Path had no revenues in that period. Further, amounts from the
inception period are not comparable to those for the year ended December 31,
1998 due to the different duration of the periods and the acceleration of
Critical Path's activities and related expenses throughout 1998. We believe
that operating expenses will continue to increase in the future as we continue
to expand our operations.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
Year Ended -------------------
December 31, 1998 1998 1999
----------------- -------- --------
<S> <C> <C> <C>
Net revenues............................ 100.0 % 100.0 % 100.0 %
Cost of net revenues.................... (261.5) (117.1) (225.0)
-------- -------- --------
Gross profit (loss)................. (161.5) (17.1) (125.0)
Operating expenses:
Research and development.............. 233.8 390.0 131.5
Sales and marketing................... 188.1 192.9 189.1
General and administrative............ 425.2 438.6 147.8
Stock-based expenses.................. 267.6 632.9 1,111.2
-------- -------- --------
Total operating expenses............ 1,114.7 1,654.3 1,579.6
-------- -------- --------
Loss from operations.................... (1,276.2) (1,671.4) (1,704.6)
Other income (expense):
Interest and other income............. 41.8 -- 33.5
Interest expense...................... (43.3) (214.3) (6.1)
-------- -------- --------
Net loss................................ (1,277.7)% (1,885.7)% (1,677.2)%
======== ======== ========
</TABLE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
Net Revenues
Our revenues consist principally of fees we earn from providing email hosting
services. Payments for those services are based either on contractual rates per
active mailbox per month, non-refundable fixed payments, or a percentage of the
email advertising revenues earned by our customers. Revenues from contracts
specifying a contractual rate per active mailbox per month are recognized
monthly for each active mailbox covered by the respective contract. Revenues
from contracts that provide non-refundable fixed payments are not dependent
upon the active number of mailboxes, and are therefore recognized ratably over
the contract term. 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.
During the quarter ended March 31, 1999, our revenues were $1,049,000, an
increase of $979,000 over the corresponding quarter of 1998. This increase in
revenues resulted from a substantial increase in the number of mailboxes we
hosted during the quarter ended March 31, 1999, in comparison with the
corresponding quarter of 1998. At March 31, 1999, we hosted approximately 1.4
million active mailboxes. At March 31, 1998, by comparison, we hosted
approximately 25,000 mailboxes.
In connection with certain customer contracts executed in 1998, we granted
warrants or options to purchase common stock to such customers. The fair value
of such warrants or options, determined
26
<PAGE>
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 during the quarter ended March 31, 1999. As
the customer contracts were executed after March 31, 1998, there was no such
amortization in the first quarter of 1998.
In early 1998, we executed agreements with E*TRADE and TABNet, a web hosting
organization, pursuant to which we derived revenue for providing email
services. During the quarter ended March 31, 1999, E*TRADE accounted for
approximately 48% of our net revenues and TABNet accounted for 32% 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 March 31, 1999, these
costs were $2,360,000, or 225% of net revenues, in comparison with costs of
$82,000, or 117% of net revenues, for the corresponding quarter of 1998. We
have made significant acquisitions of equipment for our data centers over the
past nine months, and as a result our depreciation expense of networking
equipment in the first quarter of 1999 increased substantially in comparison
with the first quarter of 1998. Additionally, we have significantly increased
our staffing in operations and customer support over the past year, and
consequently compensation and other personnel costs were higher in the current
fiscal year. From January 1, 1999 to March 31, 1999, our operations and
customer support staff increased from 25 employees to 50 employees. At March
31, 1998, we had five employees on staff in operations and customer support
functions.
Operating Expenses
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 $1.4 million, or 132% of net revenues, during the first quarter of
1999, and increased substantially from the corresponding quarter of 1998 due to
our increases in personnel and use of outside contractors. From January 1, 1999
to March 31, 1999, our research and development staff increased from 27
employees to 52 employees. At March 31, 1998, we had 15 employees on staff in
research and development functions.
Sales and Marketing. Our sales and marketing expenses consist principally of
compensation for our sales and marketing personnel, advertising, trade show and
other promotional costs, and, to a lesser extent, related overhead. Sales and
marketing expense during the quarter ended March 31, 1999, amounted to $2.0
million, or 189% of net revenue. Increases in marketing and promotional
expenses, incentive compensation payments to sales personnel, and increases in
compensation associated with additional headcount accounted for the increase to
sales and marketing expense during the first quarter of 1999 in comparison with
the corresponding quarter of 1998. From January 1, 1999 to March 31, 1999, our
sales and marketing staff increased from 30 employees to 61 employees. At March
31, 1998, we had three employees on staff in sales and marketing functions.
General and Administrative. Our general and administrative expenses consist
principally of compensation for personnel, fees for outside professional
services, allocated occupancy costs and, to
27
<PAGE>
a lesser extent, related overhead. General and administrative expenses amounted
to $1.6 million, or 148% of net revenues, during the first quarter of 1999, and
increased substantially in comparison with the corresponding quarter in 1998.
This increase was due primarily to increases in compensation associated with
additional headcount, higher fees for outside professional services, and higher
occupancy costs. From January 1, 1999 to March 31, 1999, our general and
administrative staff increased from 11 employees to 19 employees. At March 31,
1998, we had four employees on staff in general and administrative functions.
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 compensation amounted to
approximately $3.7 million during the first quarter of 1999. Approximately
$400,000 of this amount was allocated to cost of revenues and approximately
$3.3 million was allocated to operating expenses during the quarter.
Additionally, we incurred stock-based expenses for warrants we granted to ICQ
and to one other strategic partner. Amortization of the fair value of these
warrants resulted in stock-based expenses of approximately $8.4 million during
the first quarter of 1999. As noted in the Overview section, quarterly
amortization associated with the ICQ warrant is subject to substantial increase
or decrease in future quarters based upon future changes in the trading price
of our common stock.
Interest and Other Income and Interest Expense
Interest and other income consist primarily of interest earnings on our cash
and cash equivalents. Interest and other income amounted to $351,000 during the
first quarter of 1999. We concluded private placements of equity securities in
April 1998, September 1998, and January 1999. As a result, interest income
increased significantly during the first quarter of 1999 in comparison with
previous periods due to higher cash balances available for investment. During
the first quarter of 1999, we incurred interest expense on capital lease
obligations in the amount of $64,000. In the corresponding quarter of 1998, we
incurred interest expense of $150,000, of which $119,000 related to the
amortization of stock-based charges and the remainder to interest payments on
notes payable and capital obligations.
Income Taxes
No provision for federal and state income taxes has been recorded as we have
incurred net operating losses from inception through March 31, 1999. As of
March 31, 1999, we had approximately $14 million of federal and state net
operating loss carryforwards available to offset future taxable income which
expire in varying amounts beginning in 2005. 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 March 31, 1999.
28
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Revenues
Net revenues include charges relating to the amortization of fair value of
warrants issued to certain customers. In January 1998, we began to recognize
revenues from the sale of our email hosting services. Net revenues for 1998
were $897,000. In early 1998, we executed agreements with E*TRADE and TABNet
pursuant to which we began to derive revenue for providing email services. For
1998, E*TRADE accounted for approximately 62% and TABNet accounted for
approximately 30% of our net revenues, excluding the value of stock purchase
rights received by customers. A substantial portion of those revenues occurred
during the quarter ended December 31, 1998. Net revenues during the quarter
ended December 31, 1998 were $605,000, or 68% of net revenues for 1998.
Costs of Net Revenues
During 1998, our costs of net revenues were approximately $2.3 million, or
261.5% of net revenues. We made significant acquisitions of equipment for our
data centers at the beginning of the quarter ended September 30, 1998, and, as
a result, our depreciation expense increased significantly in the final two
quarters of 1998. Additionally, we significantly increased our headcount in
operations and customer support throughout the year. From January 1, 1998 to
December 31, 1998, operations and customer support personnel increased from
zero to 25.
Operating Expenses
Research and Development. Research and development expenses amounted to $2.1
million, or 233.8% of net revenues, during 1998, and increased substantially
each quarter throughout the year as we increased personnel and our use of
outside contractors. From January 1, 1998 to December 31, 1998, our research
and development personnel increased from 11 to 27.
Sales and Marketing. Sales and marketing expenses amounted to $1.7 million or
188.1% of net revenue during 1998, and increased substantially in the final two
quarters of the year as we expanded our sales force and significantly increased
the promotion of our email hosting services. Increases in compensation
associated with additional headcount, incentive compensation payments, and
increases in advertising and promotional expenses accounted for the increases
to sales and marketing expense in the second half of 1998. From January 1, 1998
to December 31, 1998, our sales and marketing personnel increased from 2 to 30.
General and Administrative. General and administrative expenses amounted to
$3.8 million, or 425.2% of net revenues, during 1998, and increased
substantially in the quarter ended December 31, 1998. Increases in compensation
associated with additional headcount, higher fees for outside professional
services, and the amortization of unearned compensation related to stock and
stock option grants accounted for this increase. From January 1, 1998 to
December 31, 1998, general and administrative personnel increased from 4 to 11.
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. Related amortization totaled $2.5 million during 1998. See Notes 8 and 9
of Notes to Consolidated Financial Statements.
29
<PAGE>
Interest and Other Income and Interest Expense
Interest and other income amounted to $375,000 during 1998. We concluded a
private placement of equity securities in September 1998. As a result, interest
income increased significantly in the final quarter of the year. To date, we
have incurred interest expense on notes payable and capital lease obligations.
For 1998, interest expense amounted to $388,000.
Income Taxes
No provision for federal and state income taxes was recorded as we incurred
net operating losses from inception through December 31, 1998. As of December
31, 1998, we had approximately $8.8 million of federal and state net operating
loss carryforwards available to offset future taxable income which expire in
varying amounts beginning in 2005. 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.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly statements of
operations data for the five quarters ended March 31, 1999. This information
has been derived from Critical Path's unaudited consolidated financial
statements, which, in management's opinion, have been prepared on the same
basis as the audited consolidated financial statements, and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the quarters presented. This
information should be read in conjunction with the audited consolidated
financial statements of Critical Path and the notes thereto included elsewhere
in this prospectus. The operating results for any quarter are not necessarily
indicative of the operating results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------
Mar. 31, 1998 June 30, 1998 Sept. 30, 1998 Dec. 31, 1998 Mar. 31, 1999
------------- ------------- -------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net revenues............ $ 70 $ 66 $ 156 $ 605 $ 1,049
Cost of revenues........ (82) (230) (941) (1,093) (2,360)
------- ------- ------- ------- --------
Gross profit (loss)... (12) (164) (785) (488) (1,311)
------- ------- ------- ------- --------
Operating expenses:
Research and
development........... 273 404 560 861 1,379
Sales and marketing.... 135 143 558 851 1,984
General and
administrative........ 307 886 895 1,726 1,550
Stock-based expenses... 443 201 224 1,532 11,657
------- ------- ------- ------- --------
Total operating
expenses............. 1,158 1,634 2,237 4,970 16,570
------- ------- ------- ------- --------
Loss from operations.... (1,170) (1,798) (3,022) (5,458) (17,881)
Interest and other
income (expense), net.. (150) 47 (39) 129 287
------- ------- ------- ------- --------
Net loss................ $(1,320) $(1,751) $(3,061) $(5,329) $(17,594)
======= ======= ======= ======= ========
</TABLE>
Revenues increased substantially in the quarter ended December 31, 1998, as
revenues from E*TRADE rose significantly during this period relative to prior
periods. General and administrative
30
<PAGE>
expenses increased substantially during the quarter ended December 31, 1998,
due to increases in compensation associated with additional headcount, higher
fees for outside professional services, and the amortization of unearned
compensation.
Fluctuations in Quarterly Results
We have incurred operating losses since inception, and we cannot be certain
that we will achieve profitability on a quarterly or annual basis in the
future. Critical Path believes that future operating results will be subject to
quarterly fluctuations due to a variety of factors, including, but not limited
to:
. continued growth of the Internet and of email usage;
. 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;
. 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 by the extent to which we incur non-cash charges associated with
stock-based arrangements with the employees and non-employees. In particular,
we expect to incur substantial non-cash charges associated with the grant of a
warrant to America Online. In addition to amortization of the initial fair
value of this warrant, which totaled $16.5 million, we expect that future
changes in the 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 ultimate amount of such amortization.
At March 31, 1999, none of the registration milestones specified within the
ICQ warrant agreement had been achieved. Therefore, the shares underlying the
second through fifth milestones of the ICQ warrant were remeasured using the
closing price for 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. This revised fair value will be amortized ratably over
four years, resulting in a quarterly amortization charge to advertising expense
in the amount of $7.9 million beginning in the first quarter of 1999. As noted,
this charge is subject to substantial increase or decrease in future quarters
based upon future changes in the trading price of our common stock.
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.
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Liquidity and Capital Resources
We have funded our operations primarily from the net proceeds from the sale
of preferred stock and our initial public offering. 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 gross
proceeds of $13.6 million. Also in January 1999, we sold 1,090,909 shares of
common stock for gross proceeds of $2.4 million. In April 1999, we received
approximately $115.5 million in net proceeds upon the closing of our initial
public offering of common stock.
Our cash and cash equivalents increased by approximately $7.8 million during
the quarter ended March 31, 1999. This net change occurred as we raised
approximately $13.8 million in proceeds from the sale of equity securities, net
of issuance costs, and used $4.6 million in cash to fund operating activities.
Increased personnel costs and expanded sales and marketing programs were the
primary causes of our increased operating expenses during the first quarter of
1999. Net of depreciation, our investment in property and equipment increased
approximately $3.1 million during the quarter ended March 31, 1999.
Installation of network infrastructure equipment in our data centers, purchases
of furniture and equipment for new employees, and leasehold improvements
related to office expansions accounted for this increase.
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 March 31, 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 $2.6 million, net of principal repayments, during the quarter
ended March 31, 1999 as we secured financing for a substantial share of our
additions to property and equipment. Deferred revenue decreased $500,000 during
the quarter as we recognized into revenue a payment we had previously received
from one customer as an advance for future service. Our line of credit and
capital lease obligations contain no provisions that would limit our future
borrowing ability.
We believe that our current cash balances and proceeds from this offering
will be 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. In addition, our operating and
investing activities on a long-term basis may require us to obtain additional
equity or debt financing. We expect that we will acquire or invest in
businesses, products, services and technologies that complement or augment our
service offerings and customer base. We are currently engaged in discussions
with a number of companies regarding strategic acquisitions or investments.
Although these discussions are ongoing, we have not signed any definitive
agreements and we cannot assure you that any of these discussions will result
in actual acquisitions. We expect that we will pay for some of our acquisitions
by issuing additional common stock and this could dilute our shareholders. In
addition, we may be required to amortize significant amounts of goodwill and
other intangible assets in connection with future acquisitions, which would
materially increase our operating expenses.
Net of depreciation, our investment in property and equipment increased
approximately $3.1 million during the first quarter of 1999. Installation of
network infrastructure equipment in our data center, purchases of furniture and
equipment for new employees, and leasehold improvements related to office
expansions accounted for this increase. We expect that our investment in
property and
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<PAGE>
equipment will continue to grow as we seek to increase our capacity to provide
email hosting services.
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 such 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 by
us within the last 24 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. All of
the testing we have completed has been performed by our own personnel; to date,
we have not retained any outside service or consultants to test or review our
systems for Year 2000 compliance. Based on the testing we have performed, we
believe that this software is Year 2000 compliant. We are designing our systems
to be Year 2000 compliant and will continue to test these systems as
development of these systems progress.
In addition to our internally developed software, we utilize software and
hardware developed by third parties both for our network and internal
information systems. To date, we have not done any testing of such third-party
software or hardware to determine Year 2000 compliance. We have, however,
obtained certifications from our key suppliers of hardware and networking
equipment for our data centers that this hardware and networking equipment are
Year 2000 compliant. Additionally, we have received assurances from the
providers of key software applications for our internal operations that their
software is Year 2000 compliant. Based upon an initial 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, and we will work with these providers to address the Year
2000 issue and continue to seek assurances from them that their products are
Year 2000 compliant.
In addition, we rely on third party network infrastructure providers to gain
access to the Internet. If such 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.
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Our customers' success in maintaining Year 2000 compliance is also
significant to our ability to generate revenues and execute our business plan.
We currently derive revenue either by charging a fixed fee per month for each
mailbox we host, or by sharing advertising revenues with our customers. In
either case, 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 such interruptions limit or delay our customers'
ability to expand their base of email users.
We have not incurred any significant expenses to date, and 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 such interruption, or quantify the
effect it may have on our future revenues. We have yet to develop a
comprehensive contingency plan to address the issues which could result from
such an event. We are prepared to develop such a plan if our ongoing assessment
leads us to conclude we have significant exposure based upon the likelihood of
such an event. See "Risk Factors--We face Year 2000 risks."
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. Critical Path does not
expect that the adoption of SOP No. 98-1 will have a material impact on its
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). Critical Path is required to
adopt SFAS 133 in fiscal 2000. SFAS 133 established methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. Critical Path has not yet
determined what the effect of SFAS 133 will be on its operations and financial
position.
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<PAGE>
BUSINESS
Company Overview
We are a leading provider of email hosting services. Our email services are
designed to allow a wide range of organizations, including Internet service
providers, web hosting companies, web portals and corporations, to reduce costs
and improve customer service by outsourcing their email systems. Our services
are designed to facilitate scalability and reliability, allow access to
advanced technologies and provide greater access with high levels of security.
In addition, our service is designed to allow our customers to enhance their
brand recognition by maintaining their "look and feel" while improving the
functionality of their email service. We intend to build on our expertise in
email services to provide additional Internet messaging services in the future.
Currently, we have approximately 250 customers and intend to further develop
new and existing strategic relationships to expand our distribution channels
and to undertake joint product development and marketing efforts. Our strategic
partners to date include ICQ, a subsidiary of America Online, E*TRADE, Network
Solutions, Sprint and U S WEST.
Recent Developments
Since our initial public offering, we have announced several strategic
contracts that help us to expand both our customer base and broaden our global
reach. We have expanded our relationship with America Online so it now includes
ICQ, AOL Latin America and AOL Enterprise, which provides us with access to one
of the largest concentrated customer bases of email users on the Internet. Our
relationship with Promus provides us with access to 1,362 hotels with more than
194,000 rooms in North and South America. Furthermore, we have significantly
expanded our international customer base to include Asiamail, Avantel British
Telecom and o.tel.o.
Industry Background
Growth of the Internet and Email
The Internet has experienced rapid growth and has developed into a
significant tool for global communications, commerce and media, enabling
millions of people to share information and transact business electronically.
International Data Corporation ("IDC") estimates that there were over
55 million web users in the United States and over 142 million worldwide at the
end of 1998. IDC projects these numbers to increase to over 135 million web
users in the United States and over 399 million worldwide by the end of 2002.
Internet-based businesses have emerged to offer a variety of products and
services over the Internet. Additionally, many traditional businesses now use
the Internet for a growing number of applications, including advertising,
sales, customer service and training. Advances in on-line security and payment
mechanisms have also prompted more businesses and consumers to engage in
electronic commerce. IDC estimates that the number of customers buying goods
and services on the Internet will grow from 17.6 million worldwide in 1997 to
128.4 million worldwide in 2002. The growth of the Internet is the result of a
number of factors, including the extensive and growing installed base of
advanced personal computers in the home and workplace, increasingly faster and
cheaper access to the Internet, improvements in network infrastructure and an
increased awareness of the Internet among consumer and business users.
Alternative access devices, including television set-top boxes, personal
digital assistants, pagers, Internet capable telephones and wireless phones are
also contributing to the increasing use of the Internet. Further, the
development of applications for the Internet platform has helped fuel the
growth of the Internet.
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Email, one of the most popular Internet applications, has broadened from a
simple personal messaging tool to a strategic business tool. According to
Electronic Mail & Messaging Systems ("EMMS"), there were 263 million electronic
mailboxes worldwide as of September 30, 1998. EMMS estimated that this number
increased to 382 million electronic mailboxes worldwide as of March 31, 1999.
According to the Gartner Group, approximately 300 billion electronic mail
messages were sent in 1998. Email messages have increased in volume and
functionality, and this trend is expected to continue. For example, email is
expected to become a major vehicle for e-commerce transactions. Forrester
Research predicts that the typical online consumer will participate in eight to
ten commerce-related exchanges via email per week by 2001. Furthermore, the
electronic mailbox as a locating and delivering device has enabled additional
applications such as directory services, scheduling, document sharing, work-
flow and unified messaging. This increased functionality, along with the
widespread acceptance of email, positions the electronic mailbox as a platform
for other forms of electronic messaging.
Development of Email
Email was initially developed for isolated groups of people working on single
mainframe computers or on small networks of homogeneous computers. Early email
implementations were based on proprietary technologies, incompatible with other
systems and limited to single local area networks ("LANs"). Mail transfer
standards were subsequently developed to carry mail traffic between LANs but
did not allow for communication outside of the user's corporation or service.
While these systems were limited when compared to current email systems, they
became an increasingly important communication tool within many organizations.
Users have migrated to open-standards mail systems, such as Lotus Notes and
Microsoft Exchange, that allow communication with any email user on the
Internet, from proprietary systems, such as Lotus cc:mail and Microsoft Mail.
Simple Mail Transport Protocol ("SMTP"), currently the most widely used mail
standard on the Internet, allows users of proprietary mail systems to
communicate over the Internet by converting messages' internal mail formats to
SMTP before transmission. In addition, new open standards are emerging to
enhance the functionality of email. For example, Post Office Protocol ("POP"),
which has been adopted by most ISPs, allows users to connect to a shared mail
server and download mail to their PC or alternative access device. In addition,
Internet Messaging Access Protocol ("IMAP"), one of the latest email standards,
allows users to access their mailboxes at the server rather than at the desktop
level. This flexibility is particularly valuable for users who access their
mail from a variety of different computers with different email clients such as
Microsoft Outlook, Eudora and HyperText Markup Language ("HTML"), more commonly
known as web-based email.
Current Trends in Email
As the importance of email grows, customers increasingly expect their email
service to meet the same standards of carrier-class reliability and
availability that consumers have traditionally received from their telephone
service providers. For example, email customers expect reliability from their
email service similar to the dial tone they hear when they pick up the
telephone, commonly referred to as web-tone reliability. Similarly, customers
want email access to be as ubiquitous as their telephone access by being able
to download their email from anywhere in the world, at anytime and through a
variety of devices. Just as many individuals have multiple phone numbers for
home and business use, a growing number of people have multiple email accounts.
As a result, domain names, which are the Internet identities that correlate to
unique electronic
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addresses such as [email protected], are proliferating. Companies use multiple
domains to build awareness of their brands in electronic communication, and
individuals increasingly use domains to express personal identity.
To address this growth, a wide range of businesses, including ISPs, web
hosting companies, web portals and corporations, are finding that providing
their customers or employees with email access is a necessity. ISPs, web
hosting companies and telecommunication carriers offer email to enhance their
services offerings and to maintain competitiveness with other companies in
their industry. Many web portals offer email service to increase web traffic on
their sites and strengthen their brand due to repeat traffic from users
checking for messages. In addition, corporations increasingly view email as a
means to decrease costs and increase productivity.
Email messages have increased not only in volume but also in complexity. The
use of graphics and multimedia elements is becoming more common and requires
greater functionality on the part of the email service. As organizations and
the numbers of users grow, the ability to accommodate thousands, or millions,
of additional mailboxes in a single domain requires substantial investment in
hardware, software and personnel. Further, in the largest email
implementations, such as ISPs or web portals, the design architecture must
handle complex networking and scale issues across many domains. Web
organizations that implement and host multiple domains for customers incur
substantial additional expenses because of the complexity associated with
hosting multiple domains. There is no unified email service standard, and
online service providers must continually enhance and maintain email
applications for existing standards, as well as seek to develop new features
and functionality for emerging standards. For example, LDAP is an emerging
standard that is the foundation for adding additional applications to login and
access features of email service. Moreover, ISPs and corporations running their
own email must make substantial investments in backup systems and networking
equipment if they are to meet the growing expectation of email service with
carrier class access, availability and reliability.
Today, most organizations are using internal hardware and software solutions
to address their email needs. Many companies attempting to manage expanding and
increasingly sophisticated email systems lack the resources and expertise to
cost-effectively implement, maintain, scale, enhance and service the hardware
and software components of an email system. Businesses often find it difficult
to implement state-of-the-art technology in their own infrastructure and
individuals with the expertise to maintain a sophisticated email system can be
scarce and costly to hire, train and retain. As a result, organizations seeking
to lower their costs and to quicken time to market with complex technologies
are increasingly looking to outsource non-core competencies to maintain
competitiveness.
Critical Path Solution
We deliver advanced email services to ISPs, web hosting companies, web
portals and corporations, giving them the ability to provide a feature-rich
email service to their customers and employees. Our services are designed to
provide the following key benefits:
Lower Total Cost of Ownership
Our customers do not need to lease, buy or continually upgrade existing
hardware and software, or recruit and retain systems engineers and
administrative personnel for their email services. Our service is designed to
reduce customers' administrative burden by eliminating the cycle of purchasing,
installing, testing, debugging and deploying email systems. The software is
maintained at
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our facilities, not at customer facilities, and we employ a team of systems
administrators to monitor the service 24 hours a day, seven days a week. By
having the capability to host millions of mailboxes, we provide customers a
cost savings over in-house email solutions through economies of scale.
Scalability; Web-Tone Reliability
Our system's architecture and infrastructure are designed to facilitate
scalability and reliability. While existing email software solutions can scale
to support millions of users at a single domain ([email protected]), we have
designed our architecture to support our service over hundreds of millions of
mailboxes across millions of domains ([email protected], [email protected],
[email protected], etc.), allowing each customer to create email addresses at
his or her own domain. Our hardware and software infrastructure consists of
multiple servers running software in a manner that balances the use of the
servers. This infrastructure allows multiple domain hosting while reducing the
amount of required equipment and capacity. We have created a global network
strategy to provide the type of continuous service that individuals have come
to expect from their telephone service providers. We provide our customers
improved performance through our multiple peering relationships, agreements
with companies with existing peering relationships and the purchase of
additional access to telecommunication paths from national Internet access
providers. For redundancy purposes, we maintain three data centers in the
United States and plan to open additional data centers in the United States and
Europe.
Leading-Edge Technology
We provide our customers with access to advanced technologies. We eliminate
the need for customers and partners to maintain a core competency in email by
having experts with experience in rapidly deploying new technologies, combating
system failures due to unsolicited commercial email traffic and maintaining
network and system security. Our services include POP3, web-based email and, in
the near future, IMAP4, which enables customers to choose the option that suits
their end-users' needs. Customers rely on us to evaluate, test and implement
the leading features to maintain a leading email solution. Our technological
capabilities enable us to quickly implement competitive new technologies for
our customers and end-users, reducing their time to market for leading
technologies.
Anytime, Anywhere Accessibility
We have designed our services to allow easy access by customers and end-
users. Designed and built on open Internet-based standards, our services are
compatible with leading desktop software such as Microsoft Outlook and Eudora.
In addition, we have developed a web-based email interface that is compatible
with leading web browsers, including Microsoft Internet Explorer and Netscape
Navigator. Our email services are designed to allow administrators and end-
users to access their email system anywhere at any time. Our technology is
designed to support innovations in standards-based access devices, such as
hand-held computers, cellular and personal communications services ("PCS")
telephones and pagers.
Enhanced Security
We have created a custom firewall solution to enhance network and data center
security. Using a combination of licensed software technology, internally
developed software and sophisticated third-party hardware, we reduce the
potential for network breaches. We have network and data center
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surveillance 24 hours a day, seven days a week to identify and curtail
potential security breaches. We are not aware of any security breaches to our
network.
Branding; Customer Control
Our messaging service solution enables our customers to maintain control over
their own brand and desired functionality. Our fully customized web-based
"brandable" email interfaces include customer logos and preserve the existing
"look and feel" of the customers' brands. Our web-based Mail Administration
Center is designed to give customers control via a secure Account Provisioning
Protocol, a software interface into our platform which allows customers to
integrate their existing functionality with our mail system. This enables
customers to add and delete accounts and functionality either at the domain
level, or at the individual end-user level.
Strategy
Our objective is to be the premier provider of comprehensive, advanced
Internet messaging services. We plan to attain this goal by pursuing the
following key strategies:
Extend Technology Leadership in Messaging Applications
We intend to capitalize on our expertise in email services to deliver
industry-leading functionality to other types of electronic messaging. Building
upon our Internet-based email architecture, we plan to deliver industry-leading
functionality, including global and local directories and other capabilities,
and to deliver new applications that will extend the core functionality of
email and integrate smoothly with existing back office applications. Our
services development team regularly meets with customers and participates in
research projects with leading industry groups and analysts to anticipate
future customer needs. We also participate in open standards organizations and
Internet technology leadership groups, such as IETF (Internet Engineering Task
Force), the North American Network Operators Group and the Coalition Against
Unsolicited Commercial Email, a spam control organization.
Acquire New Businesses and Technologies
We evaluate acquisition opportunities on an ongoing basis and, at the present
time, are engaged in discussions with respect to possible acquisitions of
businesses or technologies. We will continue to seek acquisitions that will
complement our current and planned business activities. We have a dual strategy
in pursuing acquisitions. First, we plan to focus on target companies in our
market with large numbers of email customers which will enable us to expand our
customer base. Second, we will evaluate companies that help us augment our
service offerings for our current and future email customers. In addition,
these value-added services may be used by customers not using our basic email
service to enhance the functionality of their email services. Examples of
services that we may provide include: unified messaging, guaranteed delivery,
digital certificates and calendaring.
Develop and Leverage Strategic Relationships
We intend to expand our marketing and distribution channels through strategic
relationships with key ISPs, web hosting companies, web portals and
corporations to increase quickly the number of electronic mailboxes we host.
Our strategic partners include ICQ, a subsidiary of America Online, E*TRADE,
Network Solutions, Sprint and U S WEST. We intend to further develop new and
existing strategic relationships to expand our distribution channels and to
undertake joint product development and marketing efforts, such as integrating
email into e-commerce applications.
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Increase Sales and Marketing Efforts
We intend to significantly expand our sales and marketing activities while
focusing on four target markets: ISPs, web hosting companies, web portals and
corporations. In this expansion, we plan to target and hire seasoned sales
professionals with specific expertise and contacts within our focused markets.
We also intend to expand our indirect sales channel by teaming with leading
distributors, resellers and system integrators with strong backgrounds and
market presence. As of March 31, 1999, we had 61 sales and marketing personnel.
Develop Value-Added Services
We intend to extend our services beyond email by offering additional value-
added services. These services are intended to extend our relationships with
current customers, to attract new customers and to allow us to differentiate
ourselves in the email service provider market. We believe that our email
hosting solution can form the foundation of a wide range of Internet messaging
applications for which we intend to provide solutions. Examples of value-added
services or applications that can be leveraged are unified messaging, secure
email, e-commerce and enterprise services.
Expand International Presence
In addition to expanding our U.S. presence, we believe there is substantial
opportunity for outsourcing messaging services in non-U.S. markets. We intend
to capitalize by developing worldwide sales offices, data centers and strategic
relationships. We have established sales and operations subsidiaries in Germany
and the United Kingdom, and we plan to open data centers in Europe. In
addition, we intend to support our worldwide operations by offering localized
web-based email interfaces. For example, we have already developed web-based
email interfaces in 13 languages and dialects.
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Services
We offer multiple email services to ISPs, web hosting companies, web portals
and corporations. Our "all-in" service model pricing includes all enhancements,
upgrades and new standard features. Pricing is based on a per mailbox, per
month charge that varies depending on functionality and volume. Web portal
market pricing is based on a minimal per mailbox, per month charge plus a share
of revenue generated by advertising on the web-based email interface. Our
standard service offering includes our basic services as part of the monthly
mailbox fee. Our add-ons are included in the basic mailbox offering or offered
as an optional premium service. Our premium services are optional add-ons to
the basic mailbox charge and are offered for an additional charge.
Our service offering includes web-based end-user support. Additional support
through customer help desks is provided 24 hours a day, seven days a week by
contractual agreement. Professional implementation and transitioning support
for new customers is also included in the basic offering.
[VALUE-FUNCTIONALITY CHART APPEARS HERE]
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Current Services
We have introduced to market a variety of email services. Information
concerning our current email services is summarized in the following table:
<TABLE>
<S> <C> <C> <C> <C>
Class of Target
Service Description Benefits Service Markets
- ----------------------------------------------------------------------------------------------------
Web-Based . Hosting service based on a . Requires no software Basic All
Email web mail interface downloads or configurations
. End-users simply point any
browser
to http://mail.userdomain.com,
enter account name and
password for full email
access
- ----------------------------------------------------------------------------------------------------
POP3 Hosting . Hosting service based . Allows users to connect to a Basic ISPs, web
on Post Office Protocol shared mail server and (Premium hosting,
download email to their add-on corporate
desktop client (Microsoft for
Outlook, Eudora), which portals)
stores the message on the
user's hard drive each time
the inbox is accessed
- ----------------------------------------------------------------------------------------------------
Web-Based . Mail Administration Center . Allows email administrators Basic All
Administration (MAC) to add, delete and modify Add-On
has Secure Socket Layer- accounts online
based brandable web
interface
- ----------------------------------------------------------------------------------------------------
Spam . Utilizes comprehensive . Protects users from Basic All
Blocking/UBE filtering unsolicited bulk email, Add-On
Filtering system commonly referred to as
"spam" or "junk mail"
. Identifies and eliminates
spam
- ----------------------------------------------------------------------------------------------------
Directory . Common directory layer to . Search capabilities Premium All
Services share information between Add-On
(LDAP) various independent
software applications
. LDAP services allow . End-users can update their
publishing of directory own directory entries, and
information for user domain administrators to
communities update, add and delete
entries
. Key component of many
collabora-
tive applications such as
certified delivery and
calendaring
- ----------------------------------------------------------------------------------------------------
Additional . Additional storage in . Provides expandability of Premium All
Data Storage increments of 5 megabytes storage Add-On
space
- ----------------------------------------------------------------------------------------------------
Unified . Private-label unified . Allows users to retrieve Premium Portal
Messaging messaging service through faxes and voice messages by Add-On
JFAX, a company that logging into their email
provides a unified
messaging solution
. Allows users to retrieve
faxes and emails via
voicemail and universal
telephone number
</TABLE>
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Planned Services
We intend to develop several new Internet messaging services to complement
our existing services.
<TABLE>
<S> <C> <C> <C> <C>
Class
of Target
Service Description Benefits Service Markets
- ------------------------------------------------------------------------------------------------------
IMAP4 . Hosting service that . Email messages and files hosted Basic All
Hosting bridges the gap between on an IMAP server can be
POP3 functionality and web- manipulated from multiple email
based email accessibility environments without the
need to transfer data
- ------------------------------------------------------------------------------------------------------
Double-Byte . Web mail interface in . Allows display of web-based Basic All
Localization double-byte languages: email interface in double-byte Add-On
and Traffic Chinese and Japanese languages and transfer and
storage of messages
containing double-byte message
data
- ------------------------------------------------------------------------------------------------------
Permanent . Archives up to 5 megabytes of . Stores and backs up daily Basic All
Archiving data per mailbox included archived documents on its Add-On
in basic service servers
- ------------------------------------------------------------------------------------------------------
ETRN . Email access that does not . Allows store and forward Basic ISP,
require a dedicated access service for some or all Add-On Corporate
line to the Internet messages at a specific domain
. Provides ability to send email
through the Internet while
maintaining the existing
groupware functionality of a
local mailserver
- ------------------------------------------------------------------------------------------------------
Mailing List . Supports custom-generated . Allows for user specified list Premium All
Management lists, digest formats, list management Add-On
filters, auto-subscribe and
unsubscribe, and
confirmation of
subscriptions
- ------------------------------------------------------------------------------------------------------
Calendar and . On-line calendars which . Integrates scheduling function Premium Corporate
Schedule provide groupware with the ability to access the Add-On
Functionality functionality user's schedule and those of
colleagues
- ------------------------------------------------------------------------------------------------------
SSL-Based . SSL-based encryption of . Provides enhanced security of Premium All
Email POP3, IMAP4 and web-based email Add-On
email messages messages
- ------------------------------------------------------------------------------------------------------
USENET/ . Public and private . Facilitates participation in Premium All
Newsgroup newsgroups which give the newsgroup in a web-friendly Add-On
enterprise a platform for manner
discussion outside the
mailing list functionality
. Allows access to messages
stored on a news server
- ------------------------------------------------------------------------------------------------------
Digital . Receipt verification . Verifies that message was Premium All
Certificates service received by the authenticated Add-On
recipient
. Sends a confirmation notice to
sender that the intended
recipient has picked up the
message when both sender and
recipient are hosted on our
system
- ------------------------------------------------------------------------------------------------------
Certified . More sophisticated receipt . In addition to verifying that Premium Corporate
Delivery verification service the message was delivered, Add-On
users return encrypted
digital certificates that
identify them as the recipient
</TABLE>
The statements in this prospectus regarding planned service offerings and
anticipated features of such planned service offerings are forward-looking
statements. Actual service offerings and benefits could differ materially from
those projected as a result of a variety of factors, some or all of which may
be out of our control. For a discussion of some of these factors, see "Risk
Factors."
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<PAGE>
Customers
We currently have the opportunity to offer email services to millions of
mailboxes across our four target markets. The following is a list of companies
with whom we have email services agreements and which have the greatest number
of active mailboxes within their respective categories:
<TABLE>
<S> <C>
Internet Service Providers Web Hosting Companies
- -------------------------- ---------------------
AGIS 123 India
DSL Networks CardSecure
Isp.net Data 2 Info
Las Vegas Digital Internet Navisite
NetConX Network Solutions
Surfree.com TABNet
US Online Network Tonic Domains Corporation
WNC Net True Media Solutions
Sprint Ultima Networks
Worldport Online
</TABLE>
<TABLE>
<CAPTION>
Web Portals Corporations
- ----------- ------------
<S> <C>
Ancestry.com Bank Law Services
E*TRADE Birkenstock
Gayweb California Family Health Council
ifan ChipShot Golf
The Zone Network CompareNet
The Password (a division of Password Internet ICT Financial
Publishing)
Raging Bull Partech International Ventures
Starmedia Photonetics
Third Age Media
U S WEST
</TABLE>
In addition, we plan to initiate email services with Avantel, AsiaMail,
British Telecom, o.tel.o, AOL Latin America, AOL Enterprise and Promus during
the second quarter of 1999.
Target Markets
We intend to expand our marketing and distribution channels through strategic
relationships to rapidly increase the number of electronic mailboxes hosted. We
have developed strategic relationships within four target markets: ISPs, web
hosting companies, web portals and corporations.
Internet Service Providers (ISPs)
Internet service providers are companies that provide access to the Internet.
Email has become an integral part of ISP service offerings. ISPs provide
service via dial-up and ISDN as well as dedicated private-line hookups. For a
monthly fee, customers receive a software package, username, password and
access phone number. Many ISPs offer free home-page hosting to members at the
ISP's domain name (for example, www.ispname.com/~username). Some ISPs are also
providing commercial web hosting (hosting sites at a domain name registered by
the user). ISPs serve large companies by providing a direct connection from the
companies' networks to the Internet.
Web Hosting Companies
Web hosting companies offer corporate customers and individual consumers
hosting of their website on a commercial web server (at a unique domain
registered to the customer). In addition,
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web hosting companies are increasingly offering web design, domain name
registration service and email services to their customers. We believe that
most business customers are looking for a full-service web hosting company that
can provide domain name registration, basic website services and enhanced
website services including e-commerce and messaging.
Web Portals
Web portals include online communities and search engines which offer a one-
stop source of information to a broad range of users, and vertical portals,
such as E*TRADE, which cater to the needs of a specific audience. The goal of
portal sites is to develop a sense of community in order to draw large online
audiences, encourage repeat visits, and keep users engaged. Portals are
accomplishing this goal by providing users with value-rich content and services
such as search engines, free individual homepages and free email. The majority
of a portal's revenue comes from advertising targeting its large, demographic-
specific audience and repeat website visits.
Corporations
Email has become a mission-critical application for businesses. Many U.S.-
based corporations of varying sizes use email as a primary form of
communication. In addition, the ability to access Internet-based email from
outside the office has added to email's appeal and utility for corporations. A
large percentage of the corporate market's email is supplied internally via LAN
mail systems. Companies are struggling with aging LAN-based systems designed in
the late 1980s and early 1990s when email was used on a much more casual basis
and by a smaller user population. Until recently, Internet standards-based
email has accounted for only a small portion of corporate messaging systems,
but according to Internet Week, that portion will increase to one-third of the
corporate market by the end of the decade.
Strategic Relationships
A key element of our strategy is to expand our marketing and distribution
channels through strategic relationships with entities that are both commercial
partners and/or equity investors or entities with whom we have contractualized
reseller relationships. We believe that these strategic relationships will
enable us to expand our distribution channels and to undertake joint product
development and marketing efforts. The following are examples of our existing
strategic relationships which we believe will position us to increase quickly
the number of electronic mailboxes we host.
America Online/ICQ
In January 1999, we entered into an agreement with ICQ, a subsidiary of
America Online, 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 allows users to communicate in
real time over the Internet. Our agreement with ICQ also provides for our
integration of features of the ICQ instant messaging service with our standard
email services and our offering of these integrated services to our other
customers. In April 1999, we expanded our relationship with America Online to
include AOL Latin America and AOL Enterprise.
E*TRADE Group
In September 1998, we entered into an agreement with E*TRADE, an on-line
brokerage services company, pursuant to which each party will include the other
in certain advertising campaigns,
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<PAGE>
including E*TRADE's international and strategic partner relationships. We will
also provide email services to users of E*TRADE's Internet access services.
E*TRADE uses our email services to extend its brand and value-added services to
its fast-growing customer base. As online trading grows, the need for secure
transmissions of trade confirmations grows. In addition, we are in the process
of developing an electronic order confirmation system designed to be SEC
compliant, which could allow online brokerages to conduct most of their
customer communications electronically.
Network Solutions
In May 1998, we entered into an agreement with Network Solutions, currently
the exclusive registrar of Internet domain names, pursuant to which we provide
email outsourcing services to users of Network Solutions' website. In exchange
for our services, Network Solutions will provide domain name registration
services for our customers. Through this agreement, a Network Solutions
customer is able to extend its brand using its unique domain name for its email
address instead of the domain name of its Internet access provider.
Sprint
In September 1998, we entered into an agreement with Sprint's IP Business
Services pursuant to which we provide email services to Sprint's corporate IP
customers. Sprint has over 7,000 sales representatives who can now offer hosted
email services to their business customers at their own domain name. We provide
a dedicated customer support number and a sales support center to support
Sprint's sales representatives. It is expected that Sprint will integrate our
brand and bill email services under the Sprint name.
U S WEST
In December 1998, we entered into an agreement with U S WEST pursuant to
which we provide email services to U S WEST's telephone customers. We believe
that U S WEST views web mail as part of its strategy to offer its telephone
customers value-added Internet services. Web mail is a user-friendly, simple
vehicle to transition telephone customers from dial-tone to web-tone. The
agreement also provides for the enhanced email functionality of US WEST's
!nterprise Internet customers through an email viewer.
Our agreements with our strategic partners 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 of the agreements are terminable by us without cause 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. These strategic agreements may be terminated
upon short notice.
Sales and Marketing
Sales Strategy
Our sales efforts target all market segment audiences through direct and
indirect channels. We maintain our own direct sales force to introduce and
educate prospective customers and partners about our service. The direct sales
group targets larger ISPs, telecommunications companies, medium to large
corporate customers, large web hosting companies and high-trafficked web
portals. As of
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<PAGE>
March 31, 1999, we had 20 account executives in the direct sales group, and we
plan to significantly expand this group in the next 12 months. We currently
have domestic offices in the San Francisco, Irvine, San Jose, Seattle, New
York, Phoenix, Denver and Washington D.C. metropolitan areas. We currently have
international offices in Munich, Germany and London, England. Within our direct
sales group, a subgroup is responsible for retaining and increasing use by
existing customers. This group is critical to ensuring customer satisfaction
and selling existing customers new add-on services as they become available in
our service offering.
A telesales group is located in Phoenix, Arizona and generates and qualifies
leads for referral to the direct sales group. The target markets of the
telesales group are smaller ISPs, web hosting companies and corporations. The
vast majority of the activity generated through this channel results from phone
calls that we initiate to prospective customers. The telesales group also
handles outbound calls to a specific list of contacts provided by our marketing
organization. In addition, the telesales group follows up on leads resulting
from web and telephone communication initiated by prospective customers and
qualifies those leads by placing additional calls or referring them to the
direct sales group.
The indirect sales channel will use the sales forces of our partners to offer
our services to their end-users. We share revenue with our partners to achieve
this purpose. To gain market presence and market share overseas, we plan to
team with leading distributors, resellers and system integrators that have
strong industry backgrounds and market presence in their respective markets and
geographic regions.
Marketing Strategy
Our marketing strategy includes a media relations and public speaking focus
to develop a reputation as an industry leader for email services and messaging.
We will use narrowly focused, co-branded print and online advertising campaigns
for lead generation. Direct marketing will be used to target specific ISP and
web hosting firms. Co-branded and cooperative direct mail will be the
cornerstone of the direct marketing efforts. Event, forum and trade show
participation will also be used to promote our business-to-business brand
presence.
Enhanced Services Development
Our application management and marketing organizations focus on marketing and
service development. Our application management team monitors new email and
messaging service introductions by our competitors. This in turn assists our
marketing group in determining our application pipeline and feature development
schedules and provides direction for our engineering, operations, sales and
support teams. We also have segment managers for each of our four target
markets who are responsible for defining strategies to address specific needs
within each market. These segment managers work with our technical service
managers, who are in turn responsible for service strategies and development
plans.
Our service management team focuses on provisioning and billing, mail and
directory services and mail center technology. In addition, the services
management team manages a cross-departmental service development effort. The
development process also includes quality-control steps such as reviews, walk-
throughs and post-implementation audits. The services development process
incorporates input from a variety of sources, including our current and
potential customers, and refines this information through a business
prioritization process. The service management team prepares a marketing
requirements document, which is reviewed by our change control board. The
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<PAGE>
change control board, which is attended by a cross-department management team,
prioritizes and schedules our development efforts and assigns resources to the
development project team.
Our services development process involves coordination among our application
management, marketing and service management teams. To support our service
development and marketing functions, we conduct an ongoing analysis of
competitive intelligence, product forecasting, financial analysis and pricing
strategies.
Technology
In offering email services, we employ advanced software and hardware,
combining internal expertise with industry standard technology to create a
proprietary infrastructure.
Mail Center Technology
We have created a proprietary email system, Mail Center Technology ("MCT"),
designed to ensure access to hundreds of millions of mailboxes across millions
of domains. MCT is able to handle high-volume loads for complex and diverse
mail environments such as those required for ISPs, web hosting companies, web
portals and corporations providing email accounts to their end-users for
activities such as trading securities, shopping or participating in online
communities. We have written proprietary load-balancing and email software, and
Oracle Corporation databases are used in account provisioning and management.
MCT is made up of multiple groups of servers and routers acting as a single,
virtual point of contact to customers for email services. Our MCT hardware
consists of Sun Microsystems, Inc. Ultra Enterprise servers, Cisco Systems,
Inc. routers, Network Appliance, Inc. RAID array storage and rackmounted Intel
processor-based servers running Solaris and FreeBSD, a free operating language.
All aspects of MCT are deployed in pairs with the goal of ensuring that if any
process or system goes down, another will be available to handle customer
traffic seamlessly. This behavior is called "transparent failover," and is
designed to increase the availability of email services to the customer. MCT
also includes a dynamic load-balancing system that acts as proxy servers for
firewall safety. The load balancers are configured in parallel to ensure that
if one goes down, the load is transferred to the remaining systems.
MCT currently hosts SMTP, POP3 and web-based email services and will also
host IMAP4 and other services as they are released. Both the hardware capacity
and the services hosted by the mail center can be expanded based on customer
demand.
Simple Mail Transfer Protocol (SMTP)
SMTP is currently the standard mail protocol for the Internet. It allows
hosts on the Internet to route mail from the sender to the destination. All
Internet messages must be sent using SMTP; older proprietary mail systems must
convert their internal mail formats to SMTP in order to communicate effectively
over the Internet.
Post Office Protocol (POP)
With POP, mail is delivered to a shared mail server; users periodically
connect to the server and download all pending mail to their machines.
Thereafter, all mail processing is local to the client machine. POP provides
only the store-and-forward service, moving mail on demand from a mail
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<PAGE>
server to a single destination machine, usually a PC, Macintosh or UNIX
workstation, and then typically deleting the messages from the POP server.
Web-based Email
Web-based email, also known as HTML (Hyper Text Markup Language) email,
allows users to access their mail from any computer with Web browser and
Internet access. This eliminates the need to maintain a separate program for
accessing email.
Internet Message Access Protocol (IMAP)
IMAP is more sophisticated than the POP3 protocol and provides greater
flexibility at the server level. This enhanced service allows users to sort
mail by sender and subject, search for specific text, and manipulate folders
and mailboxes while the files remain on the server, rather than downloading
them to their local desktop. This flexibility is particularly valuable for
users who travel frequently and access their mail from a variety of different
computers and email clients.
Account Provisioning
We have created a proprietary Account Provisioning Protocol ("APP") for
account creation and maintenance. The APP enables accounts transitioning from
other services or legacy systems to be bulk-loaded, tested, replicated and
deployed on our service automatically. This addresses a critical time to market
issue by enabling organizations to quickly transition to the new standards-
based email service with minimal down-time and degradation to their existing
internal systems. In addition, the APP can be used by customers and partners to
facilitate automatic account sign-ups from websites, typically in less than
three minutes.
Data Centers and Network Access
We maintain data centers in San Francisco and Palo Alto, California and
Laurel, Maryland. The data centers have private peering with all major
backbones to allow high-bandwidth access to the Internet. With multiple high-
speed connections to different backbone providers, we have reduced the
likelihood that our customers will suffer downtime as a result of network
outages. Our backbone architecture and interconnection strategy consists of
clear channel DS-3 and OC-3 connections and direct 100 MB/sec Ethernet
connections.
We currently have bilateral peering arrangements in place with the following
organizations:
<TABLE>
<S> <C> <C>
AboveNet Communications Inc. Exodus Communications Nuri Net
Compaq/Digital Equipment
Corporation Frontier GlobalCenter Pilot Network Services
Concentric Networks GTE Internetworking/Genuity Skybytes
Dacom, Inc. @Home Verio
DataResearch Associates Hurricane Electric Web Professionals
Electric Lightwave, Inc. MAXIM XMISSION
</TABLE>
In addition to our peering connections, we currently purchase additional
Internet access from MCI WorldCom and Sprint, through their relationships with
AboveNet Communications Inc.
Our data centers feature redundant systems for power, fire protection,
seismic reinforcement, and security surveillance 24 hours a day, seven days a
week by both personnel and video monitors. If we experience service
interruptions on either the East Coast or the West Coast due to a natural
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<PAGE>
disaster, all Critical Path-hosted messages will be automatically rerouted to
the data center that is not affected. We intend to open data centers in Europe
and Asia. These data centers will add further redundancy and create a local
connectivity in those markets.
Network Security
We have created a custom firewall solution to reduce the incidence of network
security breaches, utilizing Cisco Systems, Inc. routers for firewall hardware.
To enhance security for the network, our staff members monitor the network and
hardware 24 hours a day, seven days a week. Any suspicious activity is reported
and investigated immediately.
Our operations and engineering staffs include many active participants in
open Internet security groups. Newsgroups and industry consortium postings are
actively monitored for information regarding reported security flaws. Suspected
flaws in software and hardware products that could compromise security are
investigated thoroughly and fixes are implemented, often within a matter of
hours.
The goals of our security efforts are to prevent intruders from gaining
access to our customers' email messages, passwords or financial information, to
protect our server software and design information from being accessed by
intruders, and to prevent malicious individuals from causing service failure or
slowdown. We accomplish these goals by ensuring that our server clusters are
entirely isolated from the Internet at large except for the specific services
we provide, continuously monitoring the network to detect intrusion attempts,
staying up to date on current security issues, and tracking abuse incidents,
such as "spamming," blocking as necessary, and reporting incidents to the
appropriate originating ISPs.
Spam Blocking
Our basic email and web-based email services include comprehensive spam
prevention at no additional charge. This spam prevention is currently being
used to screen messages for all of our service partners and customers.
Our engineers have written proprietary "learning" software that automatically
screens incoming messages for telltale items in message headers and subject
lines. We have also developed a comprehensive database of commonly forged
addresses and frequently abused domain names. Most additions to the "black
list" have been reported by our end-users, who are encouraged to notify us of
suspected abuse. The black list is actively reviewed to ensure that no
legitimate domains or individual users are blocked from accessing the system or
sending messages.
In addition to filtering technology at the server level, our personnel
monitor incoming messages 24 hours a day, seven days a week. We are part of a
group of key network operators and ISPs working to develop technologies and
other measures aimed at protecting users from junk email. We have
representatives serving on the Coalition Against Unsolicited Commercial Email,
the leading national organization lobbying for anti-spam legislation. Our
Acceptable Use Policy explicitly states that partners and customers may not use
our service to send unsolicited bulk email.
Customer Support
We provide customer support 24 hours a day, seven days a week by contractual
agreement. Our customer support service consists of two tiers. Tier 1 includes
technical support in response to end- user inquiries. Although our customers
typically provide Tier 1 support directly to their end-
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users, they can outsource this function to us and we can provide Tier 1 support
to their end-users via email or web-based support. We also provide support
information on our website.
Tier 2 support includes technical support, provided to our ISP, web hosting,
web portal and corporate customers, via toll-free access and email
correspondence managed by our team of trained technical support
representatives. Our technical support representatives include pooled and
dedicated representatives. Pooled representatives are trained to resolve the
majority of inquiries and, where necessary, to escalate and manage inquiries
through to resolution. Dedicated representatives must meet stringent technical
criteria, are assigned to strategic accounts and assist in identifying and
qualifying new features and functionality in addition to advanced problem
solving.
In an effort to further improve customer satisfaction, we are deploying new
tools designed to allow customers to track the status of their open tickets and
access standard reported metrics through a secure web interface. These tools
will also facilitate our ability to track recurring customer issues that will
identify opportunities for service improvements. Our staff of trained technical
representatives, coupled with leading edge monitoring and tracking tools allows
us to successfully serve the needs of our clients.
Competition
The market for Internet-based email service is characterized by companies
that elect to develop and maintain in-house solutions and companies that seek
outsourcing arrangements for their email service. For customers seeking
outsourcing arrangements, we compete with email service providers, such as
USA.NET, and mail.com, as well as product-based companies, such as Software.com
and Lotus Development Corporation. In addition, companies such as Software.com,
Microsoft, Lotus and Sun Microsystems are currently offering email products
directly to ISPs, web hosting companies, web portals and corporations. These
companies could potentially leverage their existing capabilities and
relationships to enter the email service industry by redesigning their system
architecture, pricing and marketing strategies to sell through to the entire
market. In the future, ISPs, web hosting companies and outsourced application
companies may broaden their service offerings to include outsourced email
solutions.
The level of competition is likely to increase as current competitors
increase the sophistication of their offerings and as new participants enter
the market. In the future, as we expand our service offerings, we expect to
encounter increased competition in the development and delivery of these
services. 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 well-
financed companies. Certain of our competitors may be able to enter into such
strategic or commercial relationships on more favorable terms. Further, certain
of our competitors may offer services at or below cost. In addition, new
technologies and the expansion of existing technologies may increase
competitive pressures on us. Increased competition may result in reduced
operating margins and loss of market share. We believe that our service
solution competes favorably with that of other providers with respect to the
following:
. providing cost savings over in-house solutions by relieving customers of
expenses associated with acquiring and maintaining hardware and software
and the associated administrative burden;
. providing greater functionality and access to leading technologies and
protocols, which in turn enables customers to choose the protocol that
best suits their end-users' needs;
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. enabling customers to maintain brand control, thereby enhancing their
brand identity; and
. facilitating scalability through an infrastructure designed to support
hundreds of millions of mailboxes across millions of domains.
However, despite our competitive positioning, we may not be able to compete
successfully against current and future competitors, and competitive pressures
we face could have a material adverse effect on our business, operating results
and financial condition.
Intellectual Property
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, partners and others to protect our
proprietary rights. We have no registered trademarks or service marks to date.
It may be possible for unauthorized third parties to copy certain portions of
our products or reverse engineer or obtain and use information that we regard
as proprietary. Certain 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.
We have one patent pending in the United States. We do not know whether this
patent will be granted or, that if granted, that the patent will not 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. There can be no assurance that our means of protecting our proprietary
rights in the United States or abroad will be adequate or that competing
companies will not independently develop similar technology.
Other parties have asserted and may assert, from time to time, infringement
claims against us. We may also 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 by us and our licensees. For example, we recently received a
letter alleging that our name infringed the trade name of another company. Such
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources.
We also intend to continue to strategically license certain technology from
third parties, including our web server and SSL encryption technology. In the
future, if we add certificate technology to our systems, we may license
additional technology from third-party vendors. We cannot be certain that these
third-party content licenses will be available to us on commercially reasonable
terms or that we will be able to successfully integrate the technology into our
products and services. These third-party in-licenses may expose us to increased
risks, including risks associated with the assimilation 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. The inability to obtain any of
these licenses could result in delays in product and service development until
equivalent technology can be identified, licensed and integrated. Any such
delays in services could cause our business, financial condition and operating
results to suffer. See "Risk Factors--We have limited protection of our
intellectual property and proprietary rights."
Government Regulation
Although there are currently few laws and regulations directly applicable to
the Internet and commercial email services, it is possible that a number of
laws and regulations may be adopted with
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respect to the Internet or commercial email services covering issues such as
user privacy, pricing, content, copyrights, distribution, antitrust and
characteristics and quality of products and services. Further, the growth and
development of the market for online email may prompt calls for more stringent
consumer 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, in turn, decrease the demand for our products and services and increase
our cost of doing business, or otherwise have a material adverse effect on our
business, operating results and financial condition. Moreover, the
applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business or the
application of existing laws and regulations to the Internet could have a
material adverse effect on our business, operating results and financial
condition. See "Risk Factors--We face risks associated with government
regulation and legal uncertainties."
Employees
As of March 31, 1999, we had 182 full-time employees. None of our employees
is covered by collective bargaining agreements. We believe that our relations
with our employees are good.
Facilities
Our principal executive offices are located in San Francisco, California, in
a 31,500 square foot facility under a lease expiring on June 30, 2002, with a
five-year renewal option and a sublease expiring on March 31, 2002. We believe
that our facilities will be adequate for the next 12 months. However, we may
not be able to lease additional space on commercially reasonable terms or at
all.
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MANAGEMENT
Directors and Executive Officers
The executive officers, directors and key employees of Critical Path and
their ages as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Douglas T. Hickey....... 43 President, Chief Executive Officer and Director
David C. Hayden......... 43 Chairman of the Board of Directors
David A. Thatcher....... 43 Executive Vice President and Chief Financial Officer
Wayne D. Correia........ 32 Chief Technology Officer
Joseph Duncan........... 50 Vice President and Chief Information Officer
Judie A. Hayes.......... 51 Vice President of Corporate Communications
Carolyn J. Patterson.... 34 Vice President of Operations
William H. Rinehart..... 34 Vice President of Sales
Marcy Swenson........... 34 Vice President of Software Engineering
Mari E. Tangredi........ 33 Vice President of Marketing and Strategic Planning
Cynthia D. Whitehead.... 51 Vice President of Customer Service
Christos M. Cotsakos.... 50 Director
Lisa Gansky(1).......... 40 Director
Kevin R. Harvey(1)...... 34 Director
James A. Smith(2)....... 46 Director
George Zachary(2)....... 33 Director
</TABLE>
- --------
(1) Member of Compensation Committee of the Board of Directors.
(2) Member of Audit Committee of the Board of Directors.
Douglas T. Hickey has served as the President and Chief Executive Officer and
a director of Critical Path since October 1998. From February 1998 to October
1998, Mr. Hickey served as Executive Vice President of Frontier Communications
Corporation, a telecommunications company, and as President of Frontier
GlobalCenter. From July 1996 to February 1998, Mr. Hickey served as President
and CEO of GlobalCenter, Inc., a web hosting company. In February 1998,
GlobalCenter was acquired by Frontier. From December 1994 to July 1996, Mr.
Hickey was President of Internet services at MFS Communications, a provider of
high-speed fiber-optic services. From September 1990 to November 1994, Mr.
Hickey was general manager of North American sales and field operations at
Ardis, a Motorola company. Mr. Hickey received a B.S. in economics from Siena
College.
David C. Hayden founded Critical Path and served as the Chairman, President
and Chief Executive Officer and Secretary from its inception in February 1997
to October 1998. Mr. Hayden has served as Chairman of the Board of Directors of
Critical Path since October 1998. From February 1993 to August 1996, Mr. Hayden
served as Chairman, Chief Executive Officer, and co-founder of The McKinley
Group, Inc., creators of Magellan, an Internet search engine. Mr. Hayden
received a B.A. in political science from Stanford University.
David A. Thatcher has served as Executive Vice President, Chief Financial
Officer and Secretary of Critical Path since December 1998, and served as a
director of Critical Path from May 1997 to March 1998 and from May 1998 to
November 1998. From June 1998 to December 1998, Mr. Thatcher served as
President and Chief Executive Officer of Geoworks Corporation, a provider
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of software solutions for the wireless market. Mr. Thatcher joined Geoworks
Corporation in March 1997 as Vice President of Finance and Administration and
Chief Financial Officer and was appointed President and Director in January
1998. From May 1996 to January 1997, Mr. Thatcher served as Vice President and
Chief Financial Officer of Diba, Inc., an Internet software company, which was
later acquired by Sun Microsystems, Inc. From January 1996 to May 1996, Mr.
Thatcher served as Vice President and Chief Financial Officer of The McKinley
Group. From March 1993 to November 1995, Mr. Thatcher served as Vice President
and Chief Financial Officer of Peregrine Systems, Inc., a provider of customer
support software. Mr. Thatcher received a B.S. in accounting from San Diego
State University and is a CPA in California.
Wayne D. Correia has served as the Chief Technology Officer since April 1997
and as a director of Critical Path from May 1997 to January 1999. From November
1994 to February 1997, Mr. Correia was President and founder of domainNET, an
Internet strategy, engineering and services company, providing application
hosting and on-demand high-speed wireless Internet connections for mediacasts
and other events. In January 1992, Mr. Correia founded Collaboration
Technologies, a developer of leading-edge computer telephony hardware and
software and was Chief Executive Officer until May 1995. From July 1988 to
October 1993, he worked in the Macintosh Software Architecture Division and
Apple Developer Group at Apple Computer, Inc., a computer manufacturer.
Joseph Duncan has served as Vice President and Chief Information Officer of
Critical Path since December 1998. From December 1997 to December 1998, Mr.
Duncan was founder and Chief Executive Officer of Charybdis Software, a
software company. From June 1993 to November 1997, Mr. Duncan held various
positions at Oracle Corporation, most recently as Senior Vice President for
Groupware Systems and Object-Oriented Tools. Mr. Duncan received a B.A. in
philosophy from the University of Minnesota.
Judie A. Hayes joined Critical Path as Vice President of Corporate
Communications in December 1998. From January 1997 to December 1998, Ms. Hayes
served as Vice President Corporate Marketing and Communications for Frontier
GlobalCenter. From March 1995 to January 1997, Ms. Hayes served as Senior
Director of Corporate Communications for NETCOM On-Line Communication Services,
Inc., an Internet service provider. Ms. Hayes has served as Director of
Marketing Communications for MCI Data Services Division, a telecommunications
company, and Director of Corporate Communications for British Telecom North
America, a telecommunications company. Ms. Hayes received her bachelor's degree
from University of Wisconsin-Whitewater.
Carolyn J. Patterson has served as Vice President of Operations of Critical
Path since January 1999 and as Director of Operations of Critical Path from
August 1998 to January 1999. From January 1998 to July 1998, Ms. Patterson
served as Manager, Strategic Alliances for Sybase Inc. From February 1997 to
January 1998, Ms. Patterson served as General Manager, Data Services Operations
for AT&T Corp. From June 1986 to February 1997, Ms. Patterson worked as a
programmer and later in various AT&T Corp. divisions including sales, product
management, customer care, finance and sales. Ms. Patterson holds a B.S.C. in
decision science from Rider University and an M.B.A. from Monmouth University.
William H. Rinehart joined Critical Path as Vice President, Sales in November
1998. From May 1997 to November 1998, Mr. Rinehart served as Senior Vice
President, General Manager at Frontier GlobalCenter. From July 1996 to June
1997, Mr. Rinehart held a range of positions including Vice President, Product
Development and Vice President, Sales for Genuity, a Bechtel company. He has
55
<PAGE>
also served as Vice President, General Manager at MFS Communications, Internet
Division, from January 1995 to July 1996. From April 1993 to January 1995, Mr.
Rhinehart was a Senior Account Executive at Ardis, a wireless data
communications company. Mr. Rinehart received a B.S. in business administration
from Ball State University.
Marcy Swenson has served as the Vice President of Software Engineering of
Critical Path since June 1997. From May 1995 to June 1997, Ms. Swenson served
as Vice President of Software Development at Providence Systems. In June 1987,
Ms. Swenson co-founded After Hours Software, Inc., which provides custom
software solutions to Fortune 500 customers, and served as Vice President of
Software and Consulting Services until May 1994. Ms. Swenson has completed
advanced studies in Artificial Intelligence at Stanford University, and
received a B.S. in math/computer science from UCLA.
Mari E. Tangredi has served as Vice President, Marketing and Strategic
Planning for Critical Path since February 1998. From June 1995 to November
1997, Ms. Tangredi served as the General Manager/Vice President of Electronic
Commerce of Pacific Bell. From July 1986 to May 1995, Ms. Tangredi worked at
AT&T Corp. as a programmer and later in various positions in sales, emerging
product development and customer care, providing network products and services
to Fortune 500 customers. Ms. Tangredi received a B.S. in M.I.S. from Clarkson
University and an M.B.A in high technology from Northeastern University.
Cynthia D. Whitehead has served as Vice President of Customer Service since
March 1999. From May 1998 to March 1999, Ms. Whitehead was an independent
information technology consultant. From 1997 to May 1998, Ms. Whitehead was
Vice President of Information Technology and Chief Information Officer of SBC
Communications, parent of Pacific Bell and Southwestern Bell. From 1970 to
1997, Ms. Whitehead was employed in various capacities with Pacific Telesis,
most recently as Chief Information Officer and as Vice President--Technology
Services Group of its Pacific Bell operating subsidiary. Ms. Whitehead received
a B.A. in Psychology from Stanford University.
Christos M. Cotsakos has served as a director of Critical Path since May
1998. Mr. Cotsakos has served as President, Chief Executive Officer and a
director of E*TRADE Group, an on-line brokerage services company, since March
1996. From March 1995 to January 1996, Mr. Cotsakos served as President, Co-
Chief Executive Officer, Chief Operating Officer and a director of A.C.
Nielsen, Inc. From September 1993 to March 1995, he served as President and
Chief Executive Officer of Nielsen International. From March 1992 to September
1993, he served as President and Chief Operating Officer of Nielsen Europe,
Middle East and Africa. Mr. Cotsakos serves as a director of National
Processing Company, Forte Software, Inc. and The Fourth Network Communications
Network, Inc. Mr. Cotsakos received a B.A. from William Patterson College and
an M.B.A. from Pepperdine University and is currently pursuing a Ph.D. in
economics at the Management School, University of London.
Lisa Gansky has served as a director of Critical Path since May 1998. Ms.
Gansky has been a Principal at Trading Fours, a venture development company,
since January 1997. From June 1995 to January 1997, Ms. Gansky served as Vice
President of AOL, Inc., an online and Internet services company. From June 1994
to January 1995, Ms. Gansky founded and served as Chief Executive Officer of
Global Network Navigator, Inc., an Internet solutions company.
Kevin R. Harvey has served as a director of Critical Path since April 1998.
Mr. Harvey has been a General Partner of Benchmark Capital, a venture capital
firm, since January 1995. From July 1993
56
<PAGE>
to January 1995, he served as General Manager for Lotus Development
Corporation. In August 1990, Mr. Harvey founded Approach Software Corporation
("Approach"), a software company, where he served as the President and Chief
Executive Officer until July 1993 when Approach was sold to Lotus Development
Corporation. Prior to founding Approach, Mr. Harvey founded Styleware, a
software company, which was subsequently sold to Claris Corporation. Mr. Harvey
is also a director of Silicon Gaming, Inc., an entertainment and gaming
technology company, and a director of several privately held companies. Mr.
Harvey received a B.S.E.E. degree from Rice University, 1987.
James A. Smith has served as a director of Critical Path since January 1999.
Mr. Smith has served as the President and Chief Executive Officer of US West
Dex, a provider of Internet directory and database marketing services, since
October 1997. From March 1996 to October 1997, Mr. Smith served as Vice
President of Local Markets for US West. From July 1992 to March 1996, Mr. Smith
served as Vice President and General Manager of Mass Markets for US West. Mr.
Smith received a B.A. from Willamette University and a J.D. from the University
of Washington.
George Zachary has served as a director of Critical Path since April 1998.
Mr. Zachary has been a partner at Mohr, Davidow Ventures II, a venture capital
firm, since January 1996. From March 1993 to December 1997, Mr. Zachary ran the
consumer products business at Silicon Graphics, Inc., a computer workstation
company. Since September 1986 until March 1993, Mr. Zachary has held various
engineering and marketing management positions at Silicon Graphics, Inc., VPL
Research, Inc., Apple Computer, Inc., Texas Instruments Incorporated and C-ATS
Software Inc. Mr. Zachary received a B.S. degree from Massachusetts Institute
of Technology and Massachusetts Institute of Technology Sloan School of
Management.
We have authorized seven (7) directors. All directors are elected to hold
office until our next annual meeting of shareholders and until their successors
have been elected. Officers are elected at the first board of directors meeting
following the shareholders' meeting at which the directors are elected and
serve at the discretion of the board of directors. There are no family
relationships among any of our directors or executive officers.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for our directors, officers and
other employees and administering various incentive compensation and benefit
plans. The Compensation Committee consists of two outside directors. Lisa
Gansky and Kevin Harvey are currently the two outside directors on our
Compensation Committee.
Director Compensation
We reimburse each member of our board of directors for out-of-pocket expenses
incurred in connection with attending board meetings. No member of our board of
directors currently receives any additional cash compensation. In connection
with their joining the board of directors in May 1998, directors Christos
Cotsakos and Lisa Gansky each received an option to purchase 136,363 shares of
common stock vesting monthly over two years at an exercise price of $0.22 per
share.
57
<PAGE>
Executive Compensation
The following table summarizes all compensation earned by or paid to Critical
Path's Chief Executive Officer and to each of Critical Path's four most highly
compensated executive officers other than the Chief Executive Officer whose
total annual salary and bonus exceeded $100,000 (collectively, the "Named
Executive Officers"), for services rendered in all capacities to Critical Path
during the fiscal year ended December 31, 1998.
Summary Compensation Table for Last Fiscal Year
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation(1) Awards
----------------- ------------
Security
Underlying
Name and Principal Position Salary Bonus Options (#)
- --------------------------- -------- -------- ------------
<S> <C> <C> <C>
Douglas Hickey(2)
President and Chief Executive Officer.......... $ 51,136 $ -- 2,549,374(4)
David Hayden(3)
Chairman of the Board of Directors............. 170,833 135,000 1,363,636(5)
Wayne Correia
Chief Technology Officer....................... 140,417 25,000 --
Marcy Swenson
Vice President of Software Engineering......... 127,500 40,000 --
Mari E. Tangredi
Vice President of Marketing and
Strategic Planning............................ 108,056 65,000 431,816(6)
</TABLE>
- --------
(1) Other than the salary and bonus described herein, Critical Path did not pay
any executive officer named in the Summary Compensation Table any fringe
benefits, perquisites or other compensation in excess of 10% of such
executive officer's salary and bonus during fiscal 1998.
(2) Mr. Hickey became President and Chief Executive Officer in October 1998.
(3) Prior to October 1998, Mr. Hayden served as Critical Path's Chief Executive
Officer and President as well as its Chairman.
(4) In October 1998, Mr. Hickey received two options to purchase shares of
common stock (an option to purchase 478,468 and 2,070,906 shares at an
exercise price of $0.84, each of which vest in equal installments over 48
months.
(5) Option to purchase 1,363,636 shares of common stock at an exercise price of
$.02 per share vests as to 25% of the shares on the first anniversary of
Mr. Hayden's employment with Critical Path and 1/48th each full month
thereafter.
(6) Includes options to purchase 68,181, 45,454, 227,272 and 90,909 shares at
exercise prices of $0.02, $0.22, $0.84 and $2.20 per share, respectively.
All options vest as to 25% of the shares on the first anniversary of Ms.
Tangredi's employment with Critical Path and 1/48th each full month
thereafter.
58
<PAGE>
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Percentage of Annual Rates of Stock
Total Options Price Appreciation for
Granted to Exercise or Option Term(3)
Options Employees in Base Price Expiration ----------------------
Name Granted Fiscal Year(1) ($/Share)(2) Date 5% 10%
- ---- --------- -------------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Douglas Hickey.......... 478,468(4) 4.50% $0.84 10/18/08 18,303,062 29,382,633
2,070,906(5) 19.5 0.84 10/18/08 79,219,343 127,173,963
David Hayden............ 1,363,636(6) 12.9 0.02 3/2/03 53,281,992 84,858,822
Wayne Correia........... -- -- -- -- -- --
Marcy Swenson........... -- -- -- -- -- --
Mari Tangredi........... 68,181(7) 0.64 0.02 3/2/08 2,664,068 4,242,891
45,454(7) 0.43 0.22 6/15/08 1,766,955 2,819,503
227,272(7) 2.14 0.84 9/29/08 8,693,943 13,956,732
90,909(7) 0.86 2.20 12/29/08 3,353,949 5,459,069
</TABLE>
- --------
(1) Based on options to purchase an aggregate of 10,595,453 shares of common
stock granted during fiscal 1998. Under the terms of Critical Path's 1998
Stock Plan, the committee designated by the board of directors to
administer the 1998 Stock Plan retains the discretion, subject to certain
limitations within the 1998 Stock Plan, to modify, extend or renew
outstanding options and to reprice outstanding options. Options may be
repriced by canceling outstanding options and reissuing new options with an
exercise price equal to the fair market value on the date of reissue, which
may be lower than the original exercise price of such canceled options. See
"Stock Plans."
(2) The exercise price on the date of grant was equal to 100% of the fair
market value on the date of grant as determined by the board of directors.
(3) The 5% and 10% assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent Critical Path's
estimate or projection of the future common stock price. There can be no
assurance that any of the values reflected in the table will be achieved.
Assumes a per share fair market value equal to the initial public offering
price of $24.00.
(4) This incentive stock option has a 10-year term, subject to earlier
termination in certain events related to termination of employment, and
vests as to 1/48th of the shares per month over a four-year period. This
option provides for partial acceleration of vesting upon change of control
of Critical Path, and an early exercise provision.
(5) This non-statutory stock option has a 10-year term, subject to earlier
termination in certain events related to termination of employment, and
vests as to 1/48th of the shares per month over a four-year period. This
option provides for partial acceleration of vesting upon change of control
of Critical Path, and an early exercise provision. In November 1998 this
option was exercised as to 1,274,687 shares.
(6) This incentive stock option has a five-year term, subject to earlier
termination in certain events related to termination of employment, and
vests as to 25% of the shares on the first anniversary of the vest start
date, and vests ratably on a monthly basis thereafter, becoming fully
vested on the fourth anniversary of the vest start date.
(7) These incentive stock options have a ten-year term, subject to earlier
termination in certain events related to termination of employment, and
vest as to 25% of the shares on the first anniversary of the vest start
date, and vest ratably on a monthly basis thereafter, becoming fully vested
on the fourth anniversary of the vest start date.
59
<PAGE>
Aggregated Option Exercises in Last Fiscal
Year And Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Shares Options at Options at
Acquired Fiscal Year-End Fiscal Year-End(3)
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- --------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Douglas Hickey(1)....... 1,274,687(2) $-- 1,274,687/0 $29,521,750/--
David Hayden............ -- -- 653,409/710,227 15,668,747/17,031,243
Wayne Correia........... -- -- -- --
Marcy Swenson........... -- -- -- --
Mari Tangredi........... -- -- --/431,816 --/9,961,311
</TABLE>
- --------
(1) Mr. Hickey's option agreements allow for early exercise subject to
repurchase by Critical Path over the vesting period. A portion of the
shares acquired by Mr. Hickey upon exercise of his option remain subject to
vesting.
(2) Includes 9,090 shares which are held in trust for benefit of minor
children.
(3) Assumes a per share fair market value equal to the initial public offering
price of $24.00.
1998 Stock Plan
Our 1998 Stock Plan was adopted by the board of directors on January 21,
1998, amended on December 15, 1998 and was amended and restated effective upon
completion of our initial public offering. Our 1998 Stock Plan provides for
awards or sales of shares and options (including incentive stock options
("ISOs") and nonstatutory stock options ("NSOs")). Employees, consultants and
advisors of Critical Path are eligible for all awards except ISOs. Only
employees are eligible for the grant of ISOs. A total of 12,288,741 shares of
common stock has been reserved for issuance under our 1998 Stock Plan and this
amount is increased by 5% each January 1, commencing January 1, 2000.
Our 1998 Stock Plan is administered by our compensation committee and our
non-insider option committee. Our compensation committee consists of at least
two directors who are "non-employee directors," as defined in Rule 16b-3. Our
non-insider option committee consists of our chief executive officer, and is
authorized to grant options to persons who are not executive officers. The
board of directors may amend our 1998 Stock Plan as desired without further
action by Critical Path's shareholders except as required by applicable law.
Our 1998 Stock Plan will continue in effect until terminated by the board or
for a term of 10 years from its original adoption date, whichever is earlier.
The consideration for each award under our 1998 Stock Plan is established by
the compensation committee, but in no event will the option price for ISOs be
less than 100% of the fair market value of the stock on the date of grant.
Awards will have such terms and be exercisable in such manner and at such times
as the compensation committee may determine. However, each ISO must expire
within a period of not more than 10 years from the date of grant.
Our 1998 Stock Plan provides that, in the event of a merger or reorganization
of Critical Path, outstanding options and restricted shares shall be subject to
the agreement of merger or reorganization.
As of March 31, 1999, 13,244,465 awards had been granted under our 1998 Stock
Plan. Such options have exercise prices ranging from $0.02 to $24.00 per share
and a weighted average per share exercise price of $2.71. Options to purchase
2,490,057 shares have been exercised, and 1,026,125 have been cancelled.
60
<PAGE>
Employee Stock Purchase Plan
The board of directors adopted our Employee Stock Purchase Plan effective
upon completion of our initial public offering. A total of 600,000 shares of
common stock have been reserved for issuance under our Employee Stock Purchase
Plan and this amount will be increased by 5% each January 1 commencing January
1, 2000, up to a maximum of 1,000,000 additional shares. Our Employee Stock
Purchase Plan, which is intended to qualify under Section 423 of the Internal
Revenue Code of 1986, as amended, is administered by the board of directors or
by a committee appointed by the board. Employees (including officers and
employee directors of Critical Path but excluding 5% or greater shareholders)
are eligible to participate if they are customarily employed for at least 20
hours per week and for more than five months in any calendar year. Our Employee
Stock Purchase Plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 15% of an employee's compensation.
Our Employee Stock Purchase Plan is implemented in a series of overlapping
24 month participation periods. The initial participation period commenced on
the effectiveness of our initial public offering and ends on April 30, 2001.
Subsequent 24 month participation periods will commence on November 1, 1999 and
each May 1 and November 1 thereafter. Purchases will occur on each April 30 and
October 31 (the "purchase dates") during each participation period, excluding
April 30, 1999. If on any purchase date during a participation period the fair
market value of a share of common stock is less than the fair market value on
the commencement of the participation period, the participation period shall be
terminated immediately following such purchase date. The employees who had
enrolled in the terminated participation period shall automatically be enrolled
in the participation period commencing on the day after the purchase date.
The purchase price of the common stock under our Employee Stock Purchase Plan
will be equal to 85% of the fair market value per share of common stock on
either the start date of the participation period or on the purchase date,
whichever is less. Employees may end their participation in an participation
period at any time during that period, and participation ends automatically on
termination of employment with Critical Path. In the event of a proposed
dissolution or liquidation of Critical Path, the offering periods terminate
immediately prior to the consummation of the proposed action, unless otherwise
provided by the board. If there is a proposed sale of all or substantially all
of Critical Path's assets or the merger of Critical Path with or into another
corporation, then the offering period in progress will be shortened and a new
exercise date will be set that is before the sale or merger. The offering
period in progress shall end on the new exercise date. Each participant shall
be notified at least ten business days prior to the new exercise date, and
unless such participant ends his or her participation, the option will be
exercised automatically on the new exercise date.
401(k) Plan
Critical Path has established a tax-qualified employee savings and retirement
plan (the "401(k) Plan") for which all of Critical Path's employees are
eligible except for employees subject to a collective bargaining agreement and
nonresident aliens with no U.S. source income. Pursuant to the 401(k) Plan,
employees may elect to reduce their current compensation by up to the lower of
15% or the statutorily prescribed limit and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits additional
discretionary matching contributions by Critical Path. To date, Critical Path
has made no such matching contributions. The 401(k) Plan is intended to qualify
under
61
<PAGE>
Section 401 of the Internal Revenue Code of 1986, as amended, so that
contributions by employees or by Critical Path to the 401(k) Plan, and income
earned on plan contributions, are not taxable to employees until withdrawn from
the 401(k) Plan, and so that contributions by Critical Path, if any, will be
deductible by Critical Path when made.
Employment Agreement and Change in Control Arrangements
Critical Path does not currently have any employment contracts in effect with
any of the Named Executive Officers other than Douglas T. Hickey, its
President, Chief Executive Officer and director.
Critical Path and Mr. Hickey are parties to a letter agreement dated October
1, 1998 governing his employment with Critical Path. The agreement sets forth
Mr. Hickey's compensation level and eligibility for salary increases, bonuses,
benefits and option grants under the 1998 Stock Plan. The agreement provides
for accelerated vesting of a portion of Mr. Hickey's options in the event of a
change of control. Mr. Hickey also received a loan in the amount of $500,000,
bearing interest at the applicable federal rate. The loan will be due on the
earlier of five years or 30 days following termination of his employment and is
non-recourse unless Mr. Hickey terminates his employment voluntarily. Mr.
Hickey's employment under the letter agreement is at-will and may be terminated
by Critical Path or Mr. Hickey at any time, with or without cause and with or
without notice.
Limitation of Liability and Indemnification Matters
Critical Path's articles of incorporation limit the liability of directors to
the maximum extent permitted by California law. This limitation of liability is
subject to exceptions including intentional misconduct, obtaining an improper
personal benefit and abdication or reckless disregard of director duties.
Critical Path's articles of incorporation and bylaws provide that Critical Path
may indemnify its directors, officers, employees and other agents to the
fullest extent permitted by law. Critical Path's bylaws also permit it to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit indemnification.
Critical Path has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in Critical
Path's bylaws. These agreements, among other things, provide for
indemnification of Critical Path's directors and executive officers for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by any such person in any action or proceeding, including any action
by or in the right of Critical Path, arising out of such person's services as a
director or executive officer of Critical Path, any subsidiary of Critical Path
or any other company or enterprise to which the person provides services at the
request of Critical Path. Critical Path believes that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
62
<PAGE>
CERTAIN TRANSACTIONS
Transactions with Management and Others
In 1997, Critical Path sold 2,272,727 shares of common stock to David Hayden,
the founder and Chairman of the Board of Critical Path at a purchase price of
$0.01 per share. Critical Path has also entered into a stock option agreement
with Mr. Hayden pursuant to which it granted options to purchase 1,363,636
shares of common stock to Mr. Hayden at a purchase price of $0.02. These
options vest over a four-year period, with a portion vesting in the event of a
merger, reorganization or similar change in the voting control of Critical
Path.
In October 1998, Critical Path entered into a stock option agreement with Mr.
Hickey pursuant to which it granted incentive stock options to purchase 478,468
shares of common stock to Mr. Hickey at a purchase price of $0.84. Also in
October 1998, Critical Path entered into a stock option agreement with Mr.
Hickey pursuant to which it granted non-statutory stock options to purchase
2,070,906 shares of common stock to Mr. Hickey at a purchase price of $0.84.
These options vest over a four-year period, with a portion vesting in the event
of a merger, reorganization or similar change in the voting control of Critical
Path.
During 1998, Critical Path entered into four stock option agreements with
Mari Tangredi pursuant to which it granted incentive stock options to purchase
an aggregate of 431,816 shares of common stock to Ms. Tangredi at purchase
prices of between $0.02 and $2.20. These options vest over a four-year period.
In May 1998, Critical Path entered into a stock option agreement with Mr.
Cotsakos pursuant to which it granted a non-statutory stock option to purchase
136,363 shares of common stock to Mr. Cotsakos at a purchase price of $0.22.
This option vests over a two-year period.
In May 1998, Critical Path entered into a stock option agreement with Lisa
Gansky pursuant to which it granted a non-statutory stock option to purchase
136,363 shares of common stock to Ms. Gansky at a purchase price of $0.22. This
option vests over a two-year period.
Between April 1998 and January 1999, Critical Path sold and issued 19,603,712
shares of its preferred stock for an aggregate consideration of $38,433,214.
Critical Path sold 12,707,851 shares of Series A Preferred Stock in April 1998
at a sale price of $0.72 per share. In addition, 31,870 shares of Series A
Preferred Stock were purchased at a sale price of $0.72 per share pursuant to
the exercise of warrants. Critical Path sold an aggregate of 6,863,991 shares
of Series B Preferred Stock in September 1998 and January 1999 at a sale price
of $4.26 per share. Each share of Series A Preferred Stock and Series B
Preferred Stock converted into one share of common stock upon the closing of
Critical Path's initial public offering.
63
<PAGE>
The following table summarizes purchases, valued in excess of $60,000, of
shares of preferred stock and of common stock by directors, executive officers
and 5% shareholders of Critical Path:
<TABLE>
<CAPTION>
Common
stock
---------
<S> <C>
Directors and Executive Officers
Douglas Hickey........................................................ 1,256,504
The Cotsakos Revocable Trust, UAD 9/3/87.............................. 176,248
David Hayden.......................................................... 2,423,831
Lisa Gansky........................................................... 242,236
5% Shareholders
E*TRADE Group, Inc.................................................... 3,865,876
U S WEST Data Investments, Inc........................................ 2,404,827
Mohr, Davidow Ventures V, L.P......................................... 4,565,282
Benchmark Capital Partners II, L.P.................................... 4,565,282
CMG@Ventures II, L.L.C................................................ 1,737,751
</TABLE>
In December 1998, Critical Path entered into an agreement with US West
pursuant to which Critical Path agreed to provide email services and certain
related development services to US West. In exchange for such services, US
West, through the use of its sales channels, will provide Critical Path
assistance in selling advertising for the email sites of certain customers of
Critical Path. The agreement also provides for the joint development of certain
services and features from time to time.
Certain Business Relationships
In April 1998, Critical Path entered into an agreement with E*TRADE pursuant
to which each party will include the other party in certain advertising
campaigns, including E*TRADE's international and strategic partner
relationships. Critical Path will also provide email services to users of
E*TRADE's Internet access services. In addition, under the terms of the
agreement, Critical Path agreed to develop certain features for its email
services which Critical Path may make available to other customers in addition
to E*TRADE. E*TRADE accounted for approximately 62% of our revenues in 1998.
Christos Cotsakos, the Chief Executive Officer of E*TRADE is a director of
Critical Path. Mr. Cotsakos is the trustee of The Cotsakos Revocable Trust, UAD
9/3/87.
The shares held by Mohr, Davidow Ventures V, L.P. include 4,245,713 shares
held by it and 319,570 shares held by Mohr, Davidow Ventures V, L.P. as nominee
for MDV Entrepreneurs' Network Fund II (A), L.P. and MDV Entrepreneurs' Network
Fund II (B), L.P. George Zachary, a member of Mohr, Davidow Ventures V, L.P.,
is a director of Critical Path.
The shares held by Benchmark Capital Partners II, L.P. are held by it as
nominee for Benchmark Capital Partners II, L.P., Benchmark Founders' Fund II,
L.P., Benchmark Founders Fund II-A, L.P. and Benchmark Members' Fund II, L.P.
Kevin Harvey, a managing member of Benchmark Capital Partners II, L.P., is a
director of Critical Path.
Indebtedness of Management
In November 1998, Critical Path loaned Douglas Hickey, the Chief Executive
Officer of Critical Path, $500,000 pursuant to a five-year promissory note
bearing interest at the rate of 4.51% (the applicable federal rate) per annum.
In November 1998, Mr. Hickey exercised an option to purchase 1,274,687 shares
of common stock by execution of a five-year promissory note in the principal
amount of $1,065,638.94 bearing interest of 4.51% annually.
64
<PAGE>
In January 1999, Critical Path loaned William Rinehart $65,000 pursuant to a
promissory note bearing interest at the rate of 4.64% per annum. Mr. Rinehart
is an executive officer of Critical Path.
Critical Path believes that the foregoing transactions were in its best
interests. It is Critical Path's current policy that all transactions by
Critical Path with officers, directors, 5 percent shareholders and their
affiliates will be entered into only if such transactions are approved by a
majority of the disinterested independent directors, are on terms no less
favorable to Critical Path than could be obtained from unaffiliated parties and
are reasonably expected to benefit Critical Path.
For information concerning indemnification of directors and officers, see
"Management--Limitation of Liability and Indemnification Matters."
65
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of common stock as of May 26, 1999 by:
. each person or entity known to Critical Path to own beneficially more
than 5% of Critical Path's common stock;
. each of Critical Path's directors;
. each of Critical Path's Named Executive Officers;
. all executive officers and directors as a group; and
. the selling shareholders.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Owned Beneficially Owned
Prior to Offering Number of After Offering(2)
Name and Address of Beneficial ------------------ Shares ------------------
Owner(1) Number Percent Offered(2) Number Percent
- ------------------------------ ---------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Benchmark Capital Partners II,
L.P.(3)
2480 Sand Hill Road
Menlo Park, CA 94025......... 4,565,283 13.0% 107,933 4,457,350 11.7%
Mohr, Davidow Ventures V,
L.P.(4)
2775 Sand Hill Road, Suite
240
Menlo Park, CA 94025......... 4,565,283 13.0 107,933 4,457,350 11.7
E*TRADE Group, Inc.
Four Embarcadero
2400 Geng Road
Palo Alto, CA 94306.......... 3,865,877 11.0 91,388 3,774,489 9.9
U S WEST Data Investments,
Inc.
1999 Broadway, Suite 500
Denver, CO 80202............. 2,404,827 6.8 56,855 2,347,972 6.2
CMG@Ventures II, L.L.C.
2420 Sand Hill Road
Menlo Park, CA 94025......... 1,737,752 4.9 41,084 1,696,668 4.5
Douglas T. Hickey(5).......... 1,326,280 3.7 120,000 1,206,280 3.2
David Hayden(6)............... 3,219,285 9.2 120,000 3,099,285 8.1
David A. Thatcher(7).......... 232,737 * 60,000 172,737 *
Wayne Correia................. 2,500,000 7.1 60,000 2,440,000 6.4
Marcy Swenson................. 1,113,636 3.2 60,000 1,053,636 2.8
Mari Tangredi(8).............. 106,533 * 30,000 76,533 *
Joseph Duncan(9).............. 47,348 * 25,000 22,348 *
William H. Rinehart(10)....... 56,818 * 25,000 31,818 *
Christos M. Cotsakos(11)...... 4,042,125 11.5 95,565 3,946,560 10.4
Lisa Gansky(12)............... 242,236 * 5,727 236,509 *
Kevin R. Harvey(13)........... 4,565,283 13.0 107,933 4,457,350 11.7
James A. Smith(14)............ 2,404,827 6.8 56,855 2,347,972 6.2
George Zachary(15)............ 4,565,283 13.0 107,933 4,457,350 11.7
Softbank Technology Ventures.. 692,905 2.0 16,382 676,523 1.8
Network Solutions, Inc........ 514,711 1.5 12,169 502,542 1.3
Other selling shareholders.... 2,591,166 7.4 56,352 2,534,814 6.7
All directors and executive
officers
as a group (13 persons)(16).. 24,422,391 67.6 874,013 23,548,378 60.2
</TABLE>
- --------
*Less than 1%.
66
<PAGE>
(1) Unless otherwise indicated, the address for the following shareholders is
c/o Critical Path, Inc., 320 1st Street, San Francisco, California 94105.
(2) Assumes no exercise of the underwriters' over-allotment option. If the
underwriters exercise their over-allotment option in full, each of the
selling shareholders will sell their pro rata share of these additional
shares. Applicable percentage ownership is based on 35,124,532 shares of
common stock outstanding as of May 26, 1999 and 38,124,532 shares
outstanding immediately following completion of this offering. Beneficial
ownership is determined in accordance with the rules and regulations of
the Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options held by that person that
are currently exercisable or exercisable within 60 days of March 31, 1999
are deemed outstanding. These shares, however, are not deemed outstanding
for the purposes of computing the percentage ownership of any other
person. Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each shareholder named in the table
has sole voting and investment power with respect to the shares set forth
opposite such shareholder's name.
(3) Consists of shares held by Benchmark Capital Partners II, L.P. as nominee
for Benchmark Capital Partners II, L.P., Benchmark Founders Fund II, L.P.,
Benchmark Founders Fund II-A, L.P. and Benchmark Members' Fund II, L.P.
(4) Includes 4,245,713 shares held by Mohr, Davidow Ventures V, L.P. and
319,570 shares held by Mohr, Davidow Ventures V, L.P. as nominee from MDV
Entrepreneurs' Network Fund II (A), L.P. and MDV Entrepreneurs' Network
Fund II (B), L.P.
(5) Includes 972,680 shares subject to Critical Path's right of repurchase as
of May 30, 1999. Also includes 18,181 shares held in the name of Mr.
Hickey's minor children's name and 69,776 shares subject to options
exercisable within 60 days after March 31, 1999.
(6) Includes 795,454 shares subject to options exercisable within 60 days
after March 31, 1999.
(7) Includes 68,181 shares of common stock subject to Critical Path's right of
repurchase as of May 30, 1999. Also includes 60,011 shares subject to
options exercisable within 60 days after March 31, 1999.
(8) Includes 14,206 shares subject to options exercisable within 60 days after
March 31, 1999.
(9) Consists of 47,348 shares subject to options exercisable within 60 days
after March 31, 1999.
(10) Includes 18,940 shares subject to options exercisable within 60 days after
March 31, 1999.
(11) Includes 176,248 shares held by The Cotsakos Revocable Trust, UAD 9/3/87
of which Mr. Cotsakos is the trustee, including 68,181 shares of common
stock subject to Critical Path's right of repurchase as of May 30, 1999.
Also includes 3,865,877 shares held by E*TRADE Group, of which Mr.
Cotsakos is the President and Chief Executive Officer. Mr. Cotsakos
disclaims beneficial ownership of all shares held by E*TRADE Group, except
to the extent of his pecuniary interest therein.
(12) Includes 68,181 shares subject to Critical Path's right of repurchase as
of May 30, 1999.
(13) Consists of shares held by Benchmark Capital Partners II, L.P., of which
Mr. Harvey is a managing partner. Mr. Harvey disclaims beneficial
ownership of all such shares except to the extent of his pecuniary
interest therein.
(14) Consists of shares held by U S WEST Data Investments, Inc., a subsidiary
of U S WEST. Mr. Smith is the President and Chief Executive Officer of U S
WEST Dex, also a subsidiary of U S WEST. Mr. Smith disclaims beneficial
ownership of all shares held by U S WEST Data Investments, Inc., except to
the extent of his pecuniary interest therein.
(15) Consists of shares held by Mohr, Davidow Ventures V, L.P., of which Mr.
Zachary is a member. Mr. Zachary disclaims beneficial ownership of all
such shares except to the extent of his pecuniary interest therein.
(16) Includes 1,005,734 shares subject to options exercisable within 60 days
after March 31, 1999. Of the total shares, 1,177,223 shares are subject to
Critical Path's right of repurchase as of May 30, 1999.
67
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 150,000,000 shares of common stock,
par value $0.001 and 5,000,000 shares of preferred stock, par value $0.001. The
following summary of certain provisions of our common stock, preferred stock,
amended and restated articles of incorporation and bylaws is qualified in its
entirety by reference to our amended and restated articles of incorporation and
bylaws, which have been filed as exhibits to the registration statement of
which this prospectus is a part.
Common Stock
As of May 26, 1999, there were 35,124,532 shares of common stock outstanding,
held by approximately 106 shareholders of record.
Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders, including the
election of directors, and do not have cumulative voting rights. Subject to
preferences that may be applicable to any then outstanding preferred stock,
holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared by the board of directors out of funds legally available
therefor. See "Dividend Policy." Upon a liquidation, dissolution or winding up
of Critical Path, the holders of common stock will be entitled to share ratably
in the net assets legally available for distribution to shareholders after the
payment of all debts and other liabilities of Critical Path, subject to the
prior rights of any preferred stock then outstanding. Holders of common stock
have no preemptive or conversion rights or other subscription rights and there
are no redemption or sinking funds provisions applicable to the common stock.
All outstanding shares of common stock are, and the common stock to be
outstanding upon completion of this offering will be, fully paid and
nonassessable.
Preferred Stock
Our board of directors has the authority, without further action by the
shareholders, to issue from time to time the preferred stock in one or more
series and to fix the number of shares, designations, preferences, powers and
relative, participating, optional or other special rights and the
qualifications or restrictions thereof. The preferences, powers, rights and
restrictions of different series of preferred stock may differ with respect to
dividend rates, amounts payable on liquidation, voting rights, conversion
rights, redemption provisions, sinking fund provisions and purchase funds and
other matters. The issuance of preferred stock could decrease the amount of
earnings and assets available for distribution to holders of common stock or
affect adversely the rights and powers, including voting rights, of the holders
of common stock, and may have the effect of delaying, deferring or preventing a
change in control of Critical Path. We currently do not plan to issue any
shares of preferred stock.
Registration Rights
The holders of 25,641,180 shares of common stock have the right to cause us
to register their shares of common stock, as follows:
. Demand Registration Rights: After September 25, 1999, the holders can
send a written request to Critical Path to register their shares with
respect to all or a part of their registrable securities having an
aggregate proceeds, net of underwriting discounts and expenses, exceeding
$12,500,000 and an initial offering price of at least $2.88 per share (as
adjusted for
68
<PAGE>
splits or the like). The initial offering price of $2.88 per share is
equal to four times the price per share of the Series A Preferred Stock,
which was $0.72. The $12,500,000 aggregate proceeds threshold was
negotiated as part of the Series A Preferred Stock financing.
. Piggyback Registration Rights: The holders can request to have their
shares registered anytime Critical Path is filing a registration
statement to register any of our securities for our own account. Such
registration opportunities are unlimited but the number of shares that
can be registered may be eliminated entirely or cut back in certain
situations by the underwriters.
. S-3 Registration Rights: The holders of at least 20% of the registrable
securities can request Critical Path to register their shares if Critical
Path is eligible to use Form S-3 and if the aggregate price of the shares
to the public is at least $1,000,000. The Form S-3 registration
opportunities are not limited.
All of the holders of registrable securities may sell their shares pursuant
to Rule 144 after September 25, 1999, with the exception of 3,227,252 shares
held by holders who purchased these shares in the second closing of the Series
B financing. All of these shares will be eligible for resale under Rule 144
after January 2000.
The registration rights terminate the earlier of 5 years following the
closing of our initial public offering or when Rule 144 becomes available for
the sale of all of the registrable shares during any 90 day period.
Antitakeover Effects of Provisions of Articles of Incorporation and Bylaws
Our articles of incorporation and bylaws authorize us to indemnify our
current and former directors, officers, employees or agents to the fullest
extent permitted by law. Our articles of incorporation eliminate a director's
liability for monetary damages to the fullest extent permitted by the
California Corporations Code. We believe that these provisions will assist us
in attracting or retaining qualified individuals to serve as directors and
officers.
Articles of Incorporation
Under our articles of incorporation, the board of directors has the power to
authorize the issuance of up to 5,000,000 shares of preferred stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without further vote or action by the
shareholders. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, may delay, defer or prevent a change in control of Critical Path,
may discourage bids for the common stock at a premium over the market price of
the common stock and may adversely affect the market price of and the voting
and other rights of the holders of the common stock. These provisions are
intended to:
. enhance the likelihood of continuity and stability in the composition of
the board of directors and in the policies formulated by the board of
directors,
. discourage certain types of transactions that may involve an actual or
threatened change of control of Critical Path,
. reduce the vulnerability of Critical Path to an unsolicited acquisition
proposal, and
. discourage certain tactics that may be used in proxy fights.
These provisions, however, could have the effect of discouraging others from
making tender offers for our shares and, as a consequence, they also may
inhibit fluctuations in the market price of
69
<PAGE>
our shares that could result from actual or rumored takeover attempts. These
provisions also may have the effect of preventing changes in our management.
Our articles of incorporation provide that our bylaws may be repealed or
amended only by a two-thirds vote of the board of directors or a two-thirds
shareholder vote and that all shareholder action be taken at a shareholders'
meeting. These provisions of the articles of incorporation may only be amended
or repealed by the holders of at least two-thirds of the voting power of all
the then-outstanding shares of stock entitled to vote generally for the
election of directors voting together as a single class.
Bylaws
Our bylaws provide for a board that consists of a range of authorized
directors from four to seven, which exact number can be set and amended from
time to time by our board. The directors will be elected at the annual meeting
of shareholders or any special meeting of shareholders and each director so
elected will hold office until the next annual meeting or until his successor
is duly elected and qualified or until his earlier resignation or removal. The
shareholders may not cumulate their votes in the election of directors when we
become a listed company under Section 301.5(d) of the California Corporations
Code. Unless otherwise restricted by statute, our articles of incorporation or
our bylaws, any director or the entire board may be removed, with or without
cause, by the holders of at least two-thirds of the shares entitled to vote at
an election of directors. Vacancies may be filled by a majority of the
directors then in office or by a sole remaining director.
Special meetings of shareholders may be called by the board of directors, the
chairman of the board, the chief executive officer and president, or by the
holders of shares entitled to cast no less than 10% of the votes at the
meeting. The notice of any special meeting must specify the general nature of
the business to be transacted and no other business may be transacted at such
meeting.
The bylaws may be amended or repealed by the affirmative vote of two-thirds
of the outstanding shares entitled to vote or by the board of directors. The
provisions described above, together with the ability of the board of directors
to issue preferred stock as described above, may deter a hostile takeover or
delay a change in control or management of Critical Path. See "Risk Factors--
Our articles of incorporation and bylaws contain provisions which could delay
or prevent a change of control."
Transactions Involving Interested Parties Under California Law
Section 1203 of the California Corporations Code requires delivery of a
report of an independent appraiser to shareholders in certain reorganizations,
tender offers and cash-for-asset sales proposed by an interested party. The
report must include an opinion as to the fairness of the consideration. An
interested party is a person who indirectly or directly controls the subject
corporation, is directly or indirectly controlled by an officer or director of
the subject corporation or is an entity in which a material financial interest
is held by any director or executive officer of the corporation.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Securities
Transfer & Trust.
70
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 38,124,532 shares of common
stock outstanding based on 35,124,532 shares outstanding at May 26, 1999. The
4,000,000 shares of common stock being sold hereby will be freely tradable,
other than by our "affiliates" as such term is defined in the Securities Act,
without restriction or registration under the Securities Act. Approximately
28.9 million shares of our common stock were issued and sold by us in private
transactions and are restricted shares. These shares are eligible for public
sale if registered under the Securities Act or sold in accordance with Rules
144 or 701 under the Securities Act.
All restricted shares are subject to lock-up agreements with the underwriters
under which the holders of the restricted shares have agreed they will not sell
any common stock owned by them without the prior written consent of the
representatives of the underwriters until September 25, 1999.
The following table indicates approximately when the shares of our common
stock that are not being sold in the offering but which will be outstanding
after the offering is completed will be eligible for sale into the public
market.
Eligibility for Resale into Public Market of Restricted Shares
<TABLE>
<CAPTION>
Time Number of Shares
---- ----------------
<S> <C>
Effective Date 0
After September 25, 1999 26,581,565
</TABLE>
The remaining shares of our common stock, including 3,227,252 shares of
common stock issued upon conversion of the Series B Preferred Stock that we
issued in January 1999, will be eligible for sale into the public market at
various times after the expiration of one-year holding periods. Most of the
restricted shares that will be available for public resale after September 25,
1999 will be subject to volume and other resale restrictions pursuant to Rule
144 because the holders are affiliates of Critical Path.
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from us by our employees, directors, officers,
consultants or advisers prior to the closing of this offering, pursuant to
written compensatory benefit plans or written contracts relating to the
compensation of such persons. In addition, the SEC has indicated that Rule 701
will apply to stock options granted by us before this offering, along with the
shares acquired upon exercise of these options. Securities issued in reliance
on Rule 701 are deemed to be restricted shares and, beginning 90 days after the
date of this prospectus, unless subject to the contractual restrictions
described above, may be sold by persons other than affiliates subject only to
the manner of sale provisions of Rule 144 and by affiliates under Rule 144
without compliance with its two-year minimum holding period requirements.
In general, under Rule 144 as currently in effect, beginning June 27, 1999, a
person deemed to be our affiliate, or a person holding restricted shares who
beneficially owns shares that were not acquired from us or our affiliate within
the previous two years, would be entitled to sell within any three-month period
a number of shares that does not exceed the greater of:
. 1% of the then outstanding shares of common stock, approximately 381,245
shares immediately after this offering, or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission.
71
<PAGE>
Sales under Rule 144 are subject to certain requirements relating to manner
of sale, notice and availability of current public information about us.
However, if a person (or persons whose shares are aggregated) is not deemed to
have been our affiliate at any time during the 90 days immediately preceding
the sale, he or she may sell his or her restricted shares under Rule 144(k)
without regard to the limitations described above if at least three years have
elapsed since the later of the date the shares were acquired from us or from
our affiliate. The foregoing is a summary of Rule 144 and is not intended to be
a complete description of it.
We intend to file a registration statement under the Securities Act covering
approximately 12,288,741 shares of common stock reserved for issuance under the
1998 Stock Plan. This registration statement is expected to be filed soon after
the date of this prospectus and will automatically become effective upon
filing. Shares registered under this registration statement will be available
for sale in the open market, unless the shares are subject to vesting
restrictions with us or the contractual restrictions described above.
We also intend to register an aggregate of 600,000 shares of common stock
reserved for issuance under our 1999 Employee Stock Purchase Plan.
72
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC, Dain Rauscher
Wessels, a division of Dain Rauscher Incorporated, and FAC/Equities, a division
of First Albany Corporation, have severally agreed with Critical Path, subject
to the terms and conditions set forth in the underwriting agreement, to
purchase from Critical Path and the selling shareholders the number of shares
of common stock set forth opposite their names below. The underwriters are
committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc...............................
Hambrecht & Quist LLC...........................................
Dain Rauscher Wessels...........................................
First Albany Corporation........................................
---------
Total......................................................... 4,000,000
=========
</TABLE>
The underwriters' representatives have advised us that the underwriters
propose to offer the shares of common stock to the public at the public
offering price set forth on the cover page of this prospectus and to certain
dealers at such price less a concession of not in excess of $ per share, of
which $ may be reallowed to other dealers. After the public offering, the
public offering price, concession, and reallowance to dealers may be reduced by
the underwriters' representatives. No such reduction shall change the amount of
proceeds to be received by us as set forth on the cover page of this
prospectus.
E*OFFERING is facilitating the distribution of shares sold in the offering
over the Internet.
The selling shareholders have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 600,000 additional shares of common stock at the same price per
share as will be paid for the 4,000,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise such option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of such additional shares that the number of shares of
common stock to be purchased by it shown in the above table represents as a
percentage of the 4,000,000 shares offered hereby. If purchased, such
additional shares will be sold by the underwriters on the same terms as those
on which the 4,000,000 shares are being sold.
Because E*TRADE Group, an affiliate of E*OFFERING, holds more than 10% of our
common stock, E*TRADE Group may be deemed to have a conflict of interest with
us. Consequently, the offering will be conducted in accordance with Conduct
Rule 2720 of the National Association of Securities Dealers, Inc., which
requires that the public offering price of any equity security be no higher
than the price recommended by a qualified independent underwriter that has
participated in the preparation of the registration statement and performed its
usual standards of due diligence with respect to the registration statement.
BancBoston Robertson Stephens Inc. has agreed to act as qualified independent
underwriter with respect to the offering, and the public offering price of the
common stock will be no higher than that recommended by BancBoston Robertson
Stephens Inc.
The underwriting agreement contains covenants of indemnity among the
underwriters, the selling shareholders and us against certain civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
underwriting agreement.
73
<PAGE>
Our directors, officers and certain of our other shareholders have each
agreed that, without the prior written consent of BancBoston Robertson Stephens
Inc. on behalf of the underwriters, until September 25, 1999, they will not,
directly or indirectly:
. Offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock (whether
such shares or any such securities are then owned by such person or are
thereafter acquired directly from us); or
. Enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock;
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to
. the sale to the underwriters of the shares of common stock under the
underwriting agreement;
. the issuance by us of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus which is described in the prospectus;
. transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares of common stock; or
. issuances of shares of common stock or options to purchase shares of
common stock pursuant to our employee benefit plans as in existence on
the date of the prospectus and consistent with past practices.
The underwriters have informed us that they do not intend to confirm sales to
any accounts over which they exercise discretionary authority.
Stabilization Disclosure
The underwriters' representatives have advised us that, pursuant to
Regulation M under the Securities Act, certain persons participating in the
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids which may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the common stock on behalf of
the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is the bid for the purchase of
the common stock on behalf of the underwriters to reduce a short position
incurred by the underwriters in connection with the offering. A "penalty bid"
is an arrangement permitting the underwriters' representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with the offering if the common stock originally sold by such
underwriter or syndicate member is purchased by the underwriters'
representatives in a syndicate covering transaction and has therefore not been
effectively placed by such underwriter or syndicate member. The underwriters'
representatives have advised us that such transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
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<PAGE>
Regulation M/Passive Market Disclosure
In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act, as amended, during the business day prior to the
pricing of the offering before the commencement of offers or sales of the
common stock. Passive market makers must comply with applicable volume and
price limitations and must be identified as such. In general, a passive market
maker must display its bid at a price not in excess of the highest independent
bid of such security; if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain
purchase limits are exceeded.
Prior Transactions
In September 1998 and January 1999, Hambrecht & Quist LLC acted as the
placement agent for a private placement of Critical Path's Series B Preferred
Stock. As compensation for its services as placement agent, Hambrecht & Quist
LLC received a cash fee of approximately $1.0 million and warrants to purchase
an aggregate of 121,654 shares of common stock at an exercise price of $4.26
per share, the same price per share paid by all investors who participated in
the private placement. Some entities affiliated with Hambrecht & Quist LLC also
invested in the private placement, purchasing an aggregate of 351,942 shares of
common stock on the same terms and conditions as the other investors in the
private placement, including price per share. In addition, certain affiliates
of E*TRADE Group invested in the private placement, purchasing an aggregate of
82,120 shares of common stock also on the same terms and conditions. Of the
foregoing securities, the NASD has deemed as underwriters' compensation 184,300
shares of common stock and a warrant to purchase an additional 51,364 shares of
common stock held by Hambrecht & Quist LLC and its affiliates, and 82,120
shares of common stock held by affiliates of E*TRADE Group.
Prior to the closing of our initial public offering, Hambrecht & Quist LLC
exercised each of the warrants described above. In addition, Hambrecht & Quist
LLC and persons associated with it entered into written agreements with
Critical Path, whereby Hambrecht & Quist LLC and these associated persons
agreed that, for a period of three years from the effective date of the
registration statement, they will not sell, transfer, assign, pledge or
hypothecate any of the shares of common stock purchased by them in the private
placement that are deemed to be underwriting compensation or any shares of
Critical Path's common stock received upon conversion of any of these shares of
common stock. Hambrecht & Quist LLC also sold back to Critical Path at $4.26
per share an aggregate of 53,293 shares held by Hambrecht & Quist LLC or its
affiliates. The $4.26 per share price was equal to the price at which the
shares were originally sold to Hambrecht & Quist LLC and its affiliates.
Prior to the closing of this offering, the affiliates of E*TRADE Group who
hold the 82,120 shares of common stock purchased on January 1999 have agreed
that for a period of one year from the effective date of this offering, they
will not sell, transfer, assign, pledge or hypothecate any of the shares of
common stock purchased by them in the private placement that are deemed to be
underwriting compensation.
In February 1999, BancBoston Robertson Stephens made a $2,000,000 loan to
David C. Hayden, our Chairman, pursuant to a promissory note bearing interest
at prime plus .25% per annum for the purchase of a personal residence. In May
1999, BancBoston Robertson Stephens Inc. made a $3,000,000 margin loan to Mr.
Hayden, pursuant to a margin loan agreement, which was secured by Mr. Hayden's
shares of our common stock.
75
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the common stock
offered hereby are being passed upon for Critical Path by Wilson Sonsini
Goodrich & Rosati, Palo Alto, California. Certain legal matters in connection
with this offering will be passed upon for the underwriters by Cooley Godward
LLP, San Francisco, California.
EXPERTS
The consolidated financial statements of Critical Path, Inc. as of December
31, 1997 and 1998 and for the period from February 19, 1997 (Inception) through
December 31, 1997 and for the year ended December 31, 1998 included in this
Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
Ernst & Young LLP, independent auditors, have audited Fabrik Communications,
Inc.'s consolidated financial statements at September 30, 1997 and 1998 and for
the years ended September 30, 1997 and 1998, as set forth in their report,
included in this prospectus and registration statement. Fabrik Communications,
Inc.'s consolidated financial statements are included in this prospectus and
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 with respect
to the common stock offered hereby. This prospectus, which constitutes a part
of the registration statement, does not contain all of the information set
forth in the registration statement or the exhibits and schedules which are
part of the registration statement. For further information with respect to
Critical Path and the common stock, reference is made to the registration
statement and the exhibits and schedules thereto. Critical Path is subject to
the information and periodic reporting requirements of the Securities Exchange
Act and, in accordance therewith, files periodic reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's public reference room in Washington, DC. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. Our SEC
filings are also available to the public from the SEC's website at
http://www.sec.gov.
76
<PAGE>
CRITICAL PATH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CRITICAL PATH, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheet................................................. F-3
Consolidated Statement of Operations....................................... F-4
Consolidated Statement of Shareholders' Equity (Deficit)................... F-5
Consolidated Statement of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements................................. F-7
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Overview................................................................... F-22
Pro Forma Condensed Consolidated Balance Sheet............................. F-23
Pro Forma Condensed Consolidated Statement of Operations................... F-24
Notes to Pro Forma Condensed Consolidated Financial Information............ F-25
FABRIK COMMUNICATIONS, INC. FINANCIAL STATEMENTS
Report of Independent Accountants.......................................... F-26
Balance Sheet.............................................................. F-27
Statement of Operations.................................................... F-28
Statement of Shareholders' Equity.......................................... F-29
Statement of Cash Flows.................................................... F-30
Notes to Financial Statements.............................................. F-31
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
of Critical Path, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Critical Path, Inc. and its subsidiary at December 31, 1997 and 1998, and the
results of their operations and their cash flows for the period from February
19, 1997 (Inception) to December 31, 1997 and the year ended December 31, 1998,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 28, 1999, except
for Note 9, which is as of March 26, 1999
F-2
<PAGE>
CRITICAL PATH, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
----------------- -----------
1997 1998 1999
------- -------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 1 $ 14,791 $ 22,506
Restricted cash............................... -- 325 325
Accounts receivable, net...................... -- 121 512
Other current assets.......................... 4 138 654
------- -------- ---------
Total current assets........................ 5 15,375 23.997
Notes receivable from officers.................. -- 500 670
Property and equipment, net..................... 501 4,687 7,794
Other assets.................................... 44 101 220
------- -------- ---------
$ 550 $ 20,663 $ 32,681
======= ======== =========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................. $ 593 $ 423 $ 2,350
Accrued expenses.............................. 34 426 259
Deferred revenue.............................. -- 500 --
Convertible promissory notes payable.......... 420 -- --
Convertible promissory notes payable--related
party........................................ 427 -- --
Capital lease obligations, current............ 55 1,502 2,537
------- -------- ---------
Total current liabilities................... 1,529 2,851 5,146
Capital lease obligations, long-term............ 42 2,454 4,095
------- -------- ---------
1,571 5,305 9,241
------- -------- ---------
Commitments (Note 6)
Shareholders' equity (deficit):
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; 38,636, 38,636
and 150,000 (unaudited) shares authorized;
2,394, 8,294 and 34,309 (unaudited) shares
issued and outstanding ...................... 2 8 34
Additional paid-in capital.................... 51 46,390 306,629
Stock subscriptions receivable................ -- -- (100,440)
Notes receivable from shareholders............ -- (1,151) (1,180)
Unearned compensation......................... -- (17,371) (151,474)
Accumulated deficit........................... (1,074) (12,535) (30,129)
------- -------- ---------
Total shareholders' equity (deficit)........ (1,021) 15,358 23,440
------- -------- ---------
$ 550 $ 20,663 $ 32,681
======= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CRITICAL PATH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Period from
February 19,
1997 Three Months
(Inception) to Year Ended Ended March 31,
December 31, December 31, -----------------
1997 1998 1998 1999
-------------- ------------ ------- --------
(unaudited)
<S> <C> <C> <C> <C>
Net revenues (1)................ $ -- $ 897 $ 70 $ 1,049
Cost of net revenues (2)........ -- (2,346) (82) (2,360)
------- -------- ------- --------
Gross profit (loss)........... -- (1,449) (12) (1,311)
------- -------- ------- --------
Operating expenses:
Research and development...... 454 2,098 273 1,379
Sales and marketing........... 244 1,687 135 1,984
General and administrative.... 358 3,814 307 1,550
Stock-based expenses.......... -- 2,400 443 11,657
------- -------- ------- --------
Total operating expenses.... 1,056 9,999 1,158 16,570
------- -------- ------- --------
Loss from operations............ (1,056) (11,448) (1,170) (17,881)
Interest and other income....... -- 375 -- 351
Interest expense (3)............ (18) (388) (150) (64)
------- -------- ------- --------
Net loss........................ $(1,074) $(11,461) $(1,320) $(17,594)
======= ======== ======= ========
Net loss per share--basic and
diluted ....................... $ (0.54) $ (2.94) $ (0.49) $ (2.51)
======= ======== ======= ========
Weighted average shares--basic
and diluted.................... 1,994 3,899 2,687 7,011
======= ======== ======= ========
Pro forma net loss per share
(unaudited):
Net loss per share -- basic
and diluted.................. $ (0.81) $ (0.68)
======== ========
Weighted average shares --
basic and diluted............ 14,194 26,018
======== ========
</TABLE>
- --------
(1) Includes $231, $0, and $106 of stock-based charges in the year ended
December 31, 1998, and the three months ended March 31, 1998 and 1999,
respectively
(2) Includes $193, $5, and $447 of stock-based charges in the year ended
December 31, 1998, and the three months ended March 31, 1998 and 1999,
respectively
(3) Includes $161, $119, and $16 of stock-based charges in the year ended
December 31, 1998 and the three months ended March 31, 1998 and 1999,
respectively
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CRITICAL PATH, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Notes Total
Stock Common Stock Additional Stock Receivable Shareholders'
--------------- -------------- Paid-in Subscriptions from Unearned Accumulated Equity
Shares Amount Shares Amount Capital Receivable Shareholders Compensation Deficit (Deficit)
------- ------ ------ ------ ---------- ------------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Inception,
February 19,
1997
Issuance of
Common Stock.... -- $-- 2,394 $ 2 $ 51 $ -- $ -- $ -- $ -- $ 53
Net loss........ -- -- -- -- -- -- -- -- (1,074) (1,074)
------- --- ------ --- -------- --------- ------- --------- -------- ---------
Balance at
December 31,
1997............ -- -- 2,394 2 51 -- -- -- (1,074) (1,021)
Issuance of
Common Stock.... -- -- 3,975 4 82 -- (85) -- -- 1
Exercise of
stock options... -- -- 1,925 2 1,104 -- (1,066) -- -- 40
Issuance of
Series A
Preferred Stock,
net............. 12,725 13 -- -- 9,111 -- -- -- -- 9,124
Issuance of
Series B
Preferred Stock,
net............. 3,637 4 -- -- 15,437 -- -- -- -- 15,441
Issuance of
warrants and
stock purchase
rights.......... -- -- -- -- 723 -- -- -- -- 723
Unearned
compensation.... -- -- -- -- 19,882 -- -- (19,882) -- --
Amortization of
unearned
compensation.... -- -- -- -- -- -- -- 2,511 -- 2,511
Net loss........ -- -- -- -- -- -- -- -- (11,461) (11,461)
------- --- ------ --- -------- --------- ------- --------- -------- ---------
Balance at
December 31,
1998............ 16,362 17 8,294 8 46,390 -- (1,151) (17,371) (12,535) 15,358
Issuance of
Common Stock
(unaudited)..... -- -- 1,091 1 2,399 -- -- -- -- 2,400
Exercise of
stock options
(unaudited)..... -- -- 565 -- 164 -- (29) -- -- 135
Issuance of
Preferred Stock,
net
(unaudited)..... 3,550 3 -- -- 12,493 -- -- -- -- 12,496
Conversion of
preferred to
common stock
(unaudited)..... (19,912) (20) 19,912 20 -- -- -- -- -- --
Unearned
compensation
(unaudited)..... -- -- -- -- 146,207 -- -- (146,207) -- --
Amortization of
unearned
compensation
(unaudited)..... -- -- -- -- -- -- -- 12,104 -- 12,104
Issuance of
common stock in
initial public
offering, net
(unaudited)..... -- -- 4,500 5 99,203 -- -- -- -- 99,208
Stock
subscriptions
receivable
(unaudited)..... -- -- -- -- (100,440) -- -- -- (100,440)
Purchase of
treasury stock
(unaudited)..... -- -- (53) -- (227) -- -- -- (227)
Net loss
(unaudited)..... -- -- -- -- -- -- -- (17,594) (17,594)
------- --- ------ --- -------- --------- ------- --------- -------- ---------
Balance at March
31, 1999
(unaudited)..... -- $-- 34,309 $34 $306,629 $(100,440) $(1,180) $(151,474) $(30,129) $ 23,440
======= === ====== === ======== ========= ======= ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CRITICAL PATH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from
February 19,
1997 Three Months
(Inception) to Year Ended Ended March 31,
December 31, December 31, -----------------
1997 1998 1998 1999
-------------- ------------ ------- --------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss...................... $(1,074) $(11,461) $(1,320) $(17,594)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Provision for doubtful
accounts................... -- 50 -- 24
Depreciation and
amortization............... 26 1,019 41 626
Common stock issued for
services................... 3 -- -- --
Amortization of warrants and
stock purchase rights...... -- 473 201 106
Amortization of unearned
compensation............... -- 2,511 366 12,104
Changes in assets and
liabilities:
Accounts receivable....... -- (171) (47) (415)
Other assets.............. (48) (86) 2 (741)
Accounts payable.......... 593 (170) (2) 1,927
Accrued expenses.......... 34 392 3 (167)
Deferred revenue.......... -- 500 -- (500)
------- -------- ------- --------
Net cash used in
operating activities... (466) (6,943) (756) (4,630)
------- -------- ------- --------
Cash flows from investing
activities:
Notes receivable from
officers..................... -- (500) -- (170)
Property and equipment
purchases.................... (409) (491) (189) (659)
Restricted cash............... -- (325) -- --
------- -------- ------- --------
Net cash used in
investing activities... (409) (1,316) (189) (829)
------- -------- ------- --------
Cash flows from financing
activities:
Proceeds from issuance of
Preferred Stock, net......... -- 23,445 500 12,496
Proceeds from equipment lease
line......................... -- 198 -- --
Proceeds from issuance of
Common Stock................. 50 41 -- 1,303
Proceeds from convertible
promissory notes payable..... 847 500 500 --
Repayment of convertible
promissory notes payable..... -- (227) -- --
Principal payments on lease
obligations.................. (21) (908) (20) (398)
Purchase of treasury stock.... (227)
------- -------- ------- --------
Net cash provided by
financing activities... 876 23,049 980 13,174
------- -------- ------- --------
Net increase in cash and cash
equivalents.................... 1 14,790 35 7,715
Cash and cash equivalents at
beginning of period............ -- 1 1 14,791
------- -------- ------- --------
Cash and cash equivalents at end
of period...................... $ 1 $ 14,791 $ 36 $22,506
======= ======== ======= ========
Supplemental cash flow
disclosure:
Cash paid for interest........ $ 1 $ 244 $ 31 $ 48
Non-cash investing and financing
activities
Property and equipment
leases....................... $ 118 $ 4,714 $ 20 $ 3,074
Common Stock issued for notes
receivable................... $ -- $ 1,151 $ 85 $ 29
Conversion of notes payable
into Preferred Stock......... $ -- $ 1,120 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Critical Path, Inc. (the "Company") was incorporated in California on
February 19, 1997 to deliver advanced email hosting services.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Basis of presentation
The financial statements include the accounts of the Company and its wholly
owned subsidiary. All significant intercompany balances and transactions have
been eliminated in consolidation.
Cash equivalents and restricted cash
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. Cash equivalents consist
primarily of deposits in money market funds. Restricted cash comprises amounts
held on deposit which is required as collateral for Company provided credit
cards.
Concentration of credit risk
Financial instruments that potentially subject the Company to a concentration
of credit risk consist of cash and cash equivalents, restricted cash and
accounts receivable. Cash and cash equivalents and restricted cash are
deposited with financial institutions that management believes are
creditworthy. The Company's accounts receivable are derived from transactions
with companies throughout the United States. The Company maintains an allowance
for doubtful accounts receivable based upon the expected collectibility of
accounts receivable.
During the year ended December 31, 1998, approximately 62% and 30% of
revenues before charges related to amortization of the fair value of warrants
issued to customers were derived from the delivery of email services to two
customers. During the three months ended March 31, 1999, these two customers
accounted for approximately 48% (unaudited) and 32% (unaudited) of revenues
before charges related to amortization of warrants.
Fair value of financial instruments
The Company's financial instruments, including cash and cash equivalents,
restricted cash, accounts receivable, accounts payable and capital lease
obligations, are carried at cost, which approximates fair value due to the
short maturity of these instruments.
F-7
<PAGE>
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and equipment
Property and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line method over the shorter of the estimated
useful lives of the assets, generally three to five years, or the lease term,
if applicable. The Company periodically assesses the recoverability of the
carrying amount of property and equipment and provides for any possible
impairment loss based upon the difference between the carrying amount and the
fair value of such assets. Since February 19, 1997 (Inception) through December
31, 1998, no impairment losses have been identified.
Revenue recognition
The Company derives revenue through the sale of email hosting services.
Payments for such services are based either on contractual rates per active
mailbox per month, non-refundable fixed payments or as a percentage of customer
generated email advertising revenues. Revenues from contracts specifying a
contractual rate per active mailbox per month are recognized monthly for each
active mailbox covered by the respective contract. Revenues from contracts that
provide non-refundable fixed payments are not dependent upon the active number
of mailboxes and are therefore recognized ratably over the contract term.
Revenues based upon a percentage of customer generated email advertising
revenues are recognized when such revenues are earned and reported by the
customer. Amounts billed or received in advance of service delivery are
recorded as deferred revenue.
In connection with certain customer contracts, the Company granted warrants
or options to purchase Series B Convertible Preferred Stock to such customers.
The fair value of such warrants or options, determined using the Black-Scholes
option pricing model, is being recognized ratably as a sales discount over the
terms of the respective agreements. See Note 7--Shareholders' Equity.
Research and development
Research and development costs include expenses incurred by the Company to
develop and enhance its email service offerings and to develop new electronic
messaging services. Research and development costs are expensed as incurred.
Advertising expense
Advertising costs are expensed as incurred and totaled $0 and $135,000 during
the period from February 19, 1997 (Inception) through December 31, 1997 and the
year ended December 31, 1998, respectively.
Advertising costs totaled $0 (unaudited) and $18,000 (excluding $7.9 million
of stock-based charges, unaudited) for the three months ended March 31, 1998
and 1999, respectively.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for
F-8
<PAGE>
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Issued to Employees" and complies with the disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." Under APB No. 25, compensation expense is based on
the difference, if any, on the date of the grant, between the fair value of the
Company's stock and the exercise price of the option. The Company accounts for
equity instruments issued to nonemployees in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force ("EITF") 96-18.
Income taxes
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax assets and liabilities for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax assets and liabilities are
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
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 comprise restricted Common Stock and
incremental common and preferred shares issuable upon the exercise of stock
options and warrants and upon conversion of Series A and Series B Convertible
Preferred Stock. At December 31, 1998 and March 31, 1999, 28,607,997 and
16,024,637 (unaudited) potential common shares respectively, are excluded from
the determination of diluted net loss per share as the effect of such shares on
a weighted average basis is anti-dilutive.
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended December 31, 1998 and the
three months ended March 31, 1999 is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Series A and Series B Convertible Preferred Stock
into shares of the Company's Common Stock as if such conversion occurred at the
beginning of the period, or at date of original issuance, if later. The
resulting pro forma adjustment includes an increase in the weighted average
shares used to compute basic and diluted net loss per share of approximately
10,295,000 shares for the year ended December 31, 1998 and 19,007,000 shares
for the three months ended March 31, 1999. The pro forma effects of these
transactions are unaudited and have been reflected in the accompanying pro
forma consolidated statement of operations.
F-9
<PAGE>
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income other
than its net loss.
Segment information
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. In accordance with the provisions of SFAS No. 131, the
Company has determined that it does not have separately reportable operating
segments.
Interim Financial Information (Unaudited)
The accompanying interim consolidated financial statements as of March 31,
1999 and for the three months ended March 31, 1998 and 1999 are unaudited. The
unaudited interim financial statements have been prepared on the same basis as
the annual financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the results of the Company's operations and its cash flows for
the three months ended March 31, 1998 and 1999. The financial data and other
information disclosed in these notes to consolidated financial statements
related to these periods are unaudited. The results for the three months ended
March 31, 1999, are not necessarily indicative of the results to be expected
for the year ending December 31, 1999.
Reclassifications
In the quarter ended March 31, 1999, the Company elected to disclose stock-
based expenses as a separate component of Operating Expenses. Accordingly, for
the year ended December 31, 1998, approximately $148,000, $582,000, and
$1,670,000 have been reclassified from Research and Development, Sales and
Marketing, and General and Administrative expenses, respectively, to Stock-
based expenses.
Recent accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The Company does not expect
that the adoption of SOP No. 98-1 will have a material impact on its
consolidated financial statements.
F-10
<PAGE>
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Company is required to adopt SFAS 133
in fiscal 2000. SFAS 133 established methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. To date, the Company has not entered into any
derivative financial instruments or hedging activities.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
December 31,
------------- March 31,
1997 1998 1999
---- ------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Accounts receivable, net:
Accounts receivable........................... $ -- $ 171 $ 586
Less: Allowance for doubtful accounts....... -- (50) (74)
---- ------- -------
$ -- $ 121 $ 512
==== ======= =======
Property and equipment, net:
Computer equipment and software............... $440 $ 5,247 $ 8,826
Furniture and fixtures........................ 34 74 115
Leasehold improvements........................ 53 411 524
---- ------- -------
527 5,732 9,465
Less: Accumulated depreciation and
amortization............................... (26) (1,045) (1,671)
---- ------- -------
$501 $ 4,687 $ 7,794
==== ======= =======
</TABLE>
Property and equipment includes $118,000, $4,832,000 and $7,906,000
(unaudited) of assets under capital leases at December 31, 1997, 1998 and for
the three months ended March 31, 1999, respectively. Accumulated depreciation
of assets under capital leases totaled $3,000, $765,000 and $1,399,000
(unaudited) at December 31, 1997, 1998 and for the three months ended March 31,
1999, respectively.
<TABLE>
<CAPTION>
December 31,
------------- March 31,
1997 1998 1999
------ ------ -----------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Accrued liabilities:
Compensation related............................. $ 18 $ 89 $193
Other............................................ 16 337 66
----- ------ ----
$ 34 $ 426 $259
===== ====== ====
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
Notes receivables from shareholders
At December 31, 1998, the Company had notes receivable from shareholders and
officers of the Company related to purchases of Common Stock in the amount of
$85,000 and $1,066,000 which accrue interest at 5.69% and 4.51% per annum,
respectively. The notes are full recourse and secured
F-11
<PAGE>
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
by Common Stock. The notes are due and payable in February 2003 or, for the
$1,066,000 note, 90 days following termination of the officer.
At December 31, 1998, the Company held a note receivable from an officer
totaling $500,000. The note accrues interest at the rate of 4.51% per annum, is
secured by all shares of the Company's Common Stock held by this individual,
and is due and payable in November 2003 or 30 days following termination.
During the three months ending March 31, 1999, the Company received additional
notes from officers totaling $170,000 (unaudited). These additional notes
accrue interest at the rate of 4.64% per annum, are secured by all shares of
the Company's Common Stock held by the officers and are due and payable in
March 2004 or 30 days following termination.
Revenues
In April 1998, the Company entered into an email services agreement with a
significant customer, who is also a holder of the Company's Series B Preferred
Stock. Net revenues from this shareholder approximated $605,000 and $552,000
for the year ended December 31, 1998 and the three months ended March 31, 1999,
respectively.
NOTE 4--INCOME TAXES:
No provision for income taxes was recorded due to the net losses for the
periods from February 19, 1997 (Inception) to December 31, 1998.
At December 31, 1998, and March 31, 1999, the Company had deferred tax assets
of approximately $4,001,000, and 5,821,000 (unaudited), respectively.
Management believes that, based on a number of factors, it is more likely than
not that the deferred tax assets will not be realized, such that a full
valuation allowance has been recorded. Deferred tax assets relate primarily to
net operating loss carryforwards.
At December 31, 1998, the Company had approximately $8,803,000 of federal and
state net operating loss carryforwards available to offset future taxable
income. At March 31, 1999 the Company had approximately $14 million (unaudited)
of federal and state net operating loss carryforwards available to offset
future taxable income. Federal and state net operating loss carryforwards
expire in varying amounts beginning in 2012 and 2005, respectively. Under the
Tax Reform Act of 1986, the amounts of and benefits from net operating loss
carryforwards may be impaired or limited in certain circumstances. Events which
cause limitations in the amount of net operating losses that the Company may
utilize in any one year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three year period.
NOTE 5--BORROWINGS:
Line of credit
At December 31, 1998, and March 31, 1999 (unaudited), the Company maintained
a revolving line of credit with a bank that provides for borrowings of up to
$1,000,000. The line of credit expires
F-12
<PAGE>
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in November 1999 and accrues interest on outstanding borrowings at a rate equal
to the bank's prime rate plus 2.0% (9.75% at December 31, 1998). The line of
credit requires the Company to meet certain financial tests and to comply with
certain other covenants. Borrowings are secured by substantially all of the
assets of the Company. At December 31, 1998, and March 31, 1999 (unaudited),
there were no borrowings outstanding and the Company was in compliance with all
restrictive covenants.
Convertible promissory notes
At December 31, 1997, the Company had obligations totaling $420,000 under 7%
convertible promissory notes payable to individual investors. In April 1998,
the principal amount of the notes was converted into 582,040 shares of Series A
Convertible Preferred Stock at $0.72 per share.
In January and February 1998, the Company issued an additional $430,000 of 7%
convertible promissory notes to individual investors. In April 1998, the
principal amount of the notes was converted into 595,897 shares of Series A
Convertible Preferred Stock at $0.72 per share.
Convertible promissory notes--related parties
At December 31, 1997, the Company had obligations totaling $427,000 under 7%-
10% convertible promissory notes payable to the Company's founder and an
individual associated with the founder. In April 1998, $200,000 of the
principal amount of the notes was converted into 277,162 shares of Series A
Convertible Preferred Stock at $0.72 per share and the remaining balance of
$227,000 was repaid in cash.
In January and February 1998, the Company issued an additional $70,000 of 7%
convertible promissory notes to a member of the Board of Directors and an
individual associated with the Company's founder. In April 1998, the principal
amount of the notes was converted into 97,006 shares of Series A Convertible
Preferred Stock at $0.72 per share.
NOTE 6--COMMITMENTS:
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through 2002. Rent expense for
the period from February 19, 1997 (inception) to December 31, 1997 and the year
ended December 31, 1998, and the three months ended March 31, 1998 and 1999,
totaled $33,000, $220,000, $22,000 (unaudited), and $84,000 (unaudited),
respectively.
F-13
<PAGE>
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under noncancelable operating and capital
leases, including operating lease commitments entered into subsequent to
December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
Year Ending December 31, ------- ---------
(in thousands)
<S> <C> <C>
1999..................................................... $ 1,792 $358
2000..................................................... 1,779 222
2001..................................................... 979 213
2002..................................................... 3 103
------- ----
Total minimum lease payments............................. 4,553 $896
====
Less: Amount representing interest....................... (453)
Unamortized discount................................... (144)
-------
Present value of capital lease obligations............... 3,956
Less: Current portion.................................... (1,502)
-------
Long-term portion of capital lease obligations........... $ 2,454
=======
</TABLE>
Equipment lease lines
In April 1998, the Company entered into a financing agreement that provides
for the acquisition of equipment up to $1,000,000. Amounts available under this
agreement are limited to specific acquisitions through March 2001 and are
collateralized by the related equipment. Such amounts are payable over a three-
year period in monthly installments of principal and interest, with interest
accruing at a rate of 6.3% per annum.
In April 1998, the Company entered into another financing agreement which
provides for the acquisition of equipment up to $2,000,000. Amounts available
under this agreement are limited to specific acquisitions between May 1, 1998
and April 30, 1999. Such amounts are payable over a three-year period in
monthly installments of principal and interest, with interest accruing at the
rate of 7.0% per annum. As part of this agreement, the Company issued warrants
to purchase 97,006 shares of Series A Preferred Stock at a purchase price of
$0.72 per share. The Company estimated the fair value of these warrants at date
of issuance was approximately $53,000 which is being amortized as interest
expense over the term of the lease obligation.
In May 1998, the Company entered into a financing agreement which provides
for the acquisition of equipment up to $3,500,000 and software and tenant
improvements up to $1,500,000. Amounts available under this agreement are
limited to specific acquisitions between March 1, 1998 and May 1, 1999. Such
amounts are payable over a three-year period in monthly installments of
principal and interest, with interest accruing at the rate of 7.0% per annum.
As part of this agreement, the Company issued warrants to purchase 242,516
shares of Series A Preferred Stock at a purchase price of $0.72 per share. The
Company estimated the fair value associated with these warrants at date of
issuance was approximately $133,000 which is being amortized as interest
expense over the term of the lease obligation.
Email service commitments
Net revenues are derived from contractual relationships which typically have
one to two year terms. Certain agreements require minimum performance standards
regarding the availability and
F-14
<PAGE>
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
response time of email services. If these standards are not met, such contracts
are subject to termination and the Company could be subject to monetary
penalties.
NOTE 7--SHAREHOLDERS' EQUITY:
As of December 31, 1998, the Company's Articles of Incorporation authorized
the Company to issue 38,636,363 shares of Common Stock at $0.001 par value, and
13,288,519 and 10,000,000 shares of Series A and Series B Convertible Preferred
Stock ("Preferred Stock"), respectively, at $0.001 par value.
Preferred Stock
On April 1, 1998, the Company completed its Series A Convertible Preferred
Stock ("Series A") financing through the issuance of 12,707,851 shares at a
price per share of $0.72 for net cash proceeds of $7,991,000, and the
conversion of convertible promissory notes payable totaling $1,120,000. The
Company issued an additional 18,013 shares of Series A Preferred Stock to the
convertible promissory note holders upon the exercise of their warrants for
proceeds of $13,000.
In September 1998, the Company issued 3,636,739 shares of its Series B
Convertible Preferred Stock ("Series B") at $4.26 per share for net proceeds of
approximately $15,441,000.
The holders of Preferred Stock have various rights and preferences as
follows:
Voting
Each share of Preferred Stock has voting rights equal to an equivalent number
of shares of Common Stock into which it is convertible and votes together as
one class with Common Stock.
As long as at least 2,954,545 shares of Preferred Stock remain outstanding,
the Company must obtain approval from a majority of the holders of Preferred
Stock to declare or pay any dividend on Common Stock; redeem, purchase or
otherwise acquire any Common Stock other than shares subject to right of
repurchase by the Company; cause the acquisition, reorganization, merger or
consolidation of the Company that results in a transfer of 50% or more of the
voting control of the Company; authorize or issue another equity security
having a preference over, or being on parity with, the Series A and Series B;
or increase the number of directors of the Company.
As long as at least 681,818 shares of Preferred Stock remain outstanding, the
Company must obtain approval from a majority of the holders of Preferred Stock
to alter the Articles of Incorporation as it relates to the Preferred Stock or
change the authorized number of shares of Preferred Stock.
Dividends
Holders of Series A and Series B are entitled to receive noncumulative
dividends at the per annum rate of $0.0577 and $0.34 per share, respectively,
when and if declared by the Board of Directors. The holders of Preferred Stock
will also be entitled to participate in dividends on Common Stock, when and if
declared by the Board of Directors, based on the number of shares of Common
Stock held on an as-if converted basis. No dividends on Preferred Stock or
Common Stock have been declared by the Board of Directors.
F-15
<PAGE>
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners
of the Company's Common Stock and Preferred Stock own less than 51% of the
resulting voting power of the surviving entity, the holders of Series A and
Series B are entitled to receive an amount of $0.72 and $4.26 per share,
respectively, plus any declared but unpaid dividends prior to and in preference
to any distribution to the holders of Common Stock. The remaining assets, if
any, shall be distributed ratably among the holders of Common Stock. Should the
Company's legally available assets be insufficient to satisfy the liquidation
preferences, the funds will be distributed ratably among the holders of
Preferred Stock.
Conversion
Each share of Preferred Stock is convertible, at the option of the holder,
according to a conversion ratio, subject to adjustment for dilution. Each share
of Preferred Stock automatically converts into the number of shares of Common
Stock into which such shares are convertible at the then effective conversion
ratio upon: (1) the closing of a public offering of Common Stock at a per share
price of at least $15.50 per share with gross proceeds of at least $30,000,000,
or (2) the consent of the holders of the majority of Convertible Preferred
Stock. The initial conversion ratio of Preferred Stock for Common Stock is 1 to
1.
Warrants and Stock Purchase Rights
In May 1998, the Company issued a right to purchase 454,544 shares of Common
Stock or Preferred Stock in a subsequent financing to a customer as part of an
email services agreement. Under the agreement, the price shall be 80% of the
price at which the stock is sold in the subsequent financing for the initial
227,272 shares and 100% of such price for the remaining 227,272 shares. In
September 1998, the Company completed its initial Series B financing at a per
share price of $4.26. The Company has estimated the fair value of the purchase
right to be $194,000, which will be recognized as a sales discount over the
term of the services agreement. Approximately $136,000 was recognized in 1998.
No warrants were exercised as of December 31, 1998.
In May 1998, the Company issued to a different customer, a warrant to
purchase up to $250,000 of Preferred Stock in the Company's next financing
round. The warrant is exercisable until December 31, 2001 and the exercise
price per share will equal the price per share at which the Preferred Stock is
sold by the Company. In September 1998, the warrants were exercised in
connection with the Series B financing at a per share price of $4.26. The
Company has estimated the fair value of the warrants approximated $143,000,
which will be recognized as a sales discount over the term of the services
agreement. Approximately $95,000 was recognized in 1998.
In connection with various financing agreements described in Note 6, the
Company issued warrants to purchase 339,522 share of Series A at $0.72 per
share. The warrants are exercisable for seven years from May 1, 1998, or five
years from the effective date of the Company's initial public offering,
whichever is shorter. As of December 31, 1998, no warrants were exercised.
In connection with the issuance of certain convertible promissory notes
described in Note 5, the Company issued warrants to purchase 113,636 shares of
Common Stock at $0.02 per share and
F-16
<PAGE>
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
241,123 shares of Series A at $0.72 per share. These warrants are exercisable
for one and three years, respectively. The warrants to purchase Common Stock
were exercised in September 1998. At December 31, 1998, warrants to purchase
18,013 shares of Series A had been exercised. The Company estimated the fair
value of the warrants issued at approximately $119,000 which is being amortized
as interest expense.
In connection with the initial Series B financing, the Company issued
warrants to purchase 70,290 shares of Series B at $4.26 per share to the
placement agent. As of December 31, 1998, no warrants were exercised.
Common Stock purchase agreements
In February 1998, the Company entered into stock purchase agreements with
three founders and sold 3,863,635 shares of the Company's Common Stock at $0.02
per share. Under the terms of the stock purchase agreements, the Company has
the right to purchase the shares of Common Stock at the original issue price in
the event any one of the founders ceases to be an employee of the Company. The
repurchase rights lapse 25% on the first anniversary of the vesting start date
and ratably each month thereafter for 36 months. In the event of a change in
control of the Company or the closing date of an Initial Public Offering, as
defined, repurchase rights with respect to 50% of the then unvested shares of
Common Stock will lapse. At December 31, 1998, 2,130,680 of these shares of
Common Stock were subject to repurchase rights. In connection with the issuance
of these shares, the Company recorded unearned compensation of $1,306,000 which
is being recognized over the periods in which the Company's repurchase rights
lapse.
In October 1998, an officer exercised stock options to purchase 1,274,687
shares of the Company's Common Stock at a price of $0.84 per share. Under the
terms of the option, the Company has the right to purchase the unvested shares
of Common Stock at the original issue price in the event the officer ceases to
be an employee of the Company. The repurchase rights lapse ratably each month
for 48 months. At December 31, 1998, 1,221,575 of these shares of Common Stock
were subject to repurchase rights. In connection with the option grant
preceding this transaction, the Company recognized unearned compensation
totaling $3.8 million which is included in the aggregate unearned compensation
charges disclosed in Notes 8 and 9 to these consolidated financial statements.
NOTE 8--STOCK OPTIONS:
In January 1998, the Company's Board of Directors adopted the 1998 Stock
Option Plan. The Plan provides for the granting of up to 12,288,741 stock
options to employees and consultants of the Company. Options granted under the
Plan may be either incentive stock options ("ISO") or nonqualified stock
options ("NSO"). ISOs may be granted only to Company employees (including
officers and directors who are also employees). NSOs may be granted to Company
employees and consultants.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO may not be less than 100% of the estimated fair
value of the shares on the date of grant, and (ii) the exercise price of an ISO
granted to
F-17
<PAGE>
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
a 10% shareholder may not be less than 110% of the estimated fair value of the
shares on the date of grant. Options generally vest 25% per year and are
exercisable for a maximum period of ten years from the date of grant.
The following table summarizes activity under the Plan for the year ended
December 31, 1998 and the three months ended March 31, 1999:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, 1998 March 31, 1999
---------------------------- ------------------
(unaudited)
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------------- ----------------------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning
of period................ -- -- 7,752,556 $0.86
Granted................... 10,595,453 $0.74 2,649,012 10.57
Exercised................. (1,924,723) 0.58 (565,334) 0.27
Canceled.................. (918,174) 0.16 (107,951) 1.78
---------------- ---------
Outstanding at end of
period................... 7,752,556 0.86 9,728,283 3.50
================ =========
Options exercisable at
period end............... 939,522 0.02 1,797,462 0.44
================ =========
Weighted average minimum
value of options
granted during period.... 1.56 9.05
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Exercisable
Options Outstanding at December 31, 1998 at December 31, 1998
-------------------------------------------- --------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Shares Contractual Exercise Shares Exercise
Range of Exercise Price Outstanding Life Price Exercisable Price
----------------------- -------------- --------------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.02-
$0.55 2,850,201 9.2 years $ 0.08 939,522 $0.02
$0.84-
$2.20 4,902,355 9.8 years 1.30 -- --
-------------- ---------
7,752,556 9.5 years 0.89 939,522 0.02
============== =========
The following table summarizes information about stock options outstanding at
March 31, 1999 (unaudited):
<CAPTION>
Options Exercisable
Options Outstanding at March 31, 1999 at March 31, 1999
-------------------------------------------- --------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Numberof Average
Shares Contractual Exercise Shares Exercise
Range of Exercise Price Outstanding Life Price Exercisable Price
----------------------- -------------- --------------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.02-
$0.55 2,328,615 8.8 years $0.07 881,875 $0.02
$0.84-
$2.20 4,793,834 8.8 years 1.26 910,474 0.84
$3.38-
$7.13 1,731,136 9.8 years 3.95 5,113 3.39
$24.00 874,698 10.0 years 24.00 -- --
-------------- ---------
9,728,283 9.1 years 3.50 1,797,462 0.44
============== =========
</TABLE>
F-18
<PAGE>
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value disclosures
The Company calculated the minimum value of each options grant on the date of
grants using the Black-Scholes option pricing model as prescribed by SFAS No.
123 using the following assumptions:
<TABLE>
<CAPTION>
Three
Months
Ended March
Year Ended December 31, 31,
------------------------- -------------
1997 1998 1998 1999
----------- ----------- ----- -----
(unaudited)
<S> <C> <C> <C> <C>
Risk-free interest rates......... 6.0% 5.9% 5.5% 4.7%
Expected lives (in years)........ 4.0 4.0 4.0 4.0
Dividend yield................... 0.0% 0.0% 0.0% 0.0%
Expected volatility.............. 0.0% 0.0% 0.0% 0.0%
</TABLE>
The compensation cost associated with the Company's stock-based compensation
plans, determined using the minimum value method prescribed by SFAS No. 123,
did not result in a material difference from the reported net loss for the year
ended December 31, 1998, and the three months ended March 31, 1999 (unaudited).
Unearned stock-based compensation
In connection with certain stock option grants and common stock issuances
during the year ended December 31, 1998, and the three months ended March 31,
1999, the Company recognized unearned compensation totaling $19,882,000 and
$18,108,000, respectively, which is being amortized over the vesting periods of
the related options. Amortization expense recognized during the year ended
December 31, 1998 and the three months ended March 31, 1999, totaled
approximately $2,511,000, and $3,660,000 (unaudited), respectively.
NOTE 9--SUBSEQUENT EVENTS:
Reverse Stock Split
On March 1, 1999, the Company's Board of Directors approved a 1:2.2 reverse
stock split of the Company's outstanding shares which became effective on March
19, 1999. All share and per share information included in these consolidated
financial statements have been retroactively adjusted to reflect this reverse
stock split.
Series B Convertible Preferred Stock Financing
In January 1999, the Company completed the second round of the Series B
financing through the issuance of 2,772,708 shares at $4.26 per share for gross
proceeds of approximately $11,817,000. In connection with this financing, the
Company issued warrants to purchase 51,364 shares of Series B at $4.26 per
share to the placement agent.
Exercise of Stock Purchase Rights
In January 1999, a customer exercised stock purchase rights granted in May
1998 to purchase 454,544 shares of Series B for cash proceeds of approximately
$1,744,000.
F-19
<PAGE>
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employee Stock Purchase Plan
In January 1999, the Board of Directors adopted the 1999 Employee Stock
Purchase Plan (the "Purchase Plan") effective on the date of the Offering. The
Purchase Plan reserves 600,000 shares for issuance thereunder. Employees
generally will be eligible to participate in the Purchase Plan if they are
customarily employed by the Company for more than 20 hours per week and more
than five months in a calendar year and are not 5% or greater shareholders.
Under the Purchase Plan, eligible employees may select a rate of payroll
deduction up to 15% of their compensation subject to certain maximum purchase
limitations. The Purchase Plan will be implemented in a series of overlapping
twenty-four month offering periods and beginning on the effective date of the
Offering and subsequent offering periods will begin on the first trading day on
or after May 1 and November 1 of each year. Purchases will occur on each April
30 and October 31 (the "purchase dates") during each participation period.
Under the Purchase Plan, eligible employees will be granted an option to
purchase shares of Common Stock at a purchase price equal to 85% of the fair
market value per share of Common Stock on either the start date of the offering
period or the date on which the option is exercised, whichever is less. If the
fair market value of the Common Stock on any purchase date (other than the
final purchase date) is lower than the fair market value on the start date of
that offering period, then all participants in that offering period will be
automatically withdrawn from such offering period and re-enrolled in the
offering period immediately following.
Stock Option Grants
In January and March 1999, the Company granted incentive stock options to
employees to purchase 1,789,110 shares of Common Stock at exercise prices
ranging between $3.39 and $7.13 per share. In connection with such option
grants, the Company recognized unearned compensation totaling $18,108,000 which
is being amortized over the four year vesting period of the related options.
Sale of Common Stock
In January 1999, the Company sold 1,090,909 shares of Common Stock at a price
of $2.20 per share to a customer that also agreed to provide marketing related
services. In connection with the transactions, the Company recognized a charge
totaling $2,247,000 that will be attributed to sales and marketing expense over
the one year term of the agreement.
Common Stock Warrant Issued for Services
In January 1999, the Company entered into an agreement with ICQ, Inc., 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 Series B, issuable upon
attainment of each of five
F-20
<PAGE>
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
The shares underlying the first milestone were immediately vested on the
effective date of the agreement. The shares underlying the remaining milestones
vest on the dates that ICQ completes registration of the specified number of
sub-branded ICQ mailboxes applicable to each milestone. 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, which is being amortized to advertising
expense using the straight-line method over four years. 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. In the event such remeasurement results in increases or decreases
from the initial fair value, which could be substantial, such 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.
Revaluation of Common Stock Warrant Issued for Services (unaudited)
At March 31, 1999, none of the registration milestones specified within the
ICQ warrant agreement had been achieved. Therefore, the shares underlying the
second through fifth milestones of the ICQ warrant were remeasured using the
closing price for 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. This revised fair value will be amortized ratably over
four years, resulting in a quarterly amortization charge to advertising expense
in the amount of $7.9 million beginning in the first quarter of 1999. As noted,
this charge is subject to substantial increase or decrease in future quarters
based upon future changes in the trading price of our common stock.
Initial Public Offering (unaudited)
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 $115.5 million.
Repurchase of Preferred Stock (unaudited)
Prior to the closing of the Company's initial public offering, the Series B
placement agent sold back to the Company at $4.26 per share an aggregate of
53,293 shares held by the placement agent or its affiliates.
F-21
<PAGE>
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Asset Acquisition (unaudited)
On May 26, 1999, we acquired substantially all the operating assets of the
Connect Service business of Fabrik Communications. 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 acquisition date.
The total purchase price of $20.1 million consisted of $12.0 million cash and
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.
F-22
<PAGE>
CRITICAL PATH, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Overview
Effective May 26, 1999, the Company acquired substantially all of the
operating assets of the Connect Service business of FABRIK Communications,
Inc., which provides users of local area network e-mail systems a universal
bridge to e-mail users outside their network, including those on the Internet
and all other wide area network e-mail services. 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 acquisition date.
The fair value of intangible assets was determined based upon a preliminary
valuation using a combination of methods, including a risk-adjusted income
approach for the acquired customer list and replacement cost approach for the
value of the assembled workforce.
The total purchase price of approximately $20.1 million consisted of $12.0
million cash and 109,091 shares of the Company's Common Stock with an estimated
fair value of approximately $8.0 million and other acquisition related expenses
of approximately $100,000, consisting primarily of payments for legal and other
professional fees. 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.
The unaudited pro forma condensed consolidated balance sheet gives effect to
this acquisition as if it had occurred on March 31, 1999, by consolidating the
balance sheet of FABRIK Communications, Inc. with the balance sheet of Critical
Path, Inc. at March 31, 1999.
The unaudited pro forma condensed consolidated statement of operations gives
effect to this acquisition as if it had occurred on January 1, 1998, by
consolidating the results of operations of FABRIK Communications, Inc. for the
year ended September 30, 1998 and the three months ended December 31, 1998,
with the results of operations of Critical Path, Inc. for the year ended
December 31, 1998 and the three months ended March 31, 1999.
The unaudited pro forma condensed consolidated statement of operations is not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the periods
presented and should not be construed as being representative of future
operating results.
The historical financial statements of the Company and FABRIK Communications,
Inc. are included elsewhere in this Prospectus and the unaudited proforma
condensed consolidated financial information presented herein should be read in
conjunction with those financial statements and related notes.
F-23
<PAGE>
CRITICAL PATH, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, 1999
----------------------------------------------------
Critical
Path Fabrik
Historical Historical Adjustments Pro Forma
---------- ---------- ------------------ ---------
<S> <C> <C> <C> <C> <C>
Current assets: (a) (b)
Cash and cash
equivalents.......... $ 22,506 $ 3,060 $ (3,060) $(12,100) $ 10,406
Restricted cash....... 325 -- -- -- 325
Accounts receivable,
net.................. 512 1,426 (1,426) -- 512
Other current assets.. 654 126 (126) -- 654
--------- -------- -------- -------- ---------
Total current
assets............. 23,997 4,612 (4,612) (12,100) 11,897
Notes receivable from
officers............... 670 -- -- -- 670
Property and equipment,
net.................... 7,794 1,421 (921) -- 8,294
Intangible assets....... -- -- -- 19,600 19,600
Other assets............ 220 -- -- -- 220
--------- -------- -------- -------- ---------
$ 32,681 $ 6,033 $ (5,533) $ 7,500 $ 40,681
========= ======== ======== ======== =========
LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED
STOCK AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable...... $ 2,350 $ 459 $ (459) $ -- $ 2,350
Accrued expenses...... 259 566 (566) -- 259
Capital lease
obligations,
current.............. 2,537 868 (868) -- 2,537
--------- -------- -------- -------- ---------
Total current
liabilities........ 5,146 1,893 (1,893) -- 5,146
Capital lease obliga-
tions, long term....... 4,095 1,097 (1,097) -- 4,095
--------- -------- -------- -------- ---------
9,241 2,990 (2,990) -- 9,241
--------- -------- -------- -------- ---------
Redeemable Convertible
Preferred Stock........ -- 16,991 (16,991) -- --
--------- -------- -------- -------- ---------
Shareholders' equity
(deficit):
Common Stock.......... 34 6 (6) -- 34
Additional paid-in
capital.............. 306,629 231 (231) 8,000 314,629
Stock subscriptions
receivable........... (100,440) -- -- -- (100,440)
Notes receivable from
shareholders......... (1,180) -- -- -- (1,180)
Unearned
compensation......... (151,474) -- -- -- (151,474)
Cummulative
translation
adjustment........... -- (15) 15 -- --
Accumulated deficit... (30,129) (14,170) 14,170 -- (30,129)
--------- -------- -------- -------- ---------
Total shareholders'
equity (deficit)... 23,440 (13,948) 13,948 8,000 31,440
--------- -------- -------- -------- ---------
$ 32,681 $ 6,033 $ (6,033) $ 8,000 $ 40,681
========= ======== ======== ======== =========
</TABLE>
F-24
<PAGE>
CRITICAL PATH, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31, 1998 Three months ended March 31, 1999
----------------------------------------- -----------------------------------------
Critical Pro Critical Pro
Path Fabrik Adjustments Forma Path Fabrik Adjustments Forma
-------- ------- ----------- -------- -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 897 $11,542 $ -- $ 12,439 $ 1,049 $ 3,073 $ -- $ 4,122
Cost of net revenues.... (2,346) (4,340) -- (6,686) (2,360) (1,022) -- (3,382)
-------- ------- ------- -------- -------- ------- ------- --------
Gross profit (loss)... (1,449) 7,202 -- 5,753 (1,311) 2,051 -- 740
-------- ------- ------- -------- -------- ------- ------- --------
Operating expenses:
Research and
development.......... 2,098 2,439 -- 4,537 1,379 274 -- 1,653
Sales and marketing... 1,687 4,094 -- 5,781 1,984 1,021 -- 3,005
General and
administrative....... 3,814 2,654 -- 6,468 1,550 1,010 -- 2,560
Amortization of
intangible assets.... -- -- 6,600 (c) 6,600 -- -- 1,650 (c) 1,650
Stock-based expenses.. 2,400 -- -- 2,400 11,657 -- -- 11,657
-------- ------- ------- -------- -------- ------- ------- --------
Total operating
expenses........... 9,999 9,187 6,600 25,786 16,570 2,305 1,650 20,525
Loss from operations.... (11,448) (1,985) (6,600) (19,699) (17,881) (254) (1,650) (19,785)
Interest and other in-
come, net.............. (13) (235) (724)(d) (972) 287 (74) (164)(d) 49
-------- ------- ------- -------- -------- ------- ------- --------
Net loss................ $(11,461) $(2,220) $(7,324) $(21,005) $(17,594) $ (328) $(1,814) $(19,736)
======== ======= ======= ======== ======== ======= ======= ========
Pro forma net loss per
share (unaudited) (e)
Net loss per share--
basic and diluted.... $ (1.46) $ (0.75)
======== ========
Weighted average
shares--basic and
diluted.............. 14,303 26,127
======== ========
</TABLE>
<PAGE>
CRITICAL PATH, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
The following adjustments were applied to the Company's historical financial
statements and those of FABRIK Communications, Inc. to arrive at the pro forma
condensed consolidated financial information. The proforma adjustments are
preliminary and based upon Company management's estimates and a preliminary
valuation of the intangible assets acquired.
(a) Reflects adjustments to eliminate assets, liabilities and equity that
were not acquired by the Company.
(b) The allocation of the purchase price, assuming the acquisition
occurred on March 31, 1999, for pro forma purposes, is as follows:
<TABLE>
<S> <C>
Cash Paid..................................................... $12,000,000
Value of Stock................................................ 8,000,000
Estimated acquisition costs................................... 100,000
-----------
Total purchase price...................................... $20,100,000
===========
Property and equipment........................................ $ 500,000
Intangible assets:
Assembled workforce......................................... $ 400,000
Customer list............................................... 2,100,000
Goodwill.................................................... 17,100,000
-----------
Total purchase price allocation........................... $20,100,000
===========
</TABLE>
(c) To record amortization of: acquired customer list totaling $2.1
million over the estimated period of benefit of three years, assembled
workforce totaling $400,000 over the estimated period of benefit of two
years, and goodwill totaling $17.1 million over the estimated period of
benefit of three years.
(d) Reflects the adjustment to reduce interest income for lower cash
balances as a result of the elimination of the FABRIK cash balance which is
not being acquired by the Company, and the reduction in cash balances due
to the $12 million paid on acquisition.
(e) Pro forma basic net loss per share for the year ended December 31,
1998 and the three months ended March 31, 1999 is computed using the
weighted average number of common shares outstanding, including the pro
forma effects of the conversion of the Company's Series A and Series B
Convertible Preferred Stock into shares of the Company's Common Stock
effective upon the closing of the initial public offering as if such
conversion occurred on January 1, 1998, or at date of original issuance, if
later. Pro forma 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 comprise restricted Common Stock and incremental
common and preferred shares issuable upon the exercise of stock options and
warrants and upon conversion of Series A and B Convertible Preferred Stock.
At December 31, 1998 and March 31, 1999, 28,607,997 and 16,024,637
potential common shares respectively, are excluded from the determination
of diluted net loss per share as the effect of such shares on a weighted
average basis is anti-dilutive. Differences between historical weighted
average shares outstanding and pro forma weighted average shares
outstanding used to compute net loss per share result from the inclusion of
shares issued in conjunction with the acquisition as if such shares were
outstanding from January 1, 1998 and from the conversion of the Company's
Series A and Series B Convertible Preferred Stock effective upon the close
of the initial public offering.
F-26
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Shareholders
FABRIK Communications, Inc.
We have audited the accompanying consolidated balance sheets of FABRIK
Communications, Inc. as of September 30, 1997 and 1998 and the related
consolidated statements of operations, redeemable convertible preferred stock
and shareholders' deficit and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FABRIK
Communications, Inc. at September 30, 1997 and 1998 and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Palo Alto, California
November 6, 1998
F-27
<PAGE>
FABRIK COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
------------------------ March 31,
1997 1998 1999
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 3,861,399 $ 1,894,100 $ 3,060,643
Accounts receivable, net of allowance
for doubtful accounts of $71,107 and
$295,777 in 1997 and 1998,
respectively........................ 1,268,328 1,853,880 1,425,493
Other current assets................. 120,415 131,017 126,134
----------- ----------- -----------
Total current assets................... 5,250,142 3,878,997 4,612,270
Note receivable from officer........... 31,033 34,295 --
Property and equipment, net............ 2,805,086 2,055,441 1,420,639
Other assets........................... 80,548 -- --
----------- ----------- -----------
$ 8,166,809 $ 5,968,733 $ 6,032,909
=========== =========== ===========
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND SHAREHOLDERS'
DEFICIT
Current liabilities:
Accounts payable..................... $ 1,015,455 $ 427,671 $ 459,311
Accrued compensation and related
liabilities......................... 266,716 464,767 388,560
Other accrued liabilities............ 138,762 444,029 175,325
Capital lease obligations............ 588,888 810,129 868,350
----------- ----------- -----------
Total current liabilities.............. 2,009,821 2,146,596 1,891,546
Capital lease obligations, less current
portion............................... 1,467,725 1,336,650 1,097,333
Commitments
Redeemable convertible preferred stock,
par value $.001; 20,950,868 shares
authorized; shares issued and
outstanding; 18,981,456 at September
30, 1997 and 1998 and 20,231,456 at
March 31, 1999 (liquidation preference
of $17,075,002 at March 31, 1999)..... 15,500,965 15,500,965 16,990,965
Shareholders' deficit:
Common stock, par value $.001;
42,000,000 shares authorized;
5,277,498, 5,572,332 and 5,691,739
shares issued and outstanding at
September 30, 1997, and 1998 and
March 31, 1999, respectively........ 5,277 5,572 5,691
Additional paid-in capital............. 186,531 211,192 231,434
Cumulative translation adjustment...... -- (8,562) (14,460)
Accumulated deficit.................... (11,003,510) (13,223,680) (14,169,600)
----------- ----------- -----------
Total shareholders' deficit............ (10,811,702) (13,015,478) (13,946,935)
----------- ----------- -----------
$ 8,166,809 $ 5,968,733 $ 6,032,909
=========== =========== ===========
</TABLE>
See accompanying notes.
F-28
<PAGE>
FABRIK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended September Six months ended March
30, 31,
------------------------ -----------------------
1997 1998 1998 1999
----------- ----------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenues............... $ 4,621,508 $11,542,242 $5,812,842 $5,562,834
Costs and expenses:
Cost of revenues......... 2,902,084 4,340,359 2,222,101 1,916,104
Sales and marketing...... 4,687,092 4,093,853 1,812,405 1,860,093
Research and
development............. 1,147,664 2,438,960 724,179 714,380
General and
administrative.......... 2,562,414 2,654,369 1,938,879 1,864,480
----------- ----------- ---------- ----------
Total costs and expenses... 11,299,254 13,527,541 6,697,564 6,355,057
----------- ----------- ---------- ----------
Loss from operations....... (6,677,746) (1,985,299) (884,722) (792,223)
Interest income............ 164,403 124,314 68,866 22,324
Interest expense........... (222,068) (359,185) (175,758) (176,021)
----------- ----------- ---------- ----------
Net loss................... $(6,735,411) $(2,220,170) $ (991,614) $ (945,920)
=========== =========== ========== ==========
Net loss per share--basic
and diluted............... $ (1.48) $ (0.42) $ (0.19) $ (0.17)
=========== =========== ========== ==========
Shares used in per share
calculation--basic and
diluted................... 4,541,273 5,280,723 5,122,132 5,633,671
=========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-29
<PAGE>
FABRIK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Shareholders' Deficit
---------------------------------------------------------------------------------
Redeemable Convertible Note
Preferred Stock Common Stock Additional Receivable Cumulative Total
---------------------- ----------------- Paid-In from Translation Accumulated Shareholders'
Shares Amount Shares Amount Capital Shareholder Adjustment Deficit Deficit
---------- ----------- --------- ------ ---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
September 30,
1996............. 4,474,878 $ 3,430,766 5,430,000 $5,430 $ 46,545 $(4,125) $ -- $ (4,268,099) $ (4,220,249)
Issuance of
Series D
redeemable
convertible
preferred stock
at $.76 per
share, net of
issuance costs
of $47,026...... 12,006,578 9,077,972 -- -- -- -- -- -- --
Issuance of
Series E
redeemable
convertible
preferred stock
at $1.20 per
share, net of
issuance costs
of $7,773....... 2,500,000 2,992,227 -- -- -- -- -- -- --
Issuance of
preferred stock
warrants........ -- -- -- -- 61,580 -- -- -- 61,580
Forgiveness of
note receivable
from
shareholder..... -- -- -- -- -- 4,125 -- -- 4,125
Repurchase of
common stock.... -- -- (267,708) (268) (2,586) -- -- -- (2,854)
Issuance of
stock options to
consultants..... -- -- -- -- 73,923 -- -- -- 73,923
Exercise of
stock options... -- -- 115,206 115 7,069 -- -- -- 7,184
Net loss........ -- -- -- -- -- -- -- (6,735,411) (6,735,411)
---------- ----------- --------- ------ -------- ------- -------- ------------ ------------
Balances at
September 30,
1997............. 18,981,456 15,500,965 5,277,498 5,277 186,531 -- -- (11,003,510) (10,811,702)
Repurchase of
common stock.... -- -- (30,625) (31) (582) -- -- -- (613)
Translation
loss............ -- -- -- -- -- -- (8,562) -- (8,562)
Exercise of
stock options... -- -- 325,459 326 25,243 -- -- -- 25,569
Net loss........ -- -- -- -- -- -- -- (2,220,170) (2,220,170)
---------- ----------- --------- ------ -------- ------- -------- ------------ ------------
Balances at
September 30,
1998............. 18,981,456 15,500,965 5,572,332 5,572 211,192 -- (8,562) (13,223,680) (13,015,478)
Issuance of
Series E
redeemable
convertible
preferred stock
at $1.20 per
share, net of
issuance costs
of $10,000
(unaudited)..... 1,250,000 1,490,000 -- -- -- -- -- -- --
Translation loss
(unaudited)..... -- -- -- -- -- -- (5,898) -- (5,898)
Exercise of
stock options
(unaudited)..... -- -- 119,407 119 20,242 -- -- -- 20,361
Net loss
(unaudited)..... -- -- -- -- -- -- -- (945,920) (945,920)
---------- ----------- --------- ------ -------- ------- -------- ------------ ------------
Balances at March
31, 1999
(unaudited)...... 20,231,456 $16,990,965 5,691,739 $5,691 $231,434 $ -- $(14,460) $(14,169,600) $(13,946,935)
========== =========== ========= ====== ======== ======= ======== ============ ============
</TABLE>
See accompanying notes.
F-30
<PAGE>
FABRIK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September Six months ended
30, March 31,
------------------------ ----------------------
1997 1998 1998 1999
----------- ----------- ---------- ----------
Operating activities (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss..................... $(6,735,411) $(2,220,170) $ (991,614) $ (945,920)
Adjustments to reconcile net
loss to net cash used in op-
erating activities:
Depreciation and
amortization.............. 942,674 1,434,942 720,495 713,030
Issuance of options to
consultants............... 73,923 -- -- --
Forgiveness of note receiv-
able to shareholder and
officer................... 4,125 -- -- 34,295
Changes in operating assets
and liabilities:
Accounts receivable...... (1,063,393) (585,552) (812,427) 428,387
Other current assets..... (43,461) (10,602) (35,176) 4,883
Note receivable from
officer................. -- (3,262) (2,374) --
Accounts payable......... 528,774 (587,784) 166,978 31,640
Accrued compensation and
related liabilities and
other accrued liabili-
ties.................... 250,269 503,318 (54,174) (344,911)
----------- ----------- ---------- ----------
Net cash used in operating
activities.................. (6,042,500) (1,469,110) (1,008,292) (78,596)
Investing activities
Purchases of property and
equipment................... (2,467,912) (627,181) (452,684) (78,228)
Other assets................. (22,432) 22,432 22,432 --
----------- ----------- ---------- ----------
Net cash used in investing
activities.................. (2,490,344) (604,749) (430,252) (78,228)
Financing activities
Proceeds (payments) on
capital lease obligation,
net......................... 1,376,164 90,166 269,918 (181,096)
Bridge financing............. 400,000 -- -- --
Proceeds from issuance of
common stock................ 7,184 25,569 11,768 20,361
Repurchase of common stock... (2,854) (613) -- --
Other........................ -- (8,562) 266 (5,898)
Proceeds from issuance of Se-
ries D redeemable
convertible preferred
stock....................... 7,465,957 -- -- --
Proceeds from issuance of Se-
ries E redeemable
convertible preferred
stock....................... 2,992,227 -- -- 1,490,000
----------- ----------- ---------- ----------
Net cash provided by
financing activities........ 12,238,678 106,560 281,952 1,323,367
----------- ----------- ---------- ----------
Increase (decrease) in cash.. 3,705,834 (1,967,299) (1,156,592) 1,166,543
Cash and cash equivalents,
beginning of period......... 155,565 3,861,399 3,861,399 1,894,100
----------- ----------- ---------- ----------
Cash and cash equivalents,
end of period............... $ 3,861,399 $ 1,894,100 $2,704,807 $3,060,643
=========== =========== ========== ==========
Supplemental disclosure of
cash flow information:
Cash paid during the period
for interest.............. $ 203,006 $ 337,835 $ 168,696 $ 168,150
=========== =========== ========== ==========
Supplemental disclosure of
noncash financing
activities:
Issuance of Series D re-
deemable convertible
preferred stock in ex-
change for promissory
notes..................... $ 1,612,015 $ -- $ -- $ --
=========== =========== ========== ==========
Issuance of preferred stock
warrants.................. $ 61,580 $ -- $ -- $ --
=========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-31
<PAGE>
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the Six Months ended March 31, 1998 and 1999 is Unaudited)
1. The Company and Liquidity
FABRIK Communications, Inc. (the "Company" or "Fabrik") provides messaging
services to the expanding electronic mail ("e-mail") market principally in the
United States. Fabrik provides users of local area network ("LAN") e-mail
systems a universal bridge to e-mail users outside their network, including
those on the Internet and all other wide area network ("WAN") e-mail services.
Through fiscal 1998, Fabrik incurred cumulative net losses of $13,223,680,
including a net loss of $2,220,170 in 1998. During fiscal 1997 and 1998, Fabrik
used $6,042,500 and $1,469,110, respectively, of cash to finance its growth and
related operating activities. In fiscal 1999, Fabrik expects to incur
additional losses and will use additional cash to fund its operating
activities. In fiscal 1999, Fabrik's operating plan contemplates reducing and
then aligning its cost structure with expected revenue streams and eliminating
activities that are not clearly aligned with the Fabrik's near and longer term
strategies. Fabrik's financial plan contemplates obtaining additional third
party financing. However, there can be no assurance that such financing will be
available on terms acceptable to Fabrik, if at all. Should Fabrik be required
to delay or reduce expenditures, it may not be able to expand its suite of
services and may have to reevaluate its operating plans.
Basis of Presentation
The consolidated financial statements include the accounts of Fabrik and its
wholly owned subsidiary. All significant intercompany transactions and balances
have been eliminated in consolidation.
On May 26, 1999, Fabrik sold certain assets and customer relationships
related to its connect business to Critical Path, Inc. for consideration of
$12,000,000 in cash and 109,091 shares of Critical Path, Inc.'s common stock
valued at approximately $8,000,000. The accompanying consolidated financial
statements have been prepared on the Fabrik's historical cost basis and do not
reflect any adjustments resulting from the acquisition.
2. Summary of Significant Accounting Policies
The following is a summary of Fabrik's significant accounting policies used
in the preparation of the accompanying consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes and the reported amounts of revenue and expenses during the reporting
period. Actual results may differ materially from those estimates.
F-32
<PAGE>
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the Six Months ended March 31, 1998 and 1999 is Unaudited)
Interim Financial Information
The interim financial information as of March 31, 1999 and for the six months
ended March 31, 1998 and 1999 is unaudited but includes all adjustments,
consisting only of normal recurring adjustments, that Fabrik considers
necessary for a fair presentation of its consolidated financial position at
such date and its consolidated results of operations and cash flows for those
periods. Operating results for the six months ended March 31, 1999 are not
necessarily indicative of results that may be expected for any future periods.
Cash and Cash Equivalents
Fabrik considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Concentrations of Credit Risk and Credit Evaluations
Financial instruments which subject Fabrik to concentrations of credit risk
consist primarily of cash and trade accounts receivable. Fabrik maintains its
cash and cash equivalents in a domestic financial institution with a high
credit standing. Fabrik conducts business principally with companies in various
industries throughout the United States. Fabrik performs ongoing credit
evaluations of its corporate customers and generally does not require
collateral. Reserves are maintained for potential credit losses and such
reserves to date have been within management's expectations.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets of
three years. Assets under capital leases and leasehold improvements are
amortized using the straight-line method over the lesser of the estimated
useful lives or the remaining lease terms, generally three years.
Income Taxes
Fabrik accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"), which
requires the use of the liability method in accounting for income taxes. Under
FAS 109, deferred tax assets and liabilities are measured based on differences
between the financial reporting and tax bases of assets and liabilities using
enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse.
Accounting for Stock-Based Compensation
Fabrik accounts for employee stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and has adopted the "disclosure only" alternative described in
Statement of Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The effect of applying the fair value method of
SFAS 123 to Fabrik's stock options results in net losses that are not
materially different from the amounts reported.
F-33
<PAGE>
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the Six Months ended March 31, 1998 and 1999 is Unaudited)
Revenue Recognition
Fabrik provides messaging services for the e-mail market. These services
provide users of LAN e-mail systems a universal bridge to e-mail users outside
their network. Fabrik charges users monthly for certain e-mail transactions in
addition to a monthly service fee. Fabrik recognizes revenues as such services
are provided.
Research and Development
Research and development costs are charged to operations as incurred.
Computation of Net Loss Per Share
Fabrik adopted Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share," ("FAS 128") during the year ended September 30, 1997. FAS
128 replaced the calculation of primary and fully diluted net loss per share
with basic and diluted net loss per share. In accordance with FAS 128, basic
net income (loss) per share excludes dilutive common stock equivalents and is
calculated as net income (loss) divided by the weighted average number of
common shares outstanding. Diluted net income (loss) per share is computed
using the weighted average number of common shares outstanding and dilutive
common stock equivalents outstanding during the period. Common equivalent
shares from stock options and warrants (using the treasury stock method) are
excluded from the calculation of net loss per share as their effect is anti-
dilutive.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("FAS 130"). Fabrik is required to adopt
this statement in fiscal year 1999. FAS 130 establishes new standards for
reporting and displaying comprehensive income and its components. Adoption of
this statement had no material impact on Fabrik's consolidated financial
position, results of operations or cash flows.
Additionally, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement No. 131, "Disclosure about Segments of an
Enterprise and Related Information" which establishes standards for the way
public business enterprises report information in annual statements and interim
financial reports regarding operating segments, products and services,
geographic areas, and major customers. Fabrik has determined that it operates
in one segment.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
3. Note Receivable from Officer
In February 1996, Fabrik loaned an officer a total of $30,000 in return for a
promissory note. In February 1998, the note was amended to $33,192 to include
the original amount of the note plus accrued interest. The principal on the
note, which is unsecured, is due and payable in February 2000. Interest is
payable annually on the note in arrears at a rate of 5.32% per annum.
F-34
<PAGE>
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the Six Months ended March 31, 1998 and 1999 is Unaudited)
4. Property and Equipment
The major components of property and equipment are as follows:
<TABLE>
<CAPTION>
September 30,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Computer equipment................................ $ 3,393,384 $ 3,975,071
Furniture and equipment........................... 306,779 309,492
Leasehold improvements............................ 178,029 220,810
----------- -----------
3,878,192 4,505,373
Less accumulated depreciation and amortization.... (1,073,106) (2,449,932)
----------- -----------
$ 2,805,086 $ 2,055,441
=========== ===========
</TABLE>
The cost of assets acquired under capital leases was $2,527,690 and
$3,311,946 and the accumulated amortization on these assets was $1,527,469 and
$1,662,550 at September 30, 1997 and 1998, respectively.
5. Commitments
Fabrik leases certain property and equipment under capital leases and office
facilities under an operating lease. Future minimum lease payments under these
capital leases and noncancellable payments under the operating lease with an
original lease term in excess of one year as of September 30, 1998 are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Lease
---------- ---------
<S> <C> <C>
Year ending September 30
1999................................................. $1,067,173 $498,867
2000................................................. 1,037,933 222,715
2001................................................. 459,279 1,268
2002................................................. 34,071 --
---------- --------
Total minimum lease payments......................... 2,598,456 $722,850
========
Less amounts representing interest................... (451,677)
----------
Present value of minimum lease payments.............. 2,146,779
Less current portion................................. (810,129)
----------
$1,336,650
==========
</TABLE>
Rent expense under operating leases totaled $282,638 and $279,215 for the
years ended September 30, 1997 and 1998, respectively.
6. Related Party Transactions
Fabrik is a party to a services agreement dated October 21, 1994, pursuant to
which, the supplier, a shareholder of Fabrik, has agreed to provide Fabrik with
substantially all of its telecommunication services necessary to operate its
business. For the years ended September 30,
F-35
<PAGE>
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the Six Months ended March 31, 1998 and 1999 is Unaudited)
1997 and 1998, purchases of services from this supplier amounted to $330,525
and $78,887, respectively. At September 30, 1997 and 1998, amounts due to this
supplier were $102,942 and $2,332, respectively.
7. Bank Line of Credit
In June 1998, Fabrik entered into a revolving line of credit agreement with a
bank which provides for a line of credit of up to $2 million. Borrowings under
the line of credit bear interest at the bank's prime rate plus .5% (8.3% at
September 30, 1998). Interest payments are due monthly. Total borrowings are
limited to the lesser of $2 million or 80% of eligible accounts receivable and
are secured by Fabrik's assets. At September 30, 1998, there were no
outstanding borrowings on the line of credit. The line of credit agreement
expires on June 15, 1999, at which time all amounts due and payable under this
agreement must be paid. Of the revolving line of credit, $200,000 is restricted
for purposes of meeting deposit requirements of Fabrik's payroll processor.
Among other provisions, the bank line of credit requires Fabrik to maintain
certain minimum financial ratios and profitability/maximum loss provisions.
Fabrik was not in compliance with the maximum loss provision for the fourth
quarter of the year ended September 30, 1998. Fabrik subsequently obtained a
waiver from the bank for this violation.
8. Shareholders' Equity
Redeemable Preferred Stock
Preferred stock consists of the following at September 30, 1998:
<TABLE>
<CAPTION>
Shares
Shares Issued and Liquidation
Series Authorized Outstanding Preference
------ ---------- ----------- -----------
<S> <C> <C> <C>
A......................................... 748,750 700,000 $ 700,000
B......................................... 416,670 416,670 500,004
C......................................... 3,431,502 3,358,208 2,249,999
D......................................... 12,503,946 12,006,578 9,124,999
E......................................... 2,600,000 2,500,000 3,000,000
---------- ---------- -----------
Totals.................................... 19,700,868 18,981,456 $15,575,002
========== ========== ===========
</TABLE>
Under Fabrik's Articles of Incorporation, preferred stock is issuable in
series and the Board of Directors is authorized to determine the rights,
preferences and terms of each series.
Dividends
The holders of shares of preferred stock, in preference to the holders of any
other stock of Fabrik, are entitled to receive, when and as declared by the
Board of Directors, but only out of funds that are legally available, dividends
at the rate of eight percent (8%) of the "Original Issue Price" per annum on
each outstanding share of preferred stock (as adjusted for any stock dividends,
combinations or splits with respect to such shares). The Original Issue Price
of the Series A,
F-36
<PAGE>
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the Six Months ended March 31, 1998 and 1999 is Unaudited)
Series B, Series C, Series D and Series E preferred stock is $1.00, $1.20,
$.67, $.76, and $1.20, respectively.
Conversion
Each share of preferred stock, at the option of the holder, is convertible
into the number of fully paid and nonassessable shares of common stock at the
conversion rate. The conversion rate per share of the Series A, Series B,
Series C, Series D and Series E preferred stock is 5:1, 5:1, 1:1, 1:1, and 1:1,
respectively. The conversion rates are subject to adjustment from time to time.
The number of shares of common stock into which a share of a series of
preferred stock is convertible is referred to as the conversion rate of such
series.
Each share of preferred stock shall automatically be converted into shares of
common stock, based on the then-effective conversion price, at any time upon
the affirmative vote of the holders of at least 66-2/3% of the outstanding
shares of the Preferred Series, or immediately upon the closing of a firmly
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
common stock for the account of Fabrik in which (i) the per share price is at
least $5.00 (as adjusted for stock splits, recapitalizations and the like), and
(ii) the gross cash proceeds to Fabrik (before underwriting discounts,
commissions and fees) are at least $10,000,000.
Redemption
The holders of at least sixty-six and two-thirds percent (66-2/3%) of the
then outstanding preferred stock, voting as a separate class, may, by notice
delivered on or before March 1, 2001, require Fabrik to redeem the preferred
stock in four equal annual installments beginning on August 1, 2001 and ending
on August 1, 2004 (each a "Redemption Date"). Fabrik shall effect such
redemptions on the applicable Redemption Date by paying in cash in exchange for
the shares of preferred stock to be redeemed a sum equal to the Original Issue
Price per share of preferred stock (as adjusted for any stock dividends,
combinations or splits) plus declared and unpaid dividends with respect to such
shares. The number of shares of preferred stock that Fabrik shall be required
to redeem on any one redemption date is equal to the amount determined by
dividing the number of shares outstanding immediately prior to the Redemption
Date by the number of remaining Redemption Dates (including the Redemption Date
to which such calculation applies). Shares subject to redemption are to be
redeemed from each holder of preferred stock on a pro rata basis.
If Fabrik does not have sufficient funds legally available to redeem all
shares to be redeemed at the Redemption Date (including, if applicable, those
to be redeemed at the option of Fabrik), then Fabrik shall redeem such shares
pro rata (based on the portion of the aggregate Redemption Price payable to
them) to the extent possible and shall redeem the remaining shares to be
redeemed as soon as sufficient funds are legally available.
Liquidation
In the event of any liquidation, dissolution or winding up of Fabrik, whether
voluntary or involuntary, the holders of preferred stock are entitled to
receive, prior and in preference to any
F-37
<PAGE>
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the Six Months ended March 31, 1998 and 1999 is Unaudited)
distribution of any of the assets of Fabrik to the holders of common stock by
reason of their ownership, an amount per share equal to the sum of Original
Issue Price, plus any declared but unpaid dividends on such share. After
payment of the full liquidation preference of the preferred stockholders, any
remaining assets of Fabrik legally available are to be distributed ratably to
the holders of the common stock and preferred stock on an as-if-converted to
common stock basis until such time as the holders of preferred stock and common
stock have received a total liquidation amount of one hundred million dollars
($100,000,000). The remaining assets of Fabrik legally available for
distribution, if any, are to be distributed ratably to the holders of common
stock.
If, upon the occurrence of a liquidation event, the assets and funds
distributed among the holders of the preferred stock are insufficient to permit
the payment to such holders of the full preferential amount, then the entire
assets and funds of Fabrik legally available for distribution are to be
distributed ratably among the holders of the preferred stock, in proportion to
the preferential amount each such holder is otherwise entitled to received.
Voting
The holder of each share of preferred stock is entitled to the number of
votes equal to the number of shares of common stock into which each share of
preferred stock could be converted immediately after the close of business on
the record date for the vote or consent of shareholders, except as otherwise
required by law, and has voting rights and powers equal to the voting rights
and powers of the common stock.
Warrants
In connection with the capital lease facility, Fabrik has issued four
warrants. The first is a warrant issued in October 1994 to purchase 48,750
shares of Series A redeemable preferred stock at $1.00 per share expiring on
December 31, 2000 (convertible into 243,750 common shares). The second warrant
issued in October 1995 allows the lessor to purchase 73,294 shares of Series C
redeemable preferred stock at $0.67 per share, expiring on December 31, 2001.
Fabrik deemed the fair value of these warrants to be immaterial at the date of
issuance. The third warrant issued in November 1996 allows the lessor to
purchase 72,368 shares of Series D redeemable preferred stock at $0.76 per
share, expiring on September 30, 2002. Fabrik valued the warrant at $18,095.
The fourth warrant issued in April 1997 allows the lessor to purchase 95,000
shares of Series D redeemable preferred stock at $0.76 per share expiring on
December 31, 2002. Fabrik valued this warrant at $23,750.
In association with a July 1996 promissory note, Fabrik issued warrants in
August 1997 to purchase an aggregate of 197,368 shares of Series D preferred
stock at $0.76 per share. Fabrik valued the warrants at $19,735. The warrants
were issued to certain investors involved in the bridge financing. These
warrants expire December 31, 1999. No new warrants were issued during the year
ended September 30, 1998.
F-38
<PAGE>
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the Six Months ended March 31, 1998 and 1999 is Unaudited)
Options Issued to Consultants
Fabrik granted options to purchase 49,500 shares of common stock to
consultants at exercise prices ranging from $.08 to $.30 throughout fiscal
1997. These options were granted in exchange for consulting services performed.
Fabrik valued these options using the fair value of the services performed
which amounted to $73,923. This amount was recorded as consulting expense and
additional paid-in capital in the year ended September 30, 1997.
Equity Incentive Plan
Under the 1995 Equity Incentive Plan (the "Plan"), the Board of Directors may
issue incentive stock options, nonstatutory stock options and stock bonuses to
employees of Fabrik. As of September 30, 1998, Fabrik has reserved 5,920,000
shares of common stock for issuance under the Plan. The Board of Directors
determines to whom options and bonuses will be granted, the number of shares,
the term and the exercise price (which cannot be less than the fair market
value at the date of grant, or 85% of fair market value for nonstatutory stock
options). Options granted under the Plan to date generally become exercisable
ratably over a four-year period with a one-year anniversary cliff in the first
year of the option term.
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
Outstanding Options
-------------------------
Weighted-
Shares Average
Available Number Exercise Price
for Grant of Shares per Share
---------- --------- --------------
<S> <C> <C> <C>
Balances at September 30, 1996....... 688,600 1,811,400 $.07
Additional options reserved........ 700,000 -- --
Options granted.................... (1,535,000) 1,535,000 .16
Options exercised.................. -- (115,206) .08
Options canceled................... 315,439 (315,439) .10
---------- ---------
Balances at September 30, 1997....... 169,039 2,915,755 .11
Additional options reserved........ 2,720,000 -- --
Options granted.................... (1,340,000) 1,340,000 .42
Options exercised.................. -- (325,459) .08
Options canceled................... 959,960 (959,960) .18
---------- ---------
Balances at September 30, 1998....... 2,508,999 2,970,336 .23
Additional options reserved
(unaudited)....................... 1,500,000 -- --
Options granted (unaudited)........ (3,372,500) 3,372,500 .45
Options exercised (unaudited)...... -- (119,407) .17
Options canceled (unaudited)....... 449,018 (449,018) .37
---------- ---------
Balances at March 31, 1999
(unaudited)......................... 1,085,517 5,774,411 .35
========== =========
</TABLE>
At March 31, 1999, options to purchase 1,473,155 shares of common stock were
vested and exercisable at a weighted-average exercise price of $0.16 per share.
F-39
<PAGE>
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the Six Months ended March 31, 1998 and 1999 is Unaudited)
The following table summarizes information concerning currently outstanding
and exercisable options at March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Number Average
Number Contractual Exercise Exercisable Exercise
Exercise Prices Outstanding Life Price and Vested Price
--------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ .07-.08........... 1,348,838 7.04 $.07 1,033,701 $.07
.15-.30............ 219,948 8.24 .26 130,141 .25
.35-.40............ 267,250 8.94 .40 77,625 .40
.45................ 3,938,375 9.55 .45 231,688 .45
--------- ---------
5,774,411 1,473,155
========= =========
</TABLE>
The weighted-average fair value at grant date for options granted during the
years ended September 30, 1997 and 1998 and the six months ended March 31, 1999
was $.03, $.08 and $0.09 per share, respectively.
9. Income Taxes
The Company did not provide any current or deferred federal, state or foreign
income tax provision or benefit for the periods presented because it has
experienced operating losses since inception.
As of September 30, 1998, the Company had federal and state net operating
loss carryforwards of approximately $9,500,000 and $6,400,000, respectively.
The federal and state net operating loss carryforwards will expire in the years
ending 2002 through 2013, if not utilized. Utilization of the net operating
loss carryforwards may be subject to a substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration of
the net operating losses before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
September 30,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net operating loss carryforwards................... $ 3,587,000 $ 3,632,000
Capitalized research and development............... 518,000 849,000
Depreciation and amortization...................... 39,000 275,000
Research and development credit carryfowards....... 109,000 239,000
Other.............................................. 197,000 255,000
----------- -----------
Total deferred tax assets.......................... 4,450,000 5,250,000
Valuation allowance................................ (4,450,000) (5,250,000)
----------- -----------
Net deferred tax assets............................ $ -- $ --
=========== ===========
</TABLE>
F-40
<PAGE>
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the Six Months ended March 31, 1998 and 1999 is Unaudited)
The Company has provided a full valuation allowance on the deferred tax
assets due to uncertainty regarding their realizability. The valuation
allowance increased by $2,795,000 and $800,000 during the years ended September
30, 1997 and 1998, respectively.
10. Retirement Plan
Fabrik has established the 401(k) Savings and Retirement Plan (the "Plan")
under Section 401(k) of the Internal Revenue Code covering substantially all of
its employees. Under the Plan, participating employees may defer a portion of
their pretax earnings up to the Internal Revenue Service annual contribution
limit. Fabrik does not make contributions to the Plan.
11. Year 2000 Issue (Unaudited)
The Year 2000 issue relates to the use by many existing computer programs of
only two digits to identify a year in the date field. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000. Fabrik recognizes the need to ensure that the potential Year 2000
software failures will not adversely impact its operations. Fabrik believes
that Year 2000 problems will not have a material adverse effect on its results
of operations or financial position.
Fabrik is in the process of determining if the current versions of Fabrik's
internally developed and purchased software are Year 2000 compliant.
Additionally, Fabrik is in the process of completing its Year 2000 assessment
of internal systems and applications. Fabrik is also in the process of
determining if all of its hardware systems are Year 2000 compliant. Fabrik
expects some changes to its systems will be necessary to reach compliance and
plans to complete the Year 2000 conversion of such systems by March 1999. To
date, Year 2000 costs have been minimal and Fabrik believes that future costs
will be immaterial. However, there can be no assurances that Fabrik will not
experience serious unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
systems.
Fabrik has also initiated communications with third parties on which it is
dependent for essential software and services (including services necessary for
Fabrik to perform its own services) to determine how they are addressing Year
2000 issues and to evaluate any impact on Fabrik's operations. Although Fabrik
intends to work with these third parties to resolve Year 2000 compliance
issues, the lack of resolution of Year 2000 issues by these parties could have
a material adverse effect on Fabrik's future business operations, financial
condition and results of operations. At this time, Fabrik cannot quantify the
potential impact of third-party Year 2000 issues; nor has it developed
contingency plans for the possibility that one or more of such third parties
may experience a significant disruption due to Year 2000 issues.
The year 2000 readiness of the general infrastructure necessary to support
its operations is difficult to assess. For instance, Fabrik depends on the
integrity and stability of the Internet to provide its services. Fabrik also
depends on the year 2000 compliance of the computer systems and financial
services used by consumers. Thus, the infrastructure necessary to support its
operations consists of a network of computers and telecommunications systems
located throughout the world and operated by numerous unrelated entities and
individuals, none of which has the ability to control
F-41
<PAGE>
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the Six Months ended March 31, 1998 and 1999 is Unaudited)
or manage the potential year 2000 issues that may impact the entire
infrastructure. Fabrik's ability to assess the reliability of this
infrastructure is limited and relies solely on generally available news
reports, surveys and comparable industry data. Based on these sources, Fabrik
believes most entities and individuals that rely significantly on the Internet
are carefully reviewing and attempting to remediate issues relating to year
2000 compliance, but it is not possible to predict whether these efforts will
be successful in reducing or eliminating the potential negative impact of year
2000 issues. A significant disruption in the ability of consumers to reliably
access the Internet or portions of it would have an adverse effect on demand
for Fabrik's services and would have a material adverse effect on Fabrik.
At this time, Fabrik has not yet developed a contingency plan to address
situations that may result if Fabrik or its vendors are unable to achieve year
2000 compliance because Fabrik currently does not believe that such a plan is
necessary. The cost of developing and implementing such a plan, if necessary,
could be material. Any failure of its material systems, Fabrik's vendors'
material systems or the Internet to be year 2000 compliant could have material
adverse consequences for Fabrik.
12. Subsequent Events
In October 1998, Fabrik entered into a services agreement with a third-party
service provider under which the service provider will provide Fabrik with
telecommunications services. The term of the agreement is for three years
beginning November 1998 and will require payments by Fabrik totaling $234,654
over the three-year term.
In October 1998, Fabrik granted a new officer of Fabrik options to purchase
1.6 million shares of common stock, or approximately 5% of the total
outstanding shares of Fabrik. These options were granted at an exercise price
of $.45 per share, the fair market value of underlying common stock on the date
of grant, and will vest over a four-year period.
In November 1998, Fabrik entered into an equipment financing lease agreement
with a financial services company. The agreement provides Fabrik with a lease
line for up to $2,500,000 for the purchase of computer equipment and software.
The term of the agreement is 42 months. In November 1998, Fabrik drew down
$203,190 under the agreement for the purchase of computer equipment. Under the
agreement, the financial services company has the right to purchase preferred
stock in all of Fabrik's future private or public offerings in amounts of not
less than $10,000 and not more than $500,000 at the fair market value at the
time of such an offering.
F-42
<PAGE>
INSIDE BACK COVER
the
brand
behind
the
brand
[pictures of Critical Path
customer branded
web mail interfaces
appears here]
<PAGE>
[LOGO OF CRITICAL PATH APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimated except the Securities and Exchange
Commission registration fee and the National Association of Securities Dealers,
Inc. filing fee.
<TABLE>
<CAPTION>
Payable by
Registrant
----------
<S> <C>
SEC registration fee.............................................. $118,775
National Association of Securities Dealers, Inc. filing fee....... 30,500
Nasdaq National Market Listing Fee................................ 17,500
Accounting fees and expenses...................................... 50,000
Legal fees and expenses........................................... 50,000
Printing and engraving expenses................................... 125,000
Blue Sky fees and expenses........................................ 5,000
Registrar and Transfer Agent's fees............................... 20,000
Miscellaneous fees and expenses................................... 83,225
--------
Total............................................................. $500,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 317 of the California Corporations Code provides for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article V, Section B of our
articles of incorporation (Exhibit 3.1 hereto) provides for indemnification of
our directors, officers, employees and other agents to the extent and under the
circumstances permitted by the California Corporations Code. We have also
entered into agreements with our directors and officers that will require us,
among other things, to indemnify them against certain liabilities that may
arise by reason of their status or service as directors or officers to the
fullest extent permitted by law.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
ourself, our underwriters and our directors and officers of the underwriters,
for certain liabilities, including liabilities arising under the Act, and
affords certain rights of contribution with respect thereto.
Item 15. Recent Sales of Unregistered Securities
1. From February 1997 to February 26, 1999, the Registrant issued and sold
8,486,398 shares of common stock to employees, directors and consultants at
prices ranging from $0.02 to $2.20 per share.
2. On April 1, 1998, the Registrant issued and sold 12,707,869 shares of Series
A Preferred Stock to a total of 29 investors for an aggregate purchase price
of $9,170,002.
II-1
<PAGE>
3. On September 11, 1998 and January 13, 1999, the Registrant issued and sold
6,863,991 shares of Series B Preferred Stock to a total of 19 investors for
an aggregate purchase price of $29,061,014.
4. On January 13, 1999, the Registrant issued and sold 1,090,909 shares of
common stock to one investor for an aggregate purchase price of $2,400,000.
5. From February 1997 to February, 1998, the Registrant issued and sold
6,258,251 shares of common stock to 5 investors at a purchase price of $0.02
per share.
6. On January 1999 the Registrant issued a warrant to purchase up to 2,442,766
shares of Series B Preferred Stock to one investor in connection with the
Registrant's entering into a commercial agreement with a subsidiary of such
investor.
The foregoing transactions were made in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under Rule 701.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
See exhibits listed on the Exhibit Index following the signature page of the
Form S-1, which is incorporated herein by reference.
(b) Financial Statement Schedules
Schedules other than those referred to above have been omitted because they
are not applicable or not required or because the information is included
elsewhere in the Financial Statements or the notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
as amended, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to
II-2
<PAGE>
Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) The Registrant will provide to the underwriters at the closing(s) specified
in the underwriting agreement certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to each
purchaser.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco, State of
California, on the 27th day of May, 1999.
Critical Path, Inc.
/s/ David A. Thatcher
By: _________________________________
David A. Thatcher
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
* President, Chief Executive May 27, 1999
____________________________________ Officer and Director
Douglas T. Hickey (Principal Executive
Officer)
/s/ David A. Thatcher Executive Vice President, May 27, 1999
____________________________________ Chief Financial Officer
David A. Thatcher (Principal Financial Officer)
and Accounting Officer
* Chairman of the Board May 27, 1999
____________________________________
David C. Hayden
* Director May 27, 1999
____________________________________
Christos M. Cotsakos
* Director May 27, 1999
____________________________________
Lisa Gansky
* Director May 27, 1999
____________________________________
Kevin R. Harvey
* Director May 27, 1999
____________________________________
James A. Smith
* Director May 27, 1999
____________________________________
George Zachary
</TABLE>
/s/ David A. Thatcher
*By:
----------------------------
David A. Thatcher
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Asset Purchase Agreement, dated May 26, 1999, between the Registrant
and Fabrik Communications, Inc.
3.1 Amended and Restated Articles of Incorporation. (Incorporated by
reference to Exhibit 3(i)(b) to the Registrant's Registration
Statement on Form S-1 (File No. 333-71499))
3.2 Amended and Restated Bylaws. (Incorporated by reference to Exhibit
3(ii)(b) to the Registrant's Registration Statement on Form S-1 (File
No. 333-71499))
4.1 Form of Common Stock Certificate. (Incorporated by reference to
Exhibit 4.1 to the Registrant's Registration Statement on Form S-1
(File No. 333-71499))
4.2 Warrant to Purchase Preferred Stock dated September 11, 1998 issued
by the Registrant to Hambrecht & Quist LLC. (Incorporated by
reference to Exhibit 4.2 to the Registrant's Registration Statement
on Form S-1 (File No. 333-71499))
4.3 Warrant to Purchase Preferred Stock dated January 13, 1999 issued by
the Registrant to Hambrecht & Quist LLC. (Incorporated by reference
to Exhibit 4.3 to the Registrant's Registration Statement on Form S-1
(File No. 333-71499))
4.4 Warrant to Purchase Common Stock dated January 29, 1999 issued by the
Registrant to America Online, Inc. (Incorporated by reference to
Exhibit 4.4 to the Registrant's Registration Statement on Form S-1
(File No. 333-71499))
5.1 Opinion of Wilson Sonsini Goodrich & Rosati.
10.1 Form of Indemnification Agreement between the Registrant and each of
its directors and officers. (Incorporated by reference to Exhibit
10.1 to the Registrant's Registration Statement on Form S-1 (File No.
333-71499))
10.2 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit
10.2 to the Registrant's Registration Statement on Form S-1 (File No.
333-71499))
10.3 1998 Stock Plan and forms of stock option agreements thereunder.
(Incorporated by reference to Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1 (File No. 333-71499))
10.4 Series B Preferred Stock Purchase Agreement dated September 11, 1998.
(Incorporated by reference to Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1 (File No. 333-71499))
10.5 Amendment to Series B Preferred Stock Purchase Agreement dated
January 13, 1999. (Incorporated by reference to Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1 (File No. 333-71499))
10.6 Amended and Restated Investors' Rights Agreement dated September 11,
1998. (Incorporated by reference to Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1 (File No. 333-71499))
10.7 Amendment to the Amended and Restated Investors' Rights Agreement
dated January 13, 1999. (Incorporated by reference to Exhibit 10.7 to
the Registrant's Registration Statement on Form S-1 (File No. 333-
71499))
10.8 Master Equipment Lease Agreement dated April 28, 1998, and Lease Line
Schedule thereto, by and between the Registrant and Lighthouse
Capital Partners II, L.P. (Incorporated by reference to Exhibit 10.8
to the Registrant's Registration Statement on Form S-1 (File No. 333-
71499))
10.9 Master Lease Agreement dated May 1, 1998, and addendum thereto, by
and between the Registrant and Comdisco, Inc. (Incorporated by
reference to Exhibit 10.9 to the Registrant's Registration Statement
on Form S-1 (File No. 333-71499))
10.10 Standard Industrial/Multitenant Lease-Gross dated June 20, 1997 by
and between the Registrant and 501 Folsom Street Building.
(Incorporated by reference to Exhibit 10.10 to the Registrant's
Registration Statement on Form S-1 (File No. 333-71499))
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.11 Letter Agreement dated October 1, 1998 by and between the Registrant
and Douglas Hickey. (Incorporated by reference to Exhibit 10.11 to
the Registrant's Registration Statement on Form S-1 (File No. 333-
71499))
10.12 Promissory Note and Security Agreement dated November 2, 1998 by and
between the Registrant and Douglas Hickey. (Incorporated by reference
to Exhibit 10.12 to the Registrant's Registration Statement on Form
S-1 (File No. 333-71499))
10.13 Warrant Agreement dated April 28, 1998 by and between the Registrant
and Lighthouse Capital Partners II, L.P. (Incorporated by reference
to Exhibit 10.13 to the Registrant's Registration Statement on Form
S-1 (File No. 333-71499))
10.14 Warrant Agreement dated May 1, 1998 by and between the Registrant and
Comdisco, Inc. (Incorporated by reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form S-1 (File No. 333-71499))
10.15 Master Services Agreement dated December 10, 1998 by and between the
Registrant and US West Communications Services, Inc. (Incorporated by
reference to Exhibit 10.15 to the Registrant's Registration Statement
on Form S-1 (File No. 333-71499))
10.16 Email Services Agreement dated May 27, 1998 by and between the
Registrant and Network Solutions, Inc. (Incorporated by reference to
Exhibit 10.16 to the Registrant's Registration Statement on Form S-1
(File No. 333-71499))
10.17 Email Services Agreement dated July 6, 1998 by and between the
Registrant and StarMedia Network, Inc. (Incorporated by reference to
Exhibit 10.17 to the Registrant's Registration Statement on Form S-1
(File No. 333-71499))
10.18 Amendment to Email Services Agreement September 30, 1998 by and
between the Registrant and E*TRADE Group, Inc. (Incorporated by
reference to Exhibit 10.18 to the Registrant's Registration Statement
on Form S-1 (File No. 333-71499))
10.19 Email Services Agreement dated September 14, 1998 by and between the
Registrant and Sprint Communications Company L.P. (Incorporated by
reference to Exhibit 10.19 to the Registrant's Registration Statement
on Form S-1 (File No. 333-71499))
10.20 Email Services Agreement dated March 19, 1998 by and between the
Registrant and NTX, Inc. dba TABNet, Inc. (Incorporated by reference
to Exhibit 10.20 to the Registrant's Registration Statement on Form
S-1 (File No. 333-71499))
10.21 QuickStart Loan and Security Agreement dated May 12, 1998 by and
between the Registrant and Silicon Valley Bank. (Incorporated by
reference to Exhibit 10.21 to the Registrant's Registration Statement
on Form S-1 (File No. 333-71499))
10.22 Email Services Agreement dated January 29, 1999 by and between the
Registrant and ICQ, Inc. (Incorporated by reference to Exhibit 10.22
to the Registrant's Registration Statement on Form S-1 (File No. 333-
71499))
10.23 Sublease dated February 8, 1999 by and between Times Direct
Marketing, Inc. and Critical Path. (Incorporated by reference to
Exhibit 10.23 to the Registrant's Registration Statement on Form S-1
(File No. 333-71499))
10.24 Promissory Note and Security Agreement dated January 26, 1999 by and
between the Registrant and Bill Rinehart. (Incorporated by reference
to Exhibit 10.24 to the Registrant's Registration Statement on Form
S-1 (File No. 333-71499))
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
23.3 Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit
5.1).
24.1 Power of Attorney.
</TABLE>
<PAGE>
EXHIBIT 1.1.
4,000,000 Shares/1/
CRITICAL PATH, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
June [___], 1999
BANCBOSTON ROBERTSON STEPHENS INC.
HAMBRECHT & QUIST LLC
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
FIRST ALBANY CORPORATION
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street
Suite 2600
San Francisco, California 94104
Ladies and Gentlemen:
Introductory. Critical Path, Inc., a California corporation (the
"Company"), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of 3,000,000 shares of its Common
Stock, par value $0.001 per share (the "Common Shares"); and the shareholders of
the Company named in Schedule B (collectively, the "Selling Shareholders")
severally propose to sell to the Underwriters an aggregate of 1,000,000 Common
Shares. The 3,000,000 Common Shares to be sold by the Company and the 1,000,000
shares of Common Shares to be sold by the Selling Shareholders are collectively
called the "Firm Shares". In addition, the Selling Shareholders have severally
granted to the Underwriters an option to purchase up to an additional 600,000
Common Shares (the "Option Shares"), as provided in Section 2, each Selling
Shareholder selling up to the amount set forth opposite such Selling
Shareholder's name in Schedule B. The Firm Shares and, if and to the extent such
option is exercised, the Option Shares are collectively called the "Shares".
BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC, Dain Rauscher Wessels
and First Albany Corporation have agreed to act as representatives of the
several Underwriters (in such capacity, the "Representatives") in connection
with the offering and sale of the Common Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-78197), which contains a form of prospectus to be used in connection with
the public offering and sale of
________________________
/1/ Plus an option to purchase up to 600,000 additional shares from the Company
to cover over-allotments.
<PAGE>
the Shares. Such registration statement, as amended, including the financial
statements, exhibits and schedules thereto, in the form in which it was declared
effective by the Commission under the Securities Act of 1933 and the rules and
regulations promulgated thereunder (collectively, the "Securities Act"),
including any information deemed to be a part thereof at the time of
effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is
called the "Registration Statement". Any registration statement filed by the
Company pursuant to Rule 462(b) under the Securities Act is called the "Rule
462(b) Registration Statement", and from and after the date and time of filing
of the Rule 462(b) Registration Statement the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. Such prospectus, in the
form first used by the Underwriters to confirm sales of the Shares, is called
the "Prospectus"; provided, however, if the Company has, with the consent of
BancBoston Robertson Stephens Inc., elected to rely upon Rule 434 under the
Securities Act, the term "Prospectus" shall mean the Company's prospectus
subject to completion (each, a "preliminary prospectus") dated May 11, 1999
(such preliminary prospectus is called the "Rule 434 preliminary prospectus"),
together with the applicable term sheet (the "Term Sheet") prepared and filed by
the Company with the Commission under Rules 434 and 424(b) under the Securities
Act and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. All references in this Agreement to (i) the
Registration Statement, the Rule 462(b) Registration Statement, a preliminary
prospectus, the Prospectus or the Term Sheet, or any amendments or supplements
to any of the foregoing, shall include any copy thereof filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR").
The Company and each of the Selling Shareholders hereby confirms their
respective agreements with the Underwriters as follows:
Section 1. Representations and Warranties of the Company and the Selling
Shareholders.
A. Representations and Warranties of the Company. The Company hereby
represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration Statement
and any Rule 462(b) Registration Statement have been declared effective by the
Commission under the Securities Act. The Company has complied to the
Commission's satisfaction with all requests of the Commission for additional or
supplemental information. No stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement is in effect
and no proceedings for such purpose have been instituted or are pending or, to
the best knowledge of the Company, are contemplated or threatened by the
Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Shares. Each
of the Registration Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and at all
subsequent times, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus, as
<PAGE>
amended or supplemented, as of its date and at all subsequent times, did not and
will not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representatives expressly
for use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
(b) Each of the Company and its subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation with full power and authority (corporate and
other) to own, lease and operate its properties and conduct its business as
described in the Prospectus; the Company owns all of the outstanding capital
stock of its subsidiaries free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest; each of the Company and its
subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
Material Adverse Effect (as defined below); no proceeding has been instituted in
any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke,
limit or curtail, such power and authority or qualification; each of the Company
and its subsidiaries is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from state,
federal and other regulatory authorities which are material to the conduct of
its business, all of which are valid and in full force and effect; neither the
Company nor any of its subsidiaries is in violation of its respective charter or
bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material bond,
debenture, note or other evidence of indebtedness, or in any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company or any of its subsidiaries is
a party or by which it or any of its subsidiaries or their respective properties
may be bound; and neither the Company nor any of its subsidiaries is in material
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any of its subsidiaries or over
their respective properties of which it has knowledge. The Company does not own
or control, directly or indirectly, any corporation, association or other entity
other than Critical Path GmbH.
(c) The Company has full legal right, power and authority to enter into
this Agreement and perform the transactions contemplated hereby. This Agreement
has been duly authorized, executed and delivered by the Company and is a valid
and binding agreement on the part of the Company, enforceable in accordance with
its terms, except as rights to indemnification hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; the performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any bond, debenture, note or other evidence of indebtedness, or under any
lease, contract,
<PAGE>
indenture, mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which it or any of its subsidiaries or their respective properties
may be bound, (ii) the charter or bylaws of the Company or any of its
subsidiaries, or (iii) any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties. No consent, approval,
authorization or order of or qualification with any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective properties is
required for the execution and delivery of this Agreement and the consummation
by the Company or any of its subsidiaries of the transactions herein
contemplated, except such as may be required under the Act, or under state or
other securities or Blue Sky laws, all of which requirements have been satisfied
in all material respects.
(d) There is not any pending or, to the best of the Company's knowledge,
threatened action, suit, claim or proceeding against the Company, any of its
subsidiaries or any of their respective officers or any of their respective
properties, assets or rights before any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective officers or properties or otherwise which
(i) might result in any Material Adverse Change (as defined below) or might
materially and adversely affect their properties, assets or rights, (ii) might
prevent consummation of the transactions contemplated hereby or (iii) is
required to be disclosed in the Registration Statement or Prospectus and is not
so disclosed; and there are no agreements, contracts, leases or documents of the
Company or any of its subsidiaries of a character required to be described or
referred to in the Registration Statement or Prospectus or to be filed as an
exhibit to the Registration Statement by the Act or the Rules and Regulations
which have not been accurately described in all material respects in the
Registration Statement or Prospectus or filed as exhibits to the Registration
Statement.
(e) All outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, were not issued
in violation of or subject to any preemptive rights or other rights to subscribe
for or purchase securities, and the authorized and outstanding capital stock of
the Company is as set forth in the Prospectus under the caption "Capitalization"
and conforms in all material respects to the statements relating thereto
contained in the Registration Statement and the Prospectus (and such statements
correctly state the substance of the instruments defining the capitalization of
the Company); the Firm Shares and the Option Shares to be purchased from the
Company hereunder have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered by the
Company against payment therefor in accordance with the terms of this Agreement,
will be duly and validly issued and fully paid and nonassessable, and will be
sold free and clear of any pledge, lien, security interest, encumbrance, claim
or equitable interest; and no preemptive right, co-sale right, registration
right, right of first refusal or other similar right of shareholders exists with
respect to any of the Firm Shares or Option Shares to be purchased from the
Company hereunder or the issuance and sale thereof other than those that have
been expressly waived prior to the date hereof and those that will automatically
expire upon and will not apply to the consummation of the transactions
contemplated on the Closing Date. No further approval or authorization of any
shareholder, the Board of Directors of the Company or others is required for the
issuance and sale or transfer of the Shares except as may be required under the
Act or under
<PAGE>
state or other securities or Blue Sky laws. All issued and outstanding shares of
capital stock of each subsidiary of the Company have been duly authorized and
validly issued and are fully paid and nonassessable, and were not issued in
violation of or subject to any preemptive right, or other rights to subscribe
for or purchase shares and are owned by the Company free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest.
Except as disclosed in the Prospectus and the financial statements of the
Company, and the related notes thereto, included in the Prospectus, neither the
Company nor any subsidiary has outstanding any options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
(f) PricewaterhouseCoopers LLP, which has examined the consolidated
financial statements of the Company, together with the related schedules and
notes, for the period from February 24, 1997 to December 31, 1997 and for the
twelve month period ended December 31, 1998, filed with the Commission as a part
of the Registration Statement, which are included in the Prospectus, are
independent accountants within the meaning of the Act and the Rules and
Regulations; the audited consolidated financial statements of the Company,
together with the related schedules and notes, and the unaudited consolidated
financial information, forming part of the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company and its subsidiaries at the respective dates and for the
respective periods to which they apply; and all audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, filed with the Commission as
part of the Registration Statement, have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved except as may be otherwise stated therein. The selected and
summary financial and statistical data included in the Registration Statement
present fairly the information shown therein and have been compiled on a basis
consistent with the audited financial statements presented therein. No other
financial statements or schedules are required to be included in the
Registration Statement.
(g) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been (i) any material
adverse change, or any development that could reasonably be expected to result
in a material adverse change, in the condition, financial or otherwise, or in
the earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
subsidiaries, considered as one entity (any such change or effect, where the
context so requires, is called a "Material Adverse Change" or a "Material
Adverse Effect"), (ii) any transaction that is material to the Company and its
subsidiaries considered as one enterprise, except transactions entered into in
the ordinary course of business, (iii) any obligation, direct or contingent,
that is material to the Company and its subsidiaries considered as one
enterprise, incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of the Company or any of its subsidiaries that
is material to the Company and its subsidiaries considered as one enterprise,
(v) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its subsidiaries, or (vi) any loss or
damage (whether or not insured) to the
<PAGE>
property of the Company or any of its subsidiaries which has been sustained or
will have been sustained which has a Material Adverse Effect.
(h) Except as set forth in the Registration Statement and Prospectus, (i)
each of the Company and its subsidiaries has good and marketable title to all
properties and assets described in the Registration Statement and Prospectus as
owned by it, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest, other than such as would not have a Material
Adverse Effect, (ii) the agreements to which the Company or any of its
subsidiaries is a party described in the Registration Statement and Prospectus
are valid agreements, enforceable by the Company and its subsidiaries (as
applicable), except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles and, to the best of the Company's knowledge, the other contracting
party or parties thereto are not in material breach or material default under
any of such agreements, and (iii) each of the Company and its subsidiaries has
valid and enforceable leases for all properties described in the Registration
Statement and Prospectus as leased by it, except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles. Except as set forth in the Registration Statement
and Prospectus, the Company owns or leases all such properties as are necessary
to its operations as now conducted or as proposed to be conducted.
(i) The Company and its subsidiaries have timely filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes shown thereon as due, and there is no tax deficiency that has been or, to
the best of the Company's knowledge, might be asserted against the Company or
any of its subsidiaries that might have a Material Adverse Effect; and all tax
liabilities are adequately provided for on the books of the Company and its
subsidiaries.
(j) The Company and its subsidiaries maintain insurance with insurers of
recognized financial responsibility of the types and in the amounts generally
deemed adequate for their respective businesses and consistent with insurance
coverage maintained by similar companies in similar businesses, including, but
not limited to, insurance covering real and personal property owned or leased by
the Company or its subsidiaries against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect; neither the Company nor any such
subsidiary has been refused any insurance coverage sought or applied for; and
neither the Company nor any such subsidiary has any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise.
(k) To the best of Company's knowledge, no labor disturbance by the
employees of the Company or any of its subsidiaries exists or is imminent; and
the Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, subassemblers, value added
resellers, subcontractors, original equipment manufacturers, authorized dealers
or international distributors that might be expected to result in a Material
Adverse Change. No collective bargaining agreement exists with any of the
Company's employees and, to the best of the Company's knowledge, no such
agreement is imminent.
<PAGE>
(l) Each of the Company and its subsidiaries owns or possesses adequate
rights to use all patents, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names and copyrights which are necessary to
conduct its businesses as described in the Registration Statement and
Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a Material
Adverse Effect; the Company has not received any notice of, and has no knowledge
of, any infringement of or conflict with asserted rights of the Company by
others with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights; and the Company
has not received any notice of, and has no knowledge of, any infringement of or
conflict with asserted rights of others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, might have a Material Adverse Effect.
(m) The Common Stock is registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is listed
on The Nasdaq National Market, and the Company has taken no action designed to,
or likely to have the effect of, terminating the registration of the Common
Stock under the Exchange Act or delisting the Common Stock from The Nasdaq
National Market, nor has the Company received any notification that the
Commission or the National Association of Securities Dealers, Inc. ("NASD") is
contemplating terminating such registration or listing.
(n) The Company has been advised concerning the Investment Company Act of
1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and
has in the past conducted, and intends in the future to conduct, its affairs in
such a manner as to ensure that it will not become an "investment company" or a
company "controlled" by an "investment company" within the meaning of the 1940
Act and such rules and regulations.
(o) The Company has not distributed and will not distribute prior to the
later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.
(p) The Company has not taken and will not take, directly or indirectly,
any action designed to or that might reasonably be expected to cause or result
in stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Shares.
(q) Each officer and director of the Company and each beneficial owner of
Common Stock has agreed in writing that such person will not, for a period of
180 days from March 29, 1999 (the "Lock-up Period"), offer to sell, contract to
sell, or otherwise sell, dispose of, loan, pledge or grant any rights with
respect to (collectively, a "Disposition") any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock or any securities
convertible into or exchangeable for shares of Common Stock (collectively,
"Securities") now owned or hereafter acquired directly by such person or with
respect to which such person has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, (ii) as a distribution
to partners or shareholders of such person, provided that the distributees
thereof agree in writing to be bound by the terms of this restriction, or (iii)
with the prior written consent
<PAGE>
of BancBoston Robertson Stephens Inc. The foregoing restriction has been
expressly agreed to preclude the holder of the Securities from engaging in any
hedging or other transaction which is designed to or reasonably expected to lead
to or result in a Disposition of Securities during the Lock-up Period, even if
such Securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from Securities. Furthermore, such person has also agreed and
consented to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of the Securities held by such person except in
compliance with this restriction. The Company has provided to counsel for the
Underwriters a complete and accurate list of all securityholders of the Company
and the number and type of securities held by each securityholder. The Company
has provided to counsel for the Underwriters true, accurate and complete copies
of all of the agreements pursuant to which its officers, directors and
shareholders have agreed to such or similar restrictions (the "Lock-up
Agreements") presently in effect or effected hereby. The Company hereby
represents and warrants that it will not release any of its officers, directors
or other shareholders from any Lock-up Agreements currently existing or
hereafter effected without the prior written consent of BancBoston Robertson
Stephens Inc., except that the Company has, with the prior written consent of
BancBoston Robertson Stephens Inc. (which consent BancBoston Roberston Stephens
Inc. hereby confirms), released certain of its officers, directors and
shareholders to sell that number of Common Shares as have been registered on
behalf of such Selling Shareholders under the Registration Statement.
(r) Except as set forth in the Registration Statement and Prospectus, (i)
the Company is in compliance with all rules, laws and regulations relating to
the use, treatment, storage and disposal of toxic substances and protection of
health or the environment ("Environmental Laws") which are applicable to its
business, (ii) the Company has received no notice from any governmental
authority or third party of an asserted claim under Environmental Laws, which
claim is required to be disclosed in the Registration Statement and the
Prospectus, (iii) the Company will not be required to make future material
capital expenditures to comply with Environmental Laws and (iv) no property
which is owned, leased or occupied by the Company has been designated as a
Superfund site pursuant to the Comprehensive Response, Compensation, and
Liability Act of 1980, as amended (42 U.S.C. (S) 9601, et seq.), or otherwise
designated as a contaminated site under applicable state or local law.
(s) The Company and each of its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(t) There are no outstanding loans, advances (except normal advances for
business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
<PAGE>
(u) There are no issues related to the Company's, or any of its
subsidiaries', preparedness for the Year 2000 that (i) are of a character
required to be described or referred to in the Registration Statement or
Prospectus by the Act or the Rules and Regulations which have not been
accurately described in the Registration Statement or Prospectus or (ii) might
reasonably be expected to result in any Material Adverse Change or that might
materially affect its properties, assets or rights. All internal computer
systems and each Constituent Component (as defined below) of those systems and
all computer-related products and each Constituent Component of those products
of the Company and each of its subsidiaries will, by December 31, 1999, fully
comply with the Year 2000 Qualification Requirements. "Year 2000 Qualification
Requirements" means that the internal computer systems and each Constituent
Component (as defined below) of those systems and all computer-related products
of each Constituent Component (as defined below) of those products of the
Company and each of its subsidiaries (i) have been reviewed to confirm that they
store, process (including sorting and performing mathematical operations,
calculations and computations), input and output data containing date and
information correctly regardless of whether the date contains dates and times
before, on or after January 1, 2000, (ii) have been designed to ensure date and
time entry recognition, calculations that accommodate same century and multi-
century formulas and date values, leap year recognition and calculations, and
date data interface values that reflect the century, (iii) accurately manage and
manipulate data involving dates and times, including single century formulas and
multi-century formulas, and will not cause an abnormal ending scenario within
the application or generate incorrect values or invalid results involving such
dates, (iv) accurately process any date rollover, and (v) accept and respond to
two-digit year date input in a manner that resolves any ambiguities as to the
century. "Constituent Component" means all software (including operating
systems, programs, packages and utilities), firmware, hardware, networking
components, and peripherals provided as part of the configuration.
Any certificate signed by an officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
B. Representations and Warranties of the Selling Shareholders. Each
Selling Shareholder represents, warrants and covenants to each Underwriter as
follows:
(a) The Underwriting Agreement. This Agreement has been duly authorized,
executed and delivered by or on behalf of such Selling Shareholder and is a
valid and binding agreement of such Selling Shareholder, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(b) The Custody Agreement and Power of Attorney. Each of the (i) Custody
Agreement signed by such Selling Shareholder and American Securities Transfer &
Trust, Inc., as custodian (the "Custodian"), relating to the deposit of the
Shares to be sold by such Selling Shareholder (the "Custody Agreement") and (ii)
Power of Attorney appointing certain individuals named therein as such Selling
Shareholder's attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set
forth therein relating to the transactions contemplated hereby and by the
Prospectus (the "Power of Attorney"), of such Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a valid
and binding agreement of such Selling
<PAGE>
Shareholder, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except as the
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles. Each Selling
Shareholder agrees that the Shares to be sold by such Selling Shareholder on
deposit with the Custodian is subject to the interests of the Underwriters, that
the arrangements made for such custody are to that extent irrevocable, and that
the obligations of such Selling Shareholder hereunder shall not be terminated,
except as provided in this Agreement or in the Custody Agreement, by any act of
the Selling Shareholder, by operation of law, by death or incapacity of such
Selling Shareholder or by the occurrence of any other event. If such Selling
Shareholder should die or become incapacitated, or in any other event should
occur, before the delivery of the Shares to be sold by such Selling Shareholder
hereunder, the documents evidencing the Shares to be sold by such Selling
Shareholder then on deposit with the Custodian shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such death, incapacity or other event had not occurred, regardless of whether or
not the Custodian shall have received notice thereof.
(c) Title to Shares to be Sold. Such Selling Shareholder is the lawful
owner of the Shares to be sold by such Selling Shareholder hereunder and upon
sale and delivery of, and payment for, such Shares, as provided herein, such
Selling Shareholder will convey good and marketable title to such Shares, free
and clear of all liens, encumbrances, equities and claims whatsoever.
(d) All Authorizations Obtained. Such Selling Shareholder has, and on the
First Closing Date and the Second Closing Date (as defined below) will have,
good and valid title to all of the Shares which may be sold by such Selling
Shareholder pursuant to this Agreement on such date and the legal right and
power, and all authorizations and approvals required by law and under its
charter or by-laws, partnership agreement, or other organizational documents to
enter into this Agreement and its Custody Agreement and Power of Attorney, to
sell, transfer and deliver all of the Shares which may be sold by such Selling
Shareholder pursuant to this Agreement and to comply with its other obligations
hereunder and thereunder.
(e) No Further Consents, Authorization or Approvals. No consent, approval,
authorization or order of any court or governmental agency or body is required
for the consummation by such Selling Shareholder of the transactions
contemplated herein, except such as may have been obtained under the Securities
Act and such as may be required under the federal and provincial securities laws
of Canada or the blue sky laws or any jurisdiction in connection with the
purchase and distribution of the Shares by the Underwriters and such other
approvals as have been obtained.
(f) Non-Contravention. Neither the sale of the Shares being sold by such
Selling Shareholder nor the consummation of any other of the transactions herein
contemplated by such Selling Shareholder or the fulfillment of the terms hereof
by such Selling Shareholder will conflict with, result in a breach or violation
of, or constitute a default under any law or the terms of any indenture or other
agreement or instrument to which such Selling Shareholder is party or bound, any
judgment, order or decree applicable to such Selling Shareholder or any court or
regulatory body, administrative agency, governmental body or arbitrator having
jurisdiction over such Selling Shareholder.
<PAGE>
(g) No Registration or Other Similar Rights. Such Selling Shareholder
does not have any registration or other similar rights to have any equity or
debt securities registered for sale by the Company under the Registration
Statement or included in the offering contemplated by this Agreement, except for
such rights as are described in the Prospectus under "Shares Eligible for Future
Sale".
(h) No Preemptive, Co-sale or other Rights. Such Selling Shareholder does
not have, or has waived prior to the date hereof, any preemptive right, co-sale
right or right of first refusal or other similar right to purchase any of the
Shares that are to be sold by the Company or any of the other Selling
Shareholders to the Underwriters pursuant to this Agreement; and such Selling
Shareholder does not own any warrants, options or similar rights to acquire, and
does not have any right or arrangement to acquire, any capital stock, right,
warrants, options or other securities from the Company, other than those
described in the Registration Statement and the Prospectus.
(i) Disclosure Made by Such Selling Shareholder in the Prospectus. All
information furnished by or on behalf of such Selling Shareholder in writing
expressly for use in the Registration Statement and Prospectus is, and on the
First Closing Date and the Second Closing Date (as defined below) will be, true,
correct, and complete in all material respects, and does not, and on the First
Closing Date and the Second Closing Date will not, contain any untrue statement
of a material fact or omit to state any material fact necessary to make such
information not misleading. Such Selling Shareholder confirms as accurate the
number of shares of the Company's capital stock set forth opposite such Selling
Shareholder's name in the Prospectus under the caption "Principal and Selling
Shareholders" (both prior to and after giving effect to the sale of the Shares).
(j) No Price Stabilization or Manipulation. Such Selling Shareholder has
not taken and will not take, directly or indirectly, any action designed to or
that might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Shares to facilitate the sale or resale
of the Shares.
(k) No Transfer Taxes or Other Fees. There are no transfer taxes or other
similar fees or charges under Federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the sale by the Selling Shareholders
of the Shares.
(l) Distribution of Offering Materials by the Selling Shareholders. The
Selling Shareholders have not distributed and will not distribute, prior to the
later of the Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Shares, any offering material in connection
with the offering and sale of the Shares by such Selling Shareholder other than
a preliminary prospectus, the Prospectus or the Registration Statement.
(m) Confirmation of Company Representations and Warranties. Such Selling
Shareholder has no reason to believe that the representations and warranties of
the Company contained in Section 1(A) hereof are not true and correct, is
familiar with the Registration Statement and the Prospectus and has no knowledge
of any material fact, condition or information not disclosed in the Registration
Statement or the Prospectus which has had or may result in a Material Adverse
Change, and is not prompted to sell the Shares to be sold by such Selling
Shareholder by any information concerning the Company which is not set forth in
the Registration Statement and the Prospectus.
<PAGE>
Any certificate signed by or on behalf of any Selling Shareholder and
delivered to the Representatives or to counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Shareholder to each
Underwriter as to the matters covered thereby.
Section 2. Purchase, Sale and Delivery of the Shares.
(a) The Firm Shares. Upon the terms herein set forth, (i) the Company
agrees to issue and sell to the several Underwriters an aggregate of 3,000,000
Firm Shares and (ii) the Selling Shareholders agree to sell to the several
Underwriters an aggregate of 1,000,000 Firm Shares, each Selling Shareholder
selling the number of Firm Shares set forth opposite such Selling Shareholder's
name on Schedule B. On the basis of the representations, warranties and
agreements herein contained, and upon the terms but subject to the conditions
herein set forth, the Underwriters agree, severally and not jointly, to purchase
from the Company and the Selling Shareholders the respective number of Firm
Shares set forth opposite their names on Schedule A. The purchase price per Firm
Share to be paid by the several Underwriters to the Company and the Selling
Shareholders shall be $[___] per share.
(b) The First Closing Date. Delivery of the Firm Shares to be purchased
by the Underwriters and payment therefor shall be made by the Company and the
Representatives at 6:00 a.m. San Francisco time, at the offices of Wilson,
Sonsini, Goodrich & Rosati at 650 Page Mill Road, Palo Alto, California (or at
such other place as may be agreed upon among the Representatives and the
Company), (i) on the third (3rd) full business day following the first day that
Shares are traded, (ii) if this Agreement is executed and delivered after 1:30
P.M., San Francisco time, the fourth (4th) full business day following the day
that this Agreement is executed and delivered or (iii) at such other time and
date not later that seven (7) full business days following the first day that
Shares are traded as the Representatives and the Company may determine (or at
such time and date to which payment and delivery shall have been postponed
pursuant to Section 8 hereof), such time and date of payment and delivery being
herein called the "Closing Date;" provided, however, that if the Company has not
made available to the Representatives copies of the Prospectus within the time
provided in Section 4(d) hereof, the Representatives may, in their sole
discretion, postpone the Closing Date until no later that two (2) full business
days following delivery of copies of the Prospectus to the Representatives.
(c) The Option Shares; the Second Closing Date. In addition, on the basis
of the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Selling Shareholders
hereby grant an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of 600,000 Option Shares from the Selling
Shareholders at the same purchase price per share to be paid by the Underwriters
for the Firm Shares. The option granted hereunder is for use by the
Underwriters solely in covering any over-allotments in connection with the sale
and distribution of the Firm Shares. The option granted hereunder may be
exercised at any time upon notice by the Representatives to the Selling
Shareholders (with a copy to the Company), which notice may be given at any time
within 30 days from the date of this Agreement. The time and date of delivery
of the Option Shares, if subsequent to the First Closing Date, is called the
"Second Closing Date" and shall be determined by the Representative and shall
not be earlier than three nor later than five full business days after delivery
of such notice of exercise. If any Option Shares are to be purchased, (i) each
Underwriter agrees, severally and not jointly, to purchase the number of Option
Shares (subject to such adjustments to eliminate fractional shares as the
Representatives may determine) that bears the same proportion to the total
number of Option Shares to be
<PAGE>
purchased as the number of Firm Shares set forth on Schedule A opposite the name
of such Underwriter bears to the total number of Firm Shares and (ii) each
Selling Shareholder agrees, severally and not jointly, to sell the number of
Option Shares (subject to such adjustments to eliminate fractional shares as the
Representatives may determine) that bears the same proportion to the total
number of Option Shares to be sold as the number of Option Shares set forth in
Schedule B opposite the name of such Selling Shareholder bears to the total
number of Option Shares. The Representatives may cancel the option at any time
prior to its expiration by giving written notice of such cancellation to the
Selling Shareholders (with a copy to the Company).
(d) Public Offering of the Shares. The Representatives hereby advises the
Company and the Selling Shareholders that the Underwriters intend to offer for
sale to the public, as described in the Prospectus, their respective portions of
the Shares as soon after this Agreement has been executed and the Registration
Statement has been declared effective as the Representatives, in their sole
judgment, have determined is advisable and practicable.
(e) Payment for the Shares. Payment for the Shares to be sold by the
Company shall be made at the First Closing Date by wire transfer of immediately
available funds to the order of the Company. Payment for the Shares to be sold
by the Selling Shareholders shall be made at the First Closing Date (and, if
applicable, at the Second Closing Date) by wire transfer of immediately
available funds to the order of the Custodian.
It is understood that the Representatives have been authorized, for
their own accounts and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Shares and any Option Shares the Underwriters have agreed to purchase.
BancBoston Robertson Stephens Inc., individually and not as the Representative
of the Underwriters, may (but shall not be obligated to) make payment for any
Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representatives by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
Each Selling Shareholder hereby agrees that (i) it will pay all
stock transfer taxes, stamp duties and other similar taxes, if any, payable upon
the sale or delivery of the Shares to be sold by such Selling Shareholder to the
several Underwriters, or otherwise in connection with the performance of such
Selling Shareholder's obligations hereunder and (ii) the Custodian is authorized
to deduct for such payment any such amounts from the proceeds to such Selling
Shareholder hereunder and to hold such amounts for the account of such Selling
Shareholder with the Custodian under the Custody Agreement.
(f) Delivery of the Shares. The Company and the Selling Shareholders
shall deliver, or cause to be delivered a credit representing the Firm Shares to
an account or accounts at The Depository Trust Company as designated by the
Representatives for the accounts of the Representatives and the several
Underwriters at the First Closing Date, against the irrevocable release of a
wire transfer of immediately available funds for the amount of the purchase
price therefor. The Company and the Selling Shareholders shall also deliver, or
cause to be delivered a credit representing the Option Shares to an account or
accounts at The Depository Trust Company as designated by the Representatives
for the accounts of the Representatives and the several Underwriters, at the
First Closing Date or the Second Closing Date, as the case may be, against the
irrevocable release of a wire transfer of immediately available funds for the
amount
<PAGE>
of the purchase price therefor. Time shall be of the essence, and delivery at
the time and place specified in this Agreement is a further condition to the
obligations of the Underwriters.
(g) Delivery of Prospectus to the Underwriters. Not later than 12:00 noon
on the second business day following the date the Shares are released by the
Underwriters for sale to the public, the Company shall deliver or cause to be
delivered copies of the Prospectus in such quantities and at such places as the
Representatives shall request.
Section 3. Covenants of the Company and the Selling Shareholders.
A. Covenants of the Company. The Company further covenants and agrees
with each Underwriter as follows:
(a) Registration Statement Matters. The Company will (i) use its best
efforts to cause the Registration Statement to become effective or, if the
procedure in Rule 430A of the Securities Act is followed, to prepare and timely
file with the Commission under Rule 424(b) under the Securities Act a Prospectus
in a form approved by the Representatives containing information previously
omitted at the time of effectiveness of the Registration Statement in reliance
on Rule 430A of the Securities Act and (ii) not file any amendment to the
Registration Statement or supplement to the Prospectus of which the
Representatives shall not previously have been advised and furnished with a copy
or to which the Representatives shall have reasonably objected in writing or
which is not in compliance with the Securities Act. If the Company elects to
rely on Rule 462(b) under the Securities Act, the Company shall file a Rule
462(b) Registration Statement with the Commission in compliance with Rule 462(b)
under the Securities Act prior to the time confirmations are sent or given, as
specified by Rule 462(b)(2) under the Securities Act, and shall pay the
applicable fees in accordance with Rule 111 under the Securities Act.
(b) Securities Act Compliance. The Company will advise the
Representatives promptly (i) when the Registration Statement or any post-
effective amendment thereto shall have become effective, (ii) of receipt of any
comments from the Commission, (iii) of any request of the Commission for
amendment of the Registration Statement or for supplement to the Prospectus or
for any additional information and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the use
of the Prospectus or of the institution of any proceedings for that purpose. The
Company will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(c) Blue Sky Compliance. The Company will cooperate with the
Representatives and counsel for the Underwriters in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both national
and foreign) as the Representative may reasonably have designated in writing and
will make such applications, file such documents, and furnish such information
as may be reasonably required for that purpose, provided the Company shall not
be required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction where it is not now so qualified or
required to file such a consent. The Company will, from time to time, prepare
and file such statements, reports and other documents, as are or may be required
to continue such qualifications in effect for so long a period as the
Representative may reasonably request for distribution of the Shares.
<PAGE>
(d) Amendments and Supplements to the Prospectus and Other Securities Act
Matters. The Company will comply with the Securities Act and the Exchange Act,
and the rules and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares as contemplated in this Agreement
and the Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur as a
result of which, in the judgment of the Company or in the reasonable opinion of
the Representative or counsel for the Underwriters, it becomes necessary to
amend or supplement the Prospectus in order to make the statements therein, in
the light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend or
supplement the Prospectus to comply with any law, the Company promptly will
prepare and file with the Commission, and furnish at its own expense to the
Underwriters and to dealers, an appropriate amendment to the Registration
Statement or supplement to the Prospectus so that the Prospectus as so amended
or supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with the law.
(e) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representative, without charge, during the period
when delivery of a Prospectus is required under the Act ("Prospectus Delivery
Period"), as many copies of the Prospectus and any amendments and supplements
thereto (including any documents incorporated or deemed incorporated by
reference therein) as the Representatives may request.
(f) Insurance. The Company shall (i) obtain Directors and Officers
liability insurance in the minimum amount of $10 million which shall apply to
the offering contemplated hereby and (ii) shall cause BancBoston Robertson
Stephens Inc. to be added as an additional insured to such policy in respect of
the offering contemplated hereby.
(g) Notice of Subsequent Events. If at any time during the ninety (90)
day period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Company Shares has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(h) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Shares sold by it in the manner described under the caption "Use of
Proceeds" in the Prospectus.
(i) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Company Shares.
(j) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month period
ending June 30, 2000 that satisfies the provisions of Section 11(a) of the
Securities Act.
<PAGE>
(k) Periodic Reporting Obligations. During the Prospectus Delivery
Period, the Company shall file, on a timely basis, with the Commission and the
Nasdaq National Market all reports and documents required to be filed under the
Exchange Act.
(l) Agreement Not to Offer or Sell Additional Securities. The Company will
not, without the prior written consent of BancBoston Robertson Stephens Inc.,
for a period of 180 days following March 29, 1999, offer, sell or contract to
sell, or otherwise dispose of or enter into any transaction which is designed
to, or could be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, or announce the offering of, any other Common Shares or any
securities convertible into, or exchangeable for, Common Shares; provided,
however, that the Company may (i) issue and sell Common Shares pursuant to any
director or employee stock option plan, stock ownership plan or dividend
reinvestment plan of the Company in effect at the date of the Prospectus and
described in the Prospectus and (ii) the Company may issue Common Shares
issuable upon the conversion of securities or the exercise of warrants
outstanding at the date of the Prospectus and described in the Prospectus.
(m) Future Reports to the Representatives. During the period of five
years hereafter the Company will furnish to the Representatives (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, shareholders' equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
or certified public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the NASD or any securities exchange; and (iii) as
soon as available, copies of any report or communication of the Company mailed
generally to holders of its capital stock.
B. Covenants of the Selling Shareholders. Each Selling Shareholder
further covenants and agrees with each Underwriter:
(a) Agreement Not to Offer or Sell Additional Securities. Such Selling
Shareholder will not, during the Lock-up Period, make a disposition of any
Common Shares (other than the Common Shares to be sold pursuant to the
Prospectus), any options or warrants to purchase any Common Shares or any
securities convertible into or exchangeable for Common Shares (collectively,
"Securities") now owned or hereafter acquired directly by such person or with
respect to which such person has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, (ii) as a distribution
to partners or shareholders of such person, provided that the distributees
thereof agree in writing to be bound by the terms of this restriction, (iii)
with respect to dispositions of Common Shares acquired on the open market or
(iv) with the prior written consent of BancBoston Robertson Stephens Inc. The
foregoing restriction has been expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction which is designed
to or reasonably expected to lead to or result in a disposition of the Company's
Securities during the Lock-up Period, even if such Securities would be disposed
of by someone other than such holder. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any
<PAGE>
security (other than a broad-based market basket or index) that includes,
relates to or derives any significant part of its value from Securities.
Furthermore, such person has also agreed and consented to the entry of stop
transfer instructions with the Company's transfer agent against the transfer of
the Securities held by such person except in compliance with this restriction.
(b) Delivery of Forms W-8 and W-9. To deliver to the Representatives
prior to the First Closing Date a properly completed and executed United States
Treasury Department Form W-8 (if the Selling Shareholder is a non-United States
person) or Form W-9 (if the Selling Shareholder is a United States Person).
(c) Notification of Untrue Statements, etc. If, at any time prior to the
date on which the distribution of the Common Shares as contemplated herein and
in the Prospectus has been completed, as determined by the Representatives, such
Selling Shareholder has knowledge of the occurrence of any event as a result of
which the Prospectus or the Registration Statement, in each case as then amended
or supplemented, would include an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, such Selling
Shareholder will promptly notify the Company and the Representatives.
Section 4. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Shareholders set forth in Sections 1(A) and 1(B) hereof as of the date hereof
and as of the First Closing Date as though then made and, with respect to the
Option Shares, as of the Second Closing Date as though then made, to the timely
performance by the Company and the Selling Shareholders of their respective
covenants and other obligations hereunder, and to each of the following
additional conditions:
(a) Compliance with Registration Requirements; No Stop Order; No Objection
from the NASD. The Registration Statement shall have become effective prior to
the execution of this Agreement, or at such later date as shall be consented to
in writing by you; and no stop order suspending the effectiveness thereof shall
have been issued and no proceedings for that purpose shall have been initiated
or, to the knowledge of the Company, any Selling Shareholder or any Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of Underwriters'
Counsel; and the NASD shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
(b) Corporate Proceedings. All corporate proceedings and other legal
matters in connection with this Agreement, the form of Registration Statement
and the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to Underwriters'
counsel, and such counsel shall have been furnished with such papers and
information as they may reasonably have requested to enable them to pass upon
the matters referred to in this Section.
(c) No Material Adverse Change. Subsequent to the execution and delivery
of this Agreement and prior to the First Closing Date, or the Second Closing
Date, as the case may be,
<PAGE>
there shall not have been any Material Adverse Change from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is material
and adverse and that makes it, in your sole judgment, impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus.
(d) Opinion of Counsel for the Company. You shall have received on the
First Closing Date, and the Second Closing Date, as the case may be, an opinion
of Wilson, Sonsini, Goodrich & Rosati, counsel for the Company, substantially in
the form of Exhibit B attached hereto, dated the First Closing Date, or the
Second Closing Date, addressed to the Underwriters and with reproduced copies or
signed counterparts thereof for each of the Underwriters.
Counsel rendering the opinion contained in Exhibit B may rely as to
questions of law not involving the laws of the United States or the State of
California upon opinions of local counsel, and as to questions of fact upon
representations or certificates of officers of the Company, the Selling
Shareholders or officers of the Selling Shareholders (when the Selling
Shareholder is not a natural person), and of government officials, in which case
their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' counsel.
(e) Opinion of Counsel for the Underwriters. You shall have received on
the First Closing Date or the Second Closing Date, as the case may be, an
opinion of Cooley Godward LLP, substantially in the form of Exhibit D hereto.
The Company shall have furnished to such counsel such documents as they may have
requested for the purpose of enabling them to pass upon such matters.
(f) Accountants' Comfort Letter. You shall have received on the First
Closing Date and on the Second Closing Date, as the case may be, a letter from
PricewaterhouseCoopers LLC addressed to the Underwriters, dated the First
Closing Date or the Second Closing Date, as the case may be, confirming that
they are independent certified public accountants with respect to the Company
within the meaning of the Act and the applicable published Rules and Regulations
and based upon the procedures described in such letter delivered to you
concurrently with the execution of this Agreement (herein called the "Original
Letter"), but carried out to a date not more than four (4) business days prior
to the First Closing Date or the Second Closing Date, as the case may be, (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letter are accurate as of the First Closing Date or the Second
Closing Date, as the case may be, and (ii) setting forth any revisions and
additions to the statements and conclusions set forth in the Original Letter
which are necessary to reflect any changes in the facts described in the
Original Letter since the date of such letter, or to reflect the availability of
more recent financial statements, data or information. The letter shall not
disclose any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise from that set forth in the Registration Statement
or Prospectus, which, in your sole judgment, is material and adverse and that
makes it, in your sole judgment, impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus. The
Original Letter from PricewaterhouseCoopers LLC shall be addressed to or for the
use of the Underwriters in form and substance satisfactory to the Underwriters
and shall (i) represent, to the extent true, that they are independent certified
public accountants with respect to the Company within the meaning of the Act and
the applicable
<PAGE>
published Rules and Regulations, (ii) set forth their opinion with respect to
their examination of the consolidated balance sheet of the Company as of
December 31, 1998 and related consolidated statements of operations,
shareholders' equity, and cash flows for the twelve (12) months ended December
31, 1998, (iii) state that PricewaterhouseCoopers LLC has performed the
procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a
review of interim financial information and providing the report of
PricewaterhouseCoopers LLC as described in SAS 71 on the financial statements
for the three-month period ended March 31, 1999 (the "Quarterly Financial
Statements"), (iv) state that in the course of such review, nothing came to
their attention that leads them to believe that any material modifications need
to be made to any of the Quarterly Financial Statements in order for them to be
in compliance with generally accepted accounting principles consistently applied
across the periods presented, and address other matters agreed upon by
PricewaterhouseCoopers LLC and you. In addition, you shall have received from
PricewaterhouseCoopers LLC a letter addressed to the Company and made available
to you for the use of the Underwriters stating that their review of the
Company's system of internal accounting controls, to the extent they deemed
necessary in establishing the scope of their examination of the Company's
consolidated financial statements as of December 31, 1998, did not disclose any
weaknesses in internal controls that they considered to be material weaknesses.
(g) Officers' Certificate. You shall have received on the First Closing
Date and the Second Closing Date, as the case may be, a certificate of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, signed by the Chief Executive Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the First Closing Date or the
Second Closing Date, as the case may be, and the Company has complied with
all the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the First Closing Date or the Second
Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
contained all material information required to be included therein by the
Securities Act or the Exchange Act and the applicable rules and regulations
of the Commission thereunder, as the case may be, and in all material
respects conformed to the requirements of the Securities Act or the
Exchange Act and the applicable rules and regulations of the Commission
thereunder, as the case may be, the Registration Statement and the
Prospectus, and any amendments or supplements thereto, did not and does not
include any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been (a) any
Material Adverse Change,
<PAGE>
(b) any transaction that is material to the Company and its subsidiaries
considered as one enterprise, except transactions entered into in the
ordinary course of business, (c) any obligation, direct or contingent, that
is material to the Company and its subsidiaries considered as one
enterprise, incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (d) any change in the capital
stock or outstanding indebtedness of the Company or any of its subsidiaries
that is material to the Company and its subsidiaries considered as one
enterprise, (e) any dividend or distribution of any kind declared, paid or
made on the capital stock of the Company or any of its subsidiaries, or (f)
any loss or damage (whether or not insured) to the property of the Company
or any of its subsidiaries which has been sustained or will have been
sustained which has a Material Adverse Effect.
(h) Opinion of Counsel for the Selling Shareholders. You shall have
received on the First Closing Date and the Second Closing Date, as the case may
be, an opinion from Wilson Sonsini Goodrich & Rosati, which opinion is
substantially in the form of Exhibit E attached hereto, dated as of such
Closing Date, addressed to the Underwriters and with reproduced copies or
signed counterparts thereof for each of the Underwriters.
In rendering such opinion, such counsel may rely as to questions of law
not involving the laws of the United States or State of and California upon
opinions of local counsel and as to questions of fact upon representations or
certificates of the Selling Shareholders or officers of the Selling
Shareholders (when the Selling Shareholder is not a natural person), and of
governmental officials, in which case their opinion is to state that they are
so relying and that they have no knowledge of any material misstatement or
inaccuracy of any material misstatement or inaccuracy in any such opinion,
representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.
(i) Selling Shareholders' Certificate. On each of the First Closing Date
and the Second Closing Date, as the case may be, the Representatives shall
receive a written certificate executed by the Attorney-in-Fact of each Selling
Shareholder, dated as of such Closing Date, to the effect that:
(i) the representations, warranties and covenants of such Selling
Shareholder set forth in Section 1(B) of this Agreement are true and
correct with the same force and effect as though expressly made by such
Selling Shareholder on and as of such Closing Date; and
(ii) such Selling Shareholder has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to such Closing Date.
(j) Selling Shareholders' Documents. At least three business days prior
to the date hereof, the Company and the Selling Shareholders shall have
furnished for review by the Representatives copies of the Powers of Attorney and
Custody Agreements executed by each of the Selling Shareholders and such further
information, certificates and documents as the Representatives may reasonably
request.
<PAGE>
(k) Stock Exchange Listing. The Shares shall have been approved for
inclusion on the Nasdaq National Market, subject only to official notice of
issuance.
(l) Compliance with Prospectus Delivery Requirements. The Company shall
have complied with the provisions of Sections 2(g) and 3(e) hereof with respect
to the furnishing of Prospectuses.
(m) Additional Documents. On or before each of the First Closing Date and
the Second Closing Date, as the case may be, the Representatives and counsel for
the Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and sale of the Shares as contemplated herein, or in order to evidence
the accuracy of any of the representations and warranties, or the satisfaction
of any of the conditions or agreements, herein contained.
If any condition specified in this Section 4 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Option Shares, at any time prior to the
Second Closing Date, which termination shall be without liability on the part of
any party to any other party, except that Section 5 (Payment of Expenses),
Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification
and Contribution) and Section 10 (Representations and Indemnities to Survive
Delivery) shall at all times be effective and shall survive such termination.
Section 5. Payment of Expenses. The Company and the Selling Shareholders,
jointly and severally, agree to pay in such proportions as they may agree upon
among themselves all costs, fees and expenses incurred in connection with the
performance of their obligations hereunder and in connection with the
transactions contemplated hereby, including without limitation (i) all expenses
incident to the issuance and delivery of the Common Shares (including all
printing and engraving costs), (ii) all fees and expenses of the registrar and
transfer agent of the Common Stock, (iii) all necessary issue, transfer and
other stamp taxes in connection with the issuance and sale of the Shares to the
Underwriters, (iv) all fees and expenses of the Company's counsel, independent
public or certified public accountants and other advisors, (v) all costs and
expenses incurred in connection with the preparation, printing, filing, shipping
and distribution of the Registration Statement (including financial statements,
exhibits, schedules, consents and certificates of experts), each preliminary
prospectus and the Prospectus, and all amendments and supplements thereto, and
this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by
the Company or the Underwriters in connection with qualifying or registering (or
obtaining exemptions from the qualification or registration of) all or any part
of the Shares for offer and sale under the state securities or blue sky laws or
the provincial securities laws of Canada or any other country, and, if requested
by the Representatives, preparing and printing a "Blue Sky Survey", an
"International Blue Sky Survey" or other memorandum, and any supplements
thereto, advising the Underwriters of such qualifications, registrations and
exemptions, (vii) the filing fees incident to, and the reasonable fees and
expenses of counsel for the Underwriters in connection with, the National
Association of Securities Dealers, LLC review and approval of the Underwriters'
participation in the offering and distribution of the Common Shares, (viii) the
fees and expenses associated with including the Shares on the Nasdaq National
Market, (ix) all costs and expenses incident to the preparation and undertaking
of "road show" preparations to be made to prospective investors, and (x) all
other fees, costs and expenses referred to in Item 13 Item 14 of Part II of the
Registration
<PAGE>
Statement. Except as provided in this Section 5, Section 6, and Section 7
hereof, the Underwriters shall pay their own expenses, including the fees and
disbursements of their counsel.
The Selling Shareholders further agree with each Underwriter to pay
(directly or by reimbursement) all fees and expenses incident to the performance
of their obligations under this Agreement which are not otherwise specifically
provided for herein, including but not limited to (i) fees and expenses of
counsel and other advisors for such Selling Shareholders, (ii) fees and expenses
of the Custodian and (iii) expenses and taxes incident to the sale and delivery
of the Common Shares to be sold by such Selling Shareholders to the Underwriters
hereunder (which taxes, if any, may be deducted by the Custodian under the
provisions of Section 2 of this Agreement).
This Section 5 shall not affect or modify any separate, valid
agreement relating to the allocation of payment of expenses between the Company,
on the one hand, and the Selling Shareholders, on the other hand.
Section 6. Reimbursement of Underwriters' Expenses. If this Agreement is
terminated by the Representatives pursuant to Section 4, Section 7, Section 8,
Section 9 or Section 15, or if the sale to the Underwriters of the Shares on the
First Closing Date is not consummated because of any refusal, inability or
failure on the part of the Company or the Selling Shareholders to perform any
agreement herein or to comply with any provision hereof, the Company agrees to
reimburse the Representatives and the other Underwriters (or such Underwriters
as have terminated this Agreement with respect to themselves), severally, upon
demand for all out-of-pocket expenses that shall have been reasonably incurred
by the Representatives and the Underwriters in connection with the proposed
purchase and the offering and sale of the Shares, including but not limited to
fees and disbursements of counsel, printing expenses, travel expenses, postage,
facsimile and telephone charges.
Section 7. Indemnification and Contribution.
(a) Indemnification of the Underwriters.
(1) The Company agrees to indemnify and hold harmless each
Underwriter, its officers and employees, and each person, if any, who controls
any Underwriter within the meaning of the Securities Act and the Exchange Act
against any loss, claim, damage, liability or expense, as incurred, to which
such Underwriter or such controlling person may become subject, under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company, which consent shall not be unreasonably withheld), insofar as such
loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based (i) upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, or any amendment thereto, including any information deemed to be a
part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the
omission or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading; or (ii) upon
any untrue statement or alleged untrue statement of a material fact contained in
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
<PAGE>
circumstances under which they were made, not misleading; or (iii) in whole or
in part upon any inaccuracy in the representations and warranties of the Company
contained herein; or (iv) in whole or in part upon any failure of the Company to
perform its obligations hereunder or under law; or (v) any act or failure to act
or any alleged act or failure to act by any Underwriter in connection with, or
relating in any manner to, the Shares or the offering contemplated hereby, and
which is included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon any matter covered by clause
(i), (ii), (iii) or (iv) above, provided that the Company shall not be liable
under this clause (v) to the extent that a court of competent jurisdiction shall
have determined by a final judgment that such loss, claim, damage, liability or
action resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its bad faith or willful
misconduct; and to reimburse each Underwriter and each such controlling person
for any and all expenses (including the fees and disbursements of counsel chosen
by BancBoston Robertson Stephens Inc.) as such expenses are reasonably incurred
by such Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the foregoing indemnity
agreement shall not apply to any loss, claim, damage, liability or expense to
the extent, but only to the extent, arising out of or based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by the Representatives expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); and provided, further, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the benefit of
any Underwriter from whom the person asserting any loss, claim, damage,
liability or expense purchased Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 7(a) shall be in addition to any liabilities that the
Company may otherwise have.
(2) Each of the Selling Shareholders, jointly and severally, agrees
to indemnify and hold harmless each Underwriter, its officers and employees, and
each person, if any, who controls any Underwriter within the meaning of the
Securities Act and the Exchange Act against any loss, claim, damage, liability
or expense, as incurred, to which such Underwriter or such controlling person
may become subject, under the Securities Act, the Exchange Act or other federal
or state statutory law or regulation, or at common law or otherwise (including
in settlement of any litigation, if such settlement is effected with the written
consent of the Company, which consent shall not be unreasonably withheld),
insofar as such loss, claim, damage, liability or expense (or actions in respect
thereof as contemplated below) arises out of or is based (i) upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the
Securities Act, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading; or (ii) upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission therefrom
of a material
<PAGE>
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in the case of
subparagraphs (i) and (ii) of this Section 7(a)(2) to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in conformity with written
information furnished to the Company or such Underwriter by such Selling
Shareholder, directly or through such Selling Shareholder's representatives,
specifically for use in the preparation thereof; or (iii) in whole or in part
upon any inaccuracy in the representations and warranties of the Selling
Shareholders contained herein; or (iv) in whole or in part upon any failure of
the Selling Shareholders to perform their respective obligations hereunder or
under law; or (v) any act or failure to act or any alleged act or failure to act
by any Underwriter in connection with, or relating in any manner to, the Shares
or the offering contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or action arising out of or
based upon any matter covered by clause (i), (ii), (iii) or (iv) above, provided
that the Selling Shareholders shall not be liable under this clause (v) to the
extent that a court of competent jurisdiction shall have determined by a final
judgment that such loss, claim, damage, liability or action resulted directly
from any such acts or failures to act undertaken or omitted to be taken by such
Underwriter through its bad faith or willful misconduct; and to reimburse each
Underwriter and each such controlling person for any and all expenses (including
the fees and disbursements of counsel chosen by BancBoston Robertson Stephens
Inc.) as such expenses are reasonably incurred by such Underwriter or such
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; provided, however, that the foregoing indemnity agreement shall not
apply to any loss, claim, damage, liability or expense to the extent, but only
to the extent, arising out of or based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Selling Shareholders by the
Representatives expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto); and
provided, further, that with respect to any preliminary prospectus, the
foregoing indemnity agreement shall not inure to the benefit of any Underwriter
from whom the person asserting any loss, claim, damage, liability or expense
purchased Shares, or any person controlling such Underwriter, if copies of the
Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a
copy of the Prospectus (as then amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to have
been delivered, at or prior to the written confirmation of the sale of the
Shares to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such loss, claim, damage, liability
or expense. The indemnity agreement set forth in this Section 7(a) shall be in
addition to any liabilities that the Selling Shareholders may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement , the Selling Shareholders and each person, if any, who
controls the Company or any Selling Shareholder within the meaning of the
Securities Act or the Exchange Act, against any loss, claim, damage, liability
or expense, as incurred, to which the Company, or any such director, officer ,
Selling Shareholder or controlling person may become subject, under the
Securities Act, the Exchange Act, or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such loss, claim, damage, liability or expense (or
actions in respect
<PAGE>
thereof as contemplated below) arises out of or is based upon any untrue or
alleged untrue statement of a material fact contained in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto), or arises out of or is based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the Prospectus (or any amendment or
supplement thereto), in reliance upon and in conformity with written information
furnished to the Company and the Selling Shareholders by the Representatives
expressly for use therein; and to reimburse the Company, or any such director,
officer , Selling Shareholder or controlling person for any legal and other
expense reasonably incurred by the Company, or any such director, officer,
Selling Shareholder or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. The indemnity agreement set forth in this Section
7(b) shall be in addition to any liabilities that each Underwriter may otherwise
have.
(c) Information Provided by the Underwriters. The Company and each of the
Selling Shareholders, hereby acknowledges that the only information that the
Underwriters have furnished to the Company and the Selling Shareholders
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto) are the statements set
forth in the table in the first paragraph and the second paragraph under the
caption "Underwriting" in the Prospectus; and the Underwriters confirm that such
statements are correct.
(d) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless
<PAGE>
(i) the indemnified party shall have employed separate counsel in accordance
with the proviso to the next preceding sentence (it being understood, however,
that the indemnifying party shall not be liable for the expenses of more than
one separate counsel (together with local counsel), approved by the indemnifying
party (BancBoston Robertson Stephens Inc. in the case of Section 7(b) and
Section 8), representing the indemnified parties who are parties to such
action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action, or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party, in each of which cases the fees
and expenses of counsel shall be at the expense of the indemnifying party.
(e) Settlements. The indemnifying party under this Section 7 shall not be
liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 30 days
after receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes (i) an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(f) Contribution. If the indemnification provided for in this Section 7
is unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) then each
indemnifying party shall contribute to the aggregate amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law then each indemnifying party shall contribute to such amount paid or payable
by such indemnified party in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company on the
one hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, (or
actions or proceedings in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriter on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bears to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material
<PAGE>
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 7(f) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7(f). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) referred
to above in this Section 7(f) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (f), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter and (ii) no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this Section 7(f) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(g) Timing of Any Payments of Indemnification. Any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred, but in all cases, no later than thirty
(30) days of invoice to the indemnifying party.
(h) Survival. The indemnity and contribution agreements contained in this
Section 7 and the representation and warranties of the Company set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 7.
(i) Acknowledgement of Parties. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 7, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 7 fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Securities Act and the Exchange Act.
(j) Indemnification of a Qualified Independent Underwriter. Without
limitation and in addition to its obligations under the other subsections of
this Section 7, the Company agrees to indemnify and hold harmless BancBoston
Robertson Stephens Inc. ("BancBoston") and each
<PAGE>
person, if any, who controls BancBoston within the meaning of the Securities Act
or the Exchange Act from and against any loss, claim, damage, liabilities or
expense, as incurred, arising out of or based upon BancBoston's acting as a
"qualified independent underwriter" (within the meaning of Rule 2720 to the
NASD's Conduct Rules) in connection with the offering contemplated by this
Agreement, and agrees to reimburse each such indemnified person for any legal or
other expense reasonably incurred by them in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability or expense results from the gross negligence or willful misconduct of
BancBoston.
Section 8. Default of One or More of the Several Underwriters. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the several Underwriters shall fail or refuse to purchase Shares that it
or they have agreed to purchase hereunder on such date, and the aggregate number
of Common Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase does not exceed 10% of the aggregate number of the
Shares to be purchased on such date, the other Underwriters shall be obligated,
severally, in the proportions that the number of Firm Shares set forth opposite
their respective names on Schedule A bears to the aggregate number of Firm
Shares set forth opposite the names of all such non-defaulting Underwriters, or
in such other proportions as may be specified by the Representatives with the
consent of the non-defaulting Underwriters, to purchase the Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
on such date. If, on the First Closing Date or the Second Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares and the aggregate number of Shares with respect to which such
default occurs exceeds 10% of the aggregate number of Shares to be purchased on
such date, and arrangements satisfactory to the Representatives and the Company
for the purchase of such Shares are not made within 48 hours after such default,
this Agreement shall terminate without liability of any party to any other party
except that the provisions of Section 4, and Section 7 shall at all times be
effective and shall survive such termination. In any such case either the
Representatives or the Company shall have the right to postpone the First
Closing Date or the Second Closing Date, as the case may be, but in no event for
longer than seven days in order that the required changes, if any, to the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
8. Any action taken under this Section 8 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
Section 9. Termination of this Agreement. Prior to the First Closing
Date, this Agreement may be terminated by the Representatives by notice given to
the Company and the Selling Shareholders if at any time (i) trading or quotation
in any of the Company's securities shall have been suspended or limited by the
Commission or by the Nasdaq Stock Market, or trading in securities generally on
either the Nasdaq Stock Market or the New York Stock Exchange shall have been
suspended or limited, or minimum or maximum prices shall have been generally
established on any of such stock exchanges by the Commission or the NASD; (ii) a
general banking moratorium shall have been declared by any of federal, New York,
Delaware or California authorities; (iii) there shall have occurred any outbreak
or escalation of national or
<PAGE>
international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or
development involving a prospective change in United States' or international
political, financial or economic conditions, as in the judgment of the
Representatives is material and adverse and makes it impracticable or
inadvisable to market the Common Shares in the manner and on the terms described
in the Prospectus or to enforce contracts for the sale of securities; (iv) in
the judgment of the Representatives there shall have occurred any Material
Adverse Change; or (v) the Company shall have sustained a loss by strike, fire,
flood, earthquake, accident or other calamity of such character as in the
judgment of the Representatives may interfere materially with the conduct of the
business and operations of the Company regardless of whether or not such loss
shall have been insured. Any termination pursuant to this Section 9 shall be
without liability on the part of (a) the Company or the Selling Shareholders to
any Underwriter, except that the Company and the Selling Shareholders shall be
obligated to reimburse the expenses of the Representatives and the Underwriters
pursuant to Sections 5 and 6 hereof, (b) any Underwriter to the Company or the
Selling Shareholders, or (c) of any party hereto to any other party except that
the provisions of Section 7 shall at all times be effective and shall survive
such termination.
Section 10. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Shareholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Shareholders, as
the case may be, and will survive delivery of and payment for the Shares sold
hereunder and any termination of this Agreement.
Section 11. Notices. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
C/O BANCBOSTON ROBERTSON STEPHENS INC.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2696
Attention: General Counsel
If to the Company:
CRITICAL PATH, INC.
320 First Street
San Francisco, CA 94105
Facsimile: (415) 808-7777
Attention: Douglas Hickey
<PAGE>
If to the Selling Shareholders:
American Securities Transfer & Trust, Inc.
[address]
Facsimile: [___]
Attention: [___]
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
Section 12. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 9 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 7, and to their
respective successors, and no other person will have any right or obligation
hereunder. The term "successors" shall not include any purchaser of the Shares
as such from any of the Underwriters merely by reason of such purchase.
Section 13. Partial Unenforceability. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
Section 14. Governing Law Provisions.
(a) Governing Law. This agreement shall be governed by and construed in
accordance with the internal laws of the state of California applicable to
agreements made and to be performed in such state.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding arising
out of or based upon this Agreement or the transactions contemplated hereby
("Related Proceedings") may be instituted in the federal courts of the United
States of America located in the City and County of San Francisco or the courts
of the State of California in each case located in the City and County of San
Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Each party not located in the
United States irrevocably appoints CT Corporation System, which currently
maintains a San Francisco office at 49 Stevenson Street, San Francisco,
California 94105, United States of America, as its agent to receive service of
process or other legal summons for purposes of any such suit, action or
proceeding that may be instituted in any state or federal court in the City and
County of San Francisco.
<PAGE>
SECTION 15. Failure of One or More of the Selling Shareholders to Sell and
Deliver Common Shares. If one or more of the Selling Shareholders shall fail to
sell and deliver to the Underwriters the Shares to be sold and delivered by such
Selling Shareholders at the First Closing Date pursuant to this Agreement, then
the Underwriters may at their option, by written notice from the Representatives
to the Company and the Selling Shareholders, either (i) terminate this Agreement
without any liability on the part of any Underwriter or, except as provided in
Sections 5, 6, and 7 hereof, the Company or the Selling Shareholders, or (ii)
purchase the shares which the Company and other Selling Shareholders have agreed
to sell and deliver in accordance with the terms hereof. If one or more of the
Selling Shareholders shall fail to sell and deliver to the Underwriters the
Shares to be sold and delivered by such Selling Shareholders pursuant to this
Agreement at the First Closing Date or the Second Closing Date, then the
Underwriters shall have the right, by written notice from the Representatives to
the Company and the Selling Shareholders, to postpone the First Closing Date or
the Second Closing Date, as the case may be, but in no event for longer than
seven days in order that the required changes, if any, to the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected.
SECTION 16. General Provisions. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in
two or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company and the Custodian the enclosed copies
hereof, whereupon this instrument, along with all counterparts hereof, shall
become a binding agreement in accordance with its terms.
Very truly yours,
Critical Path, Inc.
By:___________________________________
Chief Executive Officer
SELLING SHAREHOLDERS
By:___________________________________
Attorney-in-fact for the Selling
Shareholders in Schedule B hereto
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives as of the date first above written.
BANCBOSTON ROBERTSON STEPHENS INC.
HAMBRECHT & QUIST LLC
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
FIRST ALBANY CORPORATION
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street
Suite 2600
San Francisco, California 94104
On their behalf and on behalf of each of the several underwriters named in
Schedule A hereto.
By BANCBOSTON ROBERTSON STEPHENS INC.
By:_________________________________
Authorized Signatory
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Common
Shares
Underwriters To be Purchased
<S> <C>
BANCBOSTON ROBERTSON STEPHENS INC.................... [___]
HAMBRECHT & QUIST LLC................................ [___]
DAIN RAUSCHER WESSELS................................ [___]
FIRST ALBANY CORPORATION ............................ [___]
Total............................................. [___]
</TABLE>
S-A
<PAGE>
SCHEDULE B
Number of Maximum Number of
Selling Shareholder Firm Shares Option Shares to
to be Sold be Sold
Selling Shareholder #1
[address]
Attention: [___].................... [___] [___]
Selling Shareholder #2
[address]
Attention: [___].................... [___] [___]
Total:......................... [___] [___]
============ ============
S-B
<PAGE>
Exhibit A
Lock-up Agreement
A-1
<PAGE>
Exhibit B
Matters to be Covered in the Opinion of Company Counsel
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation;
(ii) The Company has the corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus;
(iii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction, if any, in which
the ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified or
be in good standing would not have a Material Adverse Effect. To such
counsel's knowledge, the Company does not own or control, directly or
indirectly, any corporation, association or other entity other than [list
subsidiaries];
(iv) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" as of
the dates stated therein, the issued and outstanding shares of capital stock
of the Company (including the Selling Shareholder Shares) have been duly and
validly issued and are fully paid and nonassessable, and, to such counsel's
knowledge, will not have been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of first refusal
or other similar right;
(v) All issued and outstanding shares of capital stock of each
Significant Subsidiary of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, and, to such counsel's
knowledge, have not been issued in violation of or subject to any preemptive
right, co-sale right, registration right, right of first refusal or other
similar right and are owned by the Company free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest;
(vi) The Firm Shares or the Option Shares, as the case may be, to be
issued by the Company pursuant to the terms of this Agreement have been duly
authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully
paid and nonassessable, and will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right.
(vii) The Company has the corporate power and authority to enter into this
Agreement and to issue, sell and deliver to the Underwriters the Shares to
be issued and sold by it hereunder;
(viii) This Agreement has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed and delivered
by the Company and, assuming due authorization, execution and delivery by
you, is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may
be limited by applicable law and except as enforceability
B-1
<PAGE>
may be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws relating to or affecting creditors' rights generally or by
general equitable principles;
(ix) The Registration Statement has become effective under the Act and, to
such counsel's knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or threatened under the Securities Act;
(x) The Firm Shares or the Option Shares have been validly registered
under the Securities Act and the Rules and Regulations of the Act and the
applicable rules and regulations of the Commission thereunder;
(xi) The Registration Statement and the Prospectus, and each amendment or
supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which such
counsel need express no opinion), as of the effective date of the
Registration Statement, complied as to form in all material respects with
the requirements of the Act and the applicable Rules and Regulations;
(xii) The information in the Prospectus under the caption "Description of
Capital Stock," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel and is a fair summary of such
matters and conclusions; and the forms of certificates evidencing the Common
Stock and filed as exhibits to the Registration Statement comply with
California law;
(xiii) The description in the Registration Statement and the Prospectus of
the charter and bylaws of the Company and of statutes are accurate and
fairly present the information required to be presented by the Securities
Act;
(xiv) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character required
to be described or referred to in the Registration Statement or Prospectus
or to be filed as an exhibit to the Registration Statement which are not
described or referred to therein or filed as required;
(xv) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the Company's
indemnification obligations hereunder, concerning which no opinion need be
expressed) will not (a) result in any violation of the Company's charter or
bylaws or (b) to such counsel's knowledge, result in a material breach or
violation of any of the terms and provisions of, or constitute a default
under, any bond, debenture, note or other evidence of indebtedness, or any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel to which the
Company is a party or by which its properties are bound, or any applicable
statute, rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court, government or
governmental agency or body having jurisdiction over the Company or any of
its subsidiaries, or over any of their properties or operations;
B-2
<PAGE>
(xvi) No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of
their properties or operations is necessary in connection with the
consummation by the Company of the transactions herein contemplated, except
(i) such as have been obtained under the Securities Act, (ii) such as may be
required under state or other securities or Blue Sky laws in connection with
the purchase and the distribution of the Shares by the Underwriters, (iii)
such as may be required by the National Association of Securities Dealers,
LLC and (iv) such as may be required under the federal or provincial laws of
Canada;
(xvii) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or any of its
subsidiaries of a character required to be disclosed in the Registration
Statement or the Prospectus by the Securities Act or by the Exchange Act or
the applicable rules and regulations of the Commission thereunder, other
than those described therein;
(xviii) To such counsel's knowledge, neither the Company nor any of its
subsidiaries is presently (a) in material violation of its respective
charter or bylaws, or (b) in material breach of any applicable statute, rule
or regulation known to such counsel or, to such counsel's knowledge, any
order, writ or decree of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of
their properties or operations; and
(xix) To such counsel's knowledge, except as set forth in the Registration
Statement and Prospectus, no holders of Company Shares or other securities
of the Company have registration rights with respect to securities of the
Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights known to
such counsel to registration of such shares of Company Shares or other
securities, because of the filing of the Registration Statement by the
Company have, with respect to the offering contemplated thereby, waived such
rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement or
have included securities in the Registration Statement pursuant to the
exercise of and in full satisfaction of such rights.
(xx) The Company is not and, after giving effect to the offering and
sale of the shares and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
(xxi) To such counsel's knowledge, the Company owns or possesses
sufficient trademarks, trade names, patent rights, copyrights, licenses,
approvals, trade secrets and other similar rights (collectively,
"Intellectual Property Rights") reasonably necessary to conduct their
business as now conducted; and the expected expiration of any such
Intellectual Property Rights would not result in a Material Adverse Effect.
The Company has not received any notice of infringement or conflict with
asserted Intellectual Property Rights of others, which infringement or
conflict, if the subject of an unfavorable decision, would result in a
Material Adverse Effect. To such counsel's knowledge, the Company's
discoveries, inventions, products, or processes referred to in the
Registration Statement or Prospectus do not infringe or conflict with any
right or patent which is the subject of a patent application known to the
Company.
B-3
<PAGE>
(xxii) Each document filed pursuant to the Act (other than the financial
statements and supporting schedules included therein, as to which no opinion
need be rendered) and incorporated or deemed to be incorporated by reference
in the Prospectus complied when so filed as to form in all material respects
with the Exchange Act.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto [and any
Incorporated Document, when such documents became effective or were filed with
the Commission] (other than the financial statements including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
First Closing Date or the Second Closing Date, as the case may be, the
Registration Statement, the Prospectus and any amendment or supplement thereto
[and any Incorporated Document] (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
B-4
<PAGE>
Exhibit C
Matters to be Covered in the Opinion of Underwriters' Counsel
1. The Underwriting Agreement has been duly authorized, executed and delivered
by the Company.
2. The Firm Shares have been duly authorized and, upon delivery to the
Underwriters against payment therefor in accordance with the terms of the
Underwriting Agreement, will be duly issued, fully paid and nonassessable.
3. The Shares conform in all material respects to the description thereof
contained in the Prospectus under the caption "Description of Capital Stock-
Common Stock" and the certificate for the Common Stock filed as an exhibit to
the Registration Statement is in due and proper form under the Delaware General
Corporation Law.
4. The Registration Statement and Prospectus comply as to form in all material
respects with the requirements of the Securities Act, except that we express no
opinion with respect to the financial statements and schedules, related notes,
other financial data and statistical data derived therefrom included in the
Registration Statement or Prospectus.
5. The Registration Statement is effective under the Securities Act, and no
stop order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been initiated or threatened by
the Commission.
* * * * *
Such counsel shall state that such counsel has reviewed the opinions
addressed to the Representatives from [list each set of counsel that has
provided an opinion], each dated the date hereof, and furnished to you in
accordance with the provisions of the Underwriting Agreement. Such opinions
appear on their face to be appropriately responsive to the requirements of the
Underwriting Agreement.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto (other than the
financial
C-1
<PAGE>
statements including supporting schedules and other financial and statistical
information derived therefrom, as to which such counsel need express no comment)
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or at the First Closing Date or the Second Closing Date, as the
case may be, the Registration Statement, the Prospectus and any amendment or
supplement thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
C-2
<PAGE>
Exhibit D
Matters to be Covered in the Opinion of Selling Shareholder Counsel
(i) The Underwriting Agreement has been duly authorized, executed and
delivered by or on behalf of, and is a valid and binding agreement of, such
Selling Shareholder, enforceable in accordance with its terms, except as
rights to indemnification thereunder may be limited by applicable law and
except as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(ii) The execution and delivery by such Selling Shareholder of, and the
performance by such Selling Shareholder of its obligations under, the
Underwriting Agreement and its Custody Agreement and its Power of Attorney
will not contravene or conflict with, result in a breach of, or constitute
a default under, the charter or by-laws, partnership agreement, trust
agreement or other organization documents, as the case may be, of such
Selling Shareholder, or, to the best of such counsel's knowledge, violate,
result in a breach of or constitute a default under the terms of any other
agreement or instrument to which such Selling Shareholder is a party or by
which it is bound, or any judgement, order or decree applicable to such
Selling Shareholder of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over such Selling
Shareholder.
(iii) Such Selling Shareholder has good and valid title to all of the
Common Shares which may be sold by such Selling Shareholder under the
Underwriting Agreement and has the legal right and power, and all
authorization and approvals required [under its charter and by-laws,]
[partnership agreement,] [trust agreement] [or other organizational
documents, as the case may be,] to enter into the Underwriting Agreement
and its Custody Agreement and its Power of Attorney, to sell, transfer and
deliver all of the Common Shares which may be sold by such Selling
Shareholder under the Underwriting Agreement and to comply with its other
obligations under the Underwriting Agreement, its Custody Agreement and its
Power of Attorney.
(iv) Each of the Custody Agreement and Power of Attorney of such Selling
Shareholder has been duly authorized, executed and delivered by such
Selling Shareholder and is a valid and binding agreement of such Selling
Shareholder, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except as
the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(v) Assuming that the Underwriters purchase the Shares which are sold by
such Selling Shareholder pursuant to the Underwriting Agreement for value,
in good faith and without notice of any adverse claims, the delivery of
such Shares pursuant to the Underwriting Agreement will pass good and valid
title to such Shares, free and clear of any security interest, mortgage,
pledge, lieu encumbrance or other claim.
(vi) To the best of such counsel's knowledge, no consent, approval,
authorization or other order of, or registration or filing with, any court
or governmental authority or
D-1
<PAGE>
agency, is required for the consummation by such Selling Shareholder of the
transactions contemplated in the Underwriting Agreement, except as required
under the Securities Act, applicable state securities or blue sky laws, and
from the National Association of Securities Dealers, LLC.
D-2
<PAGE>
EXHIBIT 2.1
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
CRITICAL PATH, INC.
AND
FABRIK COMMUNICATIONS, INC.
<PAGE>
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT ("Agreement"), dated as of May 26, 1999, is
---------
by and between Critical Path, Inc., a California corporation ("Buyer") and
-----
Fabrik Communications, Inc., a California corporation ("Seller").
------
RECITALS
--------
A. Seller desires to sell certain assets related to its Fabrik Connect
Service (the "Business"), and Buyer desires to purchase, directly or through a
--------
subsidiary, said assets related to the Business in accordance with the terms and
conditions of this Agreement.
B. In connection with the sale of the assets related to the Business by
Seller to Buyer, Buyer will employ certain Seller employees associated with the
Business to be released by Seller, all in accordance with the terms and
conditions of this Agreement.
C. In connection with the sale of the assets related to the Business by
Seller to Buyer, Seller will grant Buyer a license to use certain software
related to the Business, in accordance with the terms and conditions of the
License Agreement of even date herewith.
D. In connection with the sale of the assets related to the Business by
Seller to Buyer, Buyer will sublease that portion of the real property currently
leased by Seller and used to operate the data center associated with the
Business, in accordance with the terms and conditions of the Sublease.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants, representations, warranties, conditions and agreements herein
contained, the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS
-----------
1.1 Definitions. In this Agreement (including exhibits and schedules), the
-----------
following terms have the meanings specified or referred to in this Section 1.1
and shall be equally applicable to both the singular and plural forms. Any
agreement referred to below shall mean such agreement as amended, supplemented
and modified from time to time to the extent permitted by the applicable
provisions thereof and by this Agreement.
"Additional Agreements" means the License Agreement, the Transition
---------------------
Services Agreement and the Sublease.
<PAGE>
"Affiliate" means any person who controls, is controlled by or is under
---------
common control with another person. For purposes of this definition, the term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the affairs or management of a Person, whether through
the ownership, directly or indirectly, of securities having the power to elect a
majority of the board of directors of a Person, by contract or otherwise.
"Assumed Liabilities" has the meaning specified in Section 2.3 hereof.
-------------------
"Benefit Arrangement" has the meaning specified in Section 4.9 hereof.
-------------------
"Best Efforts" means the efforts that a prudent Person desirous of
------------
achieving a result would use in similar circumstances to ensure that such result
is achieved as expeditiously as possible, provided, however, that a Person
required to use his Best Efforts under this Agreement will not thereby be
required to take actions that would result in a materially adverse change in the
benefits to such Person under this Agreement and the transactions contemplated
hereby, or to dispose of or make any materially adverse change to its business,
expend any material funds or incur any other material burden.
"Buyer" has the meaning specified in the first paragraph of this Agreement.
-----
"Buyer Group Member" means Buyer, its officers, directors, stockholders,
------------------
agents and Affiliates.
"Cash Payment" has the meaning specified in Section 2.4 hereof.
------------
"Claim Notice" has the meaning specified in Section 9.3 hereof.
------------
"Closing" has the meaning specified in Section 3.1 hereof.
-------
"Closing Date" has the meaning specified in Section 3.1 hereof.
------------
"COBRA" has the meaning specified in Section 4.9 hereof.
-----
"Code" means the United States Internal Revenue Code of 1986, as amended.
----
"Consequential Damages" means Losses arising out of any interruption of
---------------------
business, loss of profits, loss of use of facilities, claims of customers, loss
of goodwill or other indirect or special Losses.
"Contract" means any note, instrument, agreement, license, franchise,
--------
permit, right, restriction, lease, obligation, promise or undertaking (whether
oral or written) that is legally binding upon a Person.
"Disclosure Letter" has the meaning specified in the introductory paragraph
-----------------
to Article 4 hereof.
-2-
<PAGE>
"Encumbrance" means any lien, claim, charge, security interest, mortgage,
-----------
pledge, easement, conditional sale or other title retention agreement, defect in
title, covenant or other restrictions of any kind.
"End-User Licenses" has the meaning set forth in Section 4.8.
-----------------
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Expenses" means any and all costs and expenses incurred, including,
--------
without limitation, court filing fees, court costs, arbitration fees or costs,
witness fees, and reasonable fees and expenses of legal counsel, investigators,
expert witnesses, consultants, accountants and other professionals.
"Financial Statements" has the meaning specified in Section 6.9 hereof.
--------------------
"GAAP" means the generally accepted accounting principles in the United
----
States.
"Governmental Body" means any United States federal, state, local or
-----------------
territorial government or any foreign government, any governmental, regulatory
or administrative agency, authority, board, bureau, department or commission or
any court, tribunal, judicial or arbitral body thereof.
"Governmental Order" means any judgment, order, award or decree of any
------------------
foreign, federal, state, local or other court or tribunal, or any Governmental
Body and any award in any arbitration proceeding.
"Governmental Permits" has the meaning specified in Section 4.6 hereof.
--------------------
"Indemnified Party" means a Person indemnified pursuant to Section 9.3
-----------------
hereof.
"Indemnitor" means a Person providing indemnification pursuant to Section
----------
9.3 hereof.
"Instrument of Assignment" means an instrument of assignment (i) pursuant
------------------------
to which Seller will convey the Purchased Assets to Buyer and (ii) pursuant to
which Buyer will assume the Assumed Liabilities.
"Intellectual Property" means (a) inventions, whether or not patentable,
---------------------
whether or not reduced to practice, and whether or not yet made the subject of a
pending patent application or applications; (b) ideas and conceptions of
potentially patentable subject matter, including without limitation, any patent
disclosures, whether or not reduced to practice and whether or not yet made the
subject of a pending patent application or applications; (c) all worldwide
statutory invention registrations, patents, patent registrations and patent
applications (including all reissues, divisions, continuations, continuations-
in-part, extensions and reexaminations) and all rights therein provided by law,
multinational treaties or conventions and all improvements to the inventions
disclosed in each such registration, patent or application (collectively
"Patents"); (d) trademarks, service marks,
-------
-3-
<PAGE>
trade dress, logos, trade names and corporate names, including all of the
goodwill associated therewith, whether or not registered, including all common
law rights, and registrations and applications for registration thereof,
including, but not limited to, all marks registered in the United States Patent
and Trademark Office, the Trademark Offices of the States and Territories of the
United States of America, and the trademark offices of other nations throughout
the world, and all rights therein provided by multinational treaties or
conventions (collectively "Trademarks"); (e) copyrights, whether or not
----------
registered, and registrations and applications for registration thereof, and all
rights therein provided by law, multinational treaties or conventions
(collectively "Copyrights"); (f) mask works or registrations of mask works; (g)
----------
trade secrets and confidential, technical information (including ideas,
formulas, compositions, inventions, and conceptions of inventions whether
patentable or unpatentable and whether or not reduced to practice) (collectively
"Trade Secrets"); (h) technology (including know-how and show-how),
-------------
manufacturing and production processes and techniques, research and development
information, drawings, specifications, designs, plans, proposals, technical data
and copyrightable works, whether secret or confidential or not; (i) copies and
all tangible embodiments of all of the foregoing, in whatever form or medium;
(j) all rights to obtain and rights to apply for patents, and to register
trademarks and copyrights; and (k) all rights to sue for and recover and retain
damages, costs or attorneys' fees for present and past infringement of any of
the intellectual property rights hereinabove set out.
"IRS" means the Internal Revenue Service of the United States of America.
---
"Key Employees" means Rita Cenni and Chris Sindel.
-------------
"knowledge of Seller," or "to Seller's knowledge," or phrases of similar
import means (i) the actual current knowledge of William R. Winters, Christopher
S. Logan and Kent Jarvi or (ii) matters which would have come to the attention
of the individuals listed in clause (i) upon reasonable inquiry.
"Leased Facility" means that portion of Seller's facility that will be
---------------
subleased by Seller to Buyer on the Closing Date, which is more particularly
described in Exhibit C attached hereto.
---------
"License Agreement" means the License Agreement between Seller and Buyer to
-----------------
be entered into as of the Closing Date in the form of Exhibit A attached hereto.
---------
"Licensed Intellectual Property" means the "Software" as defined in the
------------------------------
License Agreement.
"Losses" means any and all losses, costs, obligations, liabilities,
------
settlement payments, awards, judgments, fines, penalties, damages, Expenses,
deficiencies or other charges.
"New Regular Personnel" means Regular Personnel who become Buyer's
---------------------
personnel on the Closing Date.
"Nonassignable Asset" has the meaning specified in Section 2.7 hereof.
-------------------
"Nonexclusive Asset" has the meaning specified in Section 2.7 hereof.
------------------
-4-
<PAGE>
"Permitted Encumbrances" means (a) liens for taxes and other governmental
----------------------
charges and assessments which are not yet due and payable, (b) liens of
landlords and liens of carriers, warehousemen, mechanics and materialmen and
other like liens arising in the ordinary course of business for sums not yet due
and payable and (c) other liens or imperfections on property which are not
material in amount or do not materially detract from the value of or materially
impair the existing use of the property affected by such lien or imperfection.
"Person" means any individual, corporation, partnership, limited liability
------
company, joint venture, association, joint-stock company, trust, unincorporated
organization, Governmental Body or any other entity.
"Purchase Price" has the meaning specified in Section 2.4 hereof.
--------------
"Purchased Assets" has the meaning specified in Section 2.1 hereof.
----------------
"Regular Personnel" means those employees of the Seller listed on Schedule
-----------------
6.1(a).
"Requirements of Laws" means any applicable foreign, federal, state and
--------------------
local laws, statutes, regulations, rules, codes, ordinances, judgements,
injunctions, decrees, orders, permits, approvals, published guidelines
applicable to the public at large, or treaties, enacted, adopted, issued or
promulgated by any Governmental Body (including, without limitation, those
pertaining to electrical, building, zoning, environmental and occupational
safety and health requirements) or common law.
"Retained Liabilities" has the meaning specified in Section 2.3 hereof.
--------------------
"SEC" means the Securities and Exchange Commission.
---
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Seller" has the meaning specified in the first paragraph of this
------
Agreement.
"Seller Group Member" means Seller, its officers, directors, stockholders,
-------------------
agents and Affiliates.
"Seller Intellectual Property Right(s)" has the meaning set forth in
-------------------------------------
Section 4.8.
"Shares" has the meaning set forth in Section 2.4.
------
"Sublease" means the Sublease between Seller and Buyer to be entered into a
--------
of the Closing Date in the form of Exhibit B attached hereto.
---------
"Tax" means any federal, state, local or foreign net income, alternative or
---
add-on minimum, gross income, gross receipts, property, sales, use, transfer,
gains, license, excise, employment, payroll, withholding or minimum tax, or any
other tax, custom, duty, governmental fee or other like
-5-
<PAGE>
assessment or charge of any kind whatsoever, together with any interest or any
penalty, addition to tax or additional amount imposed by any Governmental Body.
"Tax Return" means any return, report or similar statement required to be
----------
filed with respect to any Taxes (including any attached schedules), including,
without limitation, any information return, claim for refund, amended return and
declaration of estimated Tax.
"Transferred Agreements" means those contracts listed on Schedule 2.1(iv).
----------------------
"Transferred Intellectual Property" has the meaning specified in Section
---------------------------------
2.1 hereof.
"Transfer Taxes" has the meaning specified in Section 2.5 hereof.
--------------
"Transition Services Agreement" means the Transition Services Agreement
-----------------------------
between Seller and Buyer to be entered into as of the Closing Date in the form
of Exhibit D attached hereto.
"WARN" has the meaning specified in Section 6.1 hereof.
----
ARTICLE 2
PURCHASE AND CONSIDERATION
--------------------------
2.1 Purchase and Sale of Assets to be Transferred. On the terms and
---------------------------------------------
subject to the conditions of this Agreement, on the Closing Date, Seller shall
sell, transfer, convey, assign and deliver to Buyer, and Buyer shall buy and
acquire from Seller, free and clear of all Encumbrances other than Permitted
Encumbrances, all right, title and interest of Seller in and to the following
(collectively, the "Purchased Assets"):
----------------
(i) all assets listed on Schedule 2.1(i) hereto;
(ii) all Intellectual Property listed on Schedule 2.1(ii) hereto
(the "Transferred Intellectual Property");
(iii) all information, books and records of Seller related to the
Purchased Assets including, without limitation, all repair and maintenance
records and operation manuals, all as listed on Schedule 2.1(iii) hereto; and
(iv) those contracts listed on Schedule 2.1(iv) hereto (the "Transferred
-----------
Agreements").
- ----------
2.2 Assets Not to be Transferred. Seller shall retain and Buyer shall not
----------------------------
acquire the right, title and interest of Seller in and to all other assets of
Seller (collectively, the "Retained Assets"), including without limitation,
---------------
those assets related to the Business more fully described below:
-6-
<PAGE>
(a) all cash, bank deposits and cash equivalents;
(b) except as provided for herein, all owned real property, options
to acquire real property and real estate leases;
(c) all telephone, telex and facsimile numbers;
(d) all accounts receivable;
(e) the Licensed Intellectual Property; and
(f) Seller's financial, tax and accounting records related to the
operation of Seller and/or the Business prior to the Closing; provided, however,
that from and after the Closing Date, Seller shall provide Buyer with copies of
such records as reasonably requested by Buyer.
2.3 Liabilities and Obligations
---------------------------
(a) As of the Closing Date, Buyer will assume and pay, perform or
otherwise discharge only those obligations associated with the Transferred
Agreements and the Transferred Intellectual Property and only in the manner and
to the extent specifically set forth herein (the "Assumed Liabilities").
-------------------
(b) "Retained Liabilities" shall mean every liability of the Seller
other than the Assumed Liabilities. All of the Retained Liabilities shall remain
the sole responsibility of and shall be retained, paid, performed and discharged
solely by Seller.
2.4 Consideration. The consideration for the transfer of the Purchased
-------------
Assets (the "Purchase Price") shall be as follows:
--------------
(a) At the Closing, Buyer shall pay Seller $12,000,000 (the "Cash
----
Payment") by wire transfer of immediately available funds to the bank account
- -------
designated by Seller at least five (5) days prior to the Closing; and
(b) At the Closing, Buyer shall deliver to Seller a certificate or
certificates representing that number of shares of Buyer Common Stock determined
by dividing $8,000,000 by the average closing price of Buyer Common Stock as
reported on the Nasdaq Stock Market for the fifteen (15) trading days ending on
and including the trading day ending three (3) trading days immediately prior to
the Closing (the "Shares").
------
2.5 Transfer Taxes. All sales, use, value-added, gross receipts, excise,
--------------
registration, stamp duty, transfer or other similar taxes or governmental fees
together with any interest or penalty, addition to tax or additional amount
imposed by a Governmental Body ("Transfer Taxes") imposed or levied by reason
--------------
of in connection with or attributable to this Agreement and the
transactions contemplated hereby shall be paid by Buyer. Seller shall cooperate
with Buyer to the extent reasonably requested and legally permitted to minimize
any Transfer Taxes.
-7-
<PAGE>
2.6 Nonassignable Assets
--------------------
(a) Nonassignable Assets. To the extent that any Purchased Asset is
--------------------
not capable of being assigned to Buyer without the consent, approval or waiver
of a third Person, or if such assignment or attempted assignment would
constitute a breach thereof or default thereunder (each a "Nonassignable
-------------
Asset"), or to the extent that the assignment of any Transferred Agreement
- -----
is not practicable because it also relates to an area of Seller's business
other than the Business (each a "Nonexclusive Asset"), nothing in this
------------------
Agreement will constitute an assignment or require the assignment thereof
except to the extent provided in this Section 2.6.
(b) Seller to Use Best Efforts. Seller shall use its Best Efforts
--------------------------
to obtain all consents, approvals and waivers to Nonassignable Assets (including
the consent of 100 Bush Corporation to the Sublease) as soon as practicable
after the Closing Date and to secure to Buyer the benefits of the Nonassigned
Assets until such consents, approvals and waivers can be obtained. Buyer shall
use its Best Efforts to assist Seller in Seller's efforts to obtain all such
required consents, approvals and waivers. As to the Nonexclusive Assets, Seller
shall use its Best Efforts to effect an assignment of rights with respect to the
parts of such Nonexclusive Asset that relate exclusively to the Business (if
practicable) or, alternatively, to enter into new agreements with respect to the
parts of each Nonexclusive Asset that relate exclusively to the Business. Each
Nonassignable Asset is identified on Schedule 2.6 hereof.
(c) Landlord Consent to Sublease. Seller represents to Buyer that
----------------------------
(a) Seller has requested the consent of the owner of the building in which the
premises under the Sublease (the "Subleased Premises") are located (the
"Landlord") to the Sublease and has delivered to the Landlord copies of the
proposed Sublease and Buyer financial statements; and (b) the Landlord has not
indicated any unwillingness to consent to the Sublease, but has stated that it
requires up to thirty (30) days to respond to the request for consent. Seller
shall use its Best Efforts to obtain such consent as soon as practicable.
Notwithstanding Seller's inability to obtain such consent prior to the Closing
Date, Seller shall have the right to use the Subleased Premises prior to receipt
of such consent on all of the terms and conditions of the Sublease. Seller shall
indemnify, defend, protect and hold harmless Seller from all losses, costs,
claims, liabilities and damages arising from Seller's failure to obtain such
consent. This paragraph shall survive the Closing Date
ARTICLE 3
CLOSING
-------
3.1 The Closing. The transactions contemplated by this Agreement shall be
consummated (the "Closing") at the offices of Wilson Sonsini Goodrich & Rosati,
-------
at 10:00 a.m., local time, on May 26, 1999, or such other place, time and
date as the parties shall agree in writing. The time and date on which the
Closing is actually held is sometimes referred to herein as the "Closing Date."
------------
-8-
<PAGE>
3.2 Payment. Subject to fulfillment or waiver of the conditions set forth
-------
in Article 7 below, at the Closing Buyer shall pay Seller by wire transfer of
immediately available funds the Cash Payment in accordance with the wire
transfer instructions set forth in Schedule 3.2.
3.3 Buyer's Additional Deliveries. Subject to fulfillment or waiver of the
-----------------------------
conditions set forth in Article 7, at the Closing Buyer shall deliver to Seller,
in addition to the Purchase Price, all of the following:
(a) Certificate or certificates representing the Shares;
(b) Certificate of the secretary or an assistant secretary of Buyer,
dated the Closing Date, in form and substance reasonably
satisfactory to Seller, as to the resolutions of the Board of
Directors of Buyer authorizing the execution and performance of
this Agreement and the contemplated transactions;
(c) The certificate contemplated by Section 8.1 below, duly executed
by any Vice President or the President of Buyer;
(d) The License Agreement duly executed by Buyer;
(e) The Sublease duly executed by Buyer;
(f) The Transition Services Agreement duly executed by Buyer; and
(g) The Instrument of Assignment duly executed by Buyer.
3.4 Seller's Deliveries. Subject to fulfillment or wavier of the
-------------------
conditions set forth in Article 8, at the Closing Seller shall deliver to Buyer
all of the following:
(a) Certificate of the secretary or an assistant secretary of Seller,
dated the Closing Date, in form and substance reasonably
satisfactory to Buyer, as to the resolutions of the Board of
Directors of Seller authorizing the execution and performance of
this Agreement and the contemplated transactions;
(b) The Instrument of Assignment duly executed by Seller;
(c) Certificates of title or origin (or like documents) with respect
to any equipment included in the Purchased Assets for which a
certificate of title or origin is required to transfer title;
(d) Subject to Section 2.6, all consents, waivers or approvals
required to be obtained by Seller with respect to the Purchased
Assets or the consummation of the transactions contemplated by
this Agreement;
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<PAGE>
(e) The certificate contemplated by Section 7.1 below, duly executed by
the President and Chief Financial Officer of Seller;
(f) Such other bills of sale, assignments and other instruments of
transfer or conveyance as Buyer may reasonably request or as may be
otherwise necessary to evidence and effect the sale, assignment,
transfer, conveyance and delivery of the Purchased Assets to Buyer;
(g) The License Agreement duly executed by Seller;
(h) The Sublease duly executed by Seller; and
(i) The Transition Services Agreement duly executed by Seller.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF SELLER
----------------------------------------
As an inducement to Buyer to enter into this Agreement and to consummate
the transactions contemplated hereby, except as set forth in Schedule 4 (the
"Disclosure Letter") (which Disclosure Letter shall specifically reference the
-----------------
Sections of this Agreement to which the disclosure therein applies and shall be
executed by an authorized officer of Seller), Seller represents and warrants to
Buyer as follows:
4.1 Organization of Seller. Seller is a corporation duly organized,
----------------------
validly existing and in good standing under the laws of the State of California.
Seller is duly qualified to carry on the Business as now conducted and is in
good standing in each of the jurisdictions in which the ownership or leasing of
the Purchased Assets or the conduct of the Business requires such qualification.
Each such jurisdiction is identified in Section 4.1 of the Disclosure Letter.
Seller has full corporate power and authority to own or lease and to operate and
use the Purchased Assets and to carry on the Business as now conducted.
4.2 Authorization.
-------------
(a) Seller has full power and authority to execute, deliver and
perform this Agreement and all of the Additional Agreements and to consummate
the transactions contemplated hereby and thereby. The execution, delivery and
performance of this Agreement and the Additional Agreements by Seller have been
duly and validly authorized and approved by all required corporate proceedings
on the part of Seller, and do not require any further authorization or consent
of Seller. This Agreement has been duly executed and delivered by Seller and
constitutes (and the Additional Agreements, when duly executed and delivered
will constitute) legal, valid and binding obligations of Seller enforceable
against Seller in accordance with their terms. No approval by Seller
Shareholders is required to execute, deliver or perform under this Agreement or
the Additional Agreements.
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<PAGE>
(b) Except as set forth in Schedule 4.2, neither the execution and
delivery of this Agreement or any of the Additional Agreements or the
consummation of any of the transactions contemplated hereby or thereby nor
compliance with or fulfillment of the terms, conditions and provisions hereof or
thereof will: (i) violate, conflict with, result in a breach of the terms,
conditions or provisions of, or constitute a default, an event of default or an
event creating rights of acceleration, termination or cancellation or a loss of
rights under, or result in the creation or imposition of any Encumbrance upon
any of the Purchased Assets under (A) the charter documents of Seller, (B) any
Contract to which Seller is a party or any of the Purchased Assets is subject or
by which Seller or any of the Purchased Assets is bound, (C) any Governmental
Order or Governmental Permit to which Seller is a party or any of the Purchased
Assets is subject or by which Seller or any of the Purchased Assets is bound, or
(D) any Requirements of Laws affecting Seller or the Purchased Assets; or (ii)
except for any filings required to be made under the HSR Act, require the
approval, consent, authorization or act of, or the making by Seller of any
declaration, filing or registration with, any Person.
4.3 Accredited Investor. Seller is an "accredited investor" as such term
-------------------
is defined in Rule 501(a) promulgated under the Securities Act of 1933, as
amended. Seller is acquiring the Shares for investment, for its own account and
not with a view to the resale or distribution of the Shares. Seller acknowledges
that the Shares will not be registered under the Securities Act or any state
securities laws. Seller further acknowledges that the Shares will be restricted
securities and that Buyer is under no obligation to register the Shares. The
Shares will bear the legend set forth in Section 11.13 of this Agreement
4.4 Taxes. Seller has timely filed within the time period for filing or
-----
any extension granted with respect thereto, all Tax Returns which it is required
to file relating or pertaining to any and all taxes attributable to or levied
upon the Business and/or the Purchased Assets and has paid any and all Taxes
shown due on such Tax Returns. There are (and as of immediately following the
Closing there will be) no Encumbrances on the Purchased Assets relating to or
attributable to Taxes other than Permitted Encumbrances. Seller has no knowledge
of any basis for the assertion of any Tax claims from Governmental Bodies which,
if adversely determined, would adversely effect Buyer or Buyer's use of the
Purchased Assets or result in an Encumbrance on the Purchased Assets, other than
Permitted Encumbrances. None of the Purchased Assets are treated as "tax-exempt
use property" within the meaning of Section 168(h) of the Code.
4.5 Condition of Assets. Except as set forth in Schedule 4.5, the
-------------------
Purchased Assets are in good and serviceable condition, subject to reasonable
wear and tear, and are suitable for the uses to which they are presently being
put or would be put in the ordinary course of the Business.
4.6 Governmental Permits. Seller owns, holds or possesses all material
---------------------
licenses, franchises, permits, privileges, immunities, approvals and other
authorizations from a Governmental Body which are necessary to entitle it to own
or lease, operate and use the Purchased Assets and to carry on and conduct the
Business as currently conducted (collectively, the "Governmental Permits").
--------------------
Schedule 4.6 sets forth a list and brief description of each Governmental
Permit, except
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for such Governmental Permits that are incidental and readily obtainable without
expense (other than a normal permit fee) and without imposition of additional
material conditions.
4.7 Title to Tangible Property. Except as set forth on Schedule 4.7,
--------------------------
Seller has good and indefeasible title to all of the tangible property
constituting Purchased Assets, free and clear of all Encumbrances other than
Permitted Encumbrances. Except as set forth in Schedule 4.7, the tangible
property constituting Purchased Assets constitute all of the tangible property
that is reasonably necessary for the continued conduct of the Business as now
conducted, are in a condition sufficient and suitable for the conduct of the
Business as presently conducted and are all located at the Leased Facility.
Except as set forth on Schedule 4.7, upon delivery to Buyer of Instruments of
Assignment, Seller will transfer to Buyer good and indefeasible title to the
tangible property constituting Purchased Assets, free and clear of Encumbrances
other than Permitted Encumbrances.
4.8 Intellectual Property.
---------------------
(a) Except as set forth on Schedule 2.1(iv) or Schedule 4.8(b),
Seller owns, or is licensed or otherwise possesses legally enforceable rights to
use, all Intellectual Property that is used in the Business as currently
conducted by the Seller (excluding object code end-user licenses granted to end-
users in the ordinary course of business that permit use of software products
without a right to modify, distribute or sublicense the same (including the end-
user licenses for the software identified in Schedule 4.8(a) ("End-User
--------
Licenses")) (the "Seller Intellectual Property Right(s)"). Schedule 2.1(iv) sets
- -------- -------------------------------------
forth a complete list of all patents, registered and material unregistered
trademarks, registered copyrights, trade names and service marks, and any
applications therefor, included in the Seller Intellectual Property Rights, and
specifies, where applicable, the jurisdictions in which each such Seller
Intellectual Property Right has been issued or registered or in which an
application for such issuance and registration has been filed, including the
respective registration or application numbers and the names of all registered
owners. Schedule 4.8(a) contains a list of all material end-user licenses used
by Seller in the Business.
(b) There are no material licenses, sublicenses and other agreements
as to which the Seller is a party and pursuant to which the Seller uses any
Seller Intellectual Property Right. The execution and delivery of this Agreement
by the Seller, and the consummation of the transactions contemplated hereby,
including, without limitation, the transfer or assignment or license of such
Seller Intellectual Property Rights, will neither cause the Seller to be in
violation or default under any such license, sublicense or agreement, nor
entitle any other party to any such license, sublicense or agreement to
terminate or modify such license, sublicense or agreement. Except as set forth
in Schedules 4.8 (b), the Seller is the sole and exclusive owner or licensee of,
with all right, title and interest in and to (free and clear of any liens or
encumbrances), the Seller Intellectual Property Rights, and has sole and
exclusive rights (and is not contractually obligated to pay any compensation to
any third party in respect thereof) to the use thereof or the material covered
thereby in connection with the services or products in respect of which Seller
Intellectual Property Rights are being used .
(c) No claims with respect to the Seller Intellectual Property
Rights used in the Business have been asserted or are, to the Seller's
knowledge, threatened by any person, (i) to the
-12-
<PAGE>
effect that the manufacture, sale, licensing or use of any of the products of
the Seller used in the Business infringes on any copyright, patent, trade mark,
service mark, trade secret or other proprietary right, (ii) against the use by
the Seller of any trademarks, service marks, trade names, trade secrets,
copyrights, maskworks, patents, technology, know-how or computer software
programs and applications used in the Business as currently conducted or as
proposed to be conducted by the Seller, or (iii) challenging the ownership by
the Seller, validity or effectiveness of any of the Seller Intellectual Property
Rights. All registered trademarks, service marks and copyrights held by the
Seller are valid and subsisting. To the best knowledge of Seller, the Business
as currently conducted does not infringe any copyright, patent, trademark,
service mark, trade secret or other proprietary right of any third party. To the
knowledge of Seller, there is no material unauthorized use, infringement or
misappropriation of any of the Seller Intellectual Property Rights by any third
party, including any employee or former employee of the Seller. No Seller
Intellectual Property Right or product used in the Business is subject to any
outstanding decree, order, judgment, or stipulation restricting in any manner
the licensing thereof by the Seller. Each current and former employee,
consultant or contractor of the Seller who has participated in the development
of the Seller Intellectual Property Rights has executed a proprietary
information and confidentiality agreement substantially in the Seller's standard
forms. All software included in the Seller Intellectual Property Rights is
original with the Seller and has been either created by employees of the Seller
on a work-for-hire basis or by consultants or contractors who have created such
software themselves and have assigned all rights they may have had in such
software to the Seller.
(d) The representations and warranties in Section 5 of the License
Agreement are incorporated herein by reference.
4.9 Employees.
---------
(a) Each "employee benefit plan" (as such term is defined in
Section 3(3) of ERISA), and each other plan, program or arrangement, whether
written or oral ("Benefit Arrangement"), providing for compensation or benefits
-------------------
in connection with the performance of services to Seller and maintained by
Seller with respect to Regular Personnel has been identified in Schedule 4.9,
and copies or descriptions of each such employee benefit plan or Benefit
Arrangement has been delivered to or made available to Buyer, together with the
most recent determination letter in the case of any "pension benefit plan" (as
such term is defined in Section 3(2) of ERISA). Buyer will not have, as a
consequence of the transactions contemplated hereby, any liability or obligation
with respect to or under any employee benefit plan or with respect to or under
any Benefit Arrangement maintained by Seller with respect to employees of the
Business or any other Seller employees, as all such matters constitute "Retained
Liabilities" hereunder. Seller has complied with the health care continuation
requirements of Section 601 et seq. of ERISA ("COBRA") with respect to employees
------ -----
of the Business and their spouses, former spouses and dependents.
(b) Schedule 6.1(a) contains: (i) a list of all Regular Personnel
as of May 21, 1999; (ii) the then current annual compensation provided by Seller
to any such employees; and (iii) a list of any increase presently scheduled
(including the effective date thereof) in the rate of compensation of any such
employees.
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<PAGE>
(c) Insofar as it pertains to the Business, the Seller is not a
party to or bound by any union contract and has not experienced any strike,
grievance or any arbitration proceeding, claim of unfair labor practices filed
or, to Seller's knowledge, threatened to be filed or any other material labor
difficulty. To Seller's knowledge, no organizational effort is being or has been
made or threatened by or on behalf of any labor union with respect to any
employees of the Seller pertaining to the Business. To Seller's knowledge,
except as described on Schedule 7.1(a), none of the Regular Personnel is
involved in or is otherwise threatening a potential labor dispute nor have any
such Regular Personnel received written or oral reviews or feedback from
supervisors that indicate their insufficiency or incapacity to perform their job
functions.
4.10 Contracts. Set forth in Schedule 2.1(iv) is a list of each supply and
---------
customer contract, and each Contract that is material to the Business or the
Leased Facility to which Seller is a party or by which Seller, the Purchased
Assets or the Business may be bound or affected. Each such Contract constitutes
a valid, legal and binding obligation of the respective parties thereto
(assuming that such Contracts are binding on all parties thereto other than
Seller; Seller has no knowledge to the contrary); and no defenses, offsets, or
counterclaims thereto have been asserted, or, to Seller's knowledge, may be made
by any party thereto. Seller has not received written notice of any default
under any of such Contracts. To Seller's knowledge, there are no existing
defaults or events or default, real or claimed, or events which with notice or
lapse of time or both would constitute a material default under any Transferred
Agreement. Except as set forth in Schedule 4.10, to Seller's knowledge, there
exists no actual or threatened termination, cancellation, or limitation of, or
any amendment, modification, or change to any Transferred Agreement.
Except as set forth in Schedule 4.10, Seller is neither renegotiating any
of the Transferred Agreements nor is it paying liquidated damages in lieu of
performance thereunder. Except as set forth in Schedule 2.6 or Schedule 4.10,
all such Transferred Agreements may be transferred to Buyer pursuant to this
Agreement, in each case without breaching the terms thereof or resulting in the
forfeiture or impairment of any rights thereunder and without the consent,
approval or act of, or the making of any filing with, any Person. Complete and
correct copies of each of the written Transferred Agreements have heretofore
been delivered to Buyer by Seller.
4.11 No Violation, Litigation or Regulatory Action. Except as set forth in
---------------------------------------------
Schedule 4.11, (a) Seller has complied in all material respects with all
Requirements of Laws and Governmental Orders which are applicable to the
Purchased Assets or the Business, (b) there are no lawsuits, claims, suits,
proceedings or investigations pending or, to the knowledge of Seller, threatened
against or affecting Seller in respect of the Purchased Assets or the Business,
and there are no lawsuits, suits or proceedings pending in which Seller is the
plaintiff or claimant and which relate to the Purchased Assets or the Business;
nor to Seller's knowledge, is there any basis for the same, and (c) there is no
action, suit or proceeding pending or, to the knowledge of Seller threatened,
which questions the legality of the transactions contemplated by this Agreement.
4.12 Environmental Matters. Seller has not operated any underground
---------------------
storage tanks, and has no knowledge of the existence, at any time, of any
underground storage tank (or related piping or pumps) at the Leased Facility.
Seller has not released any amount of any substance that has been
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designated by any Governmental Body or by applicable federal, state or local law
to be radioactive, toxic, hazardous or otherwise a danger to health or the
environment, including, without limitation, PCBs, asbestos, oil and petroleum
products, urea-formaldehyde and all substances listed as a "hazardous
substance," "hazardous waste," "hazardous material" or "toxic substance" or
words of similar import, under any law, including but not limited to, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended; the Resource Conservation and Recovery Act of 1976, as amended; the
Federal Water Pollution Control Act, as amended; the Clean Air Act, as amended,
and the regulations promulgated pursuant to said laws, (a "Hazardous Material").
------------------
No Hazardous Materials are present as a result of the actions or omissions of
Seller, or, to Seller's knowledge, as a result of any actions of any third party
or otherwise, in, on or under the Leased Facility.
4.13 No Finder. Neither Seller nor any Person acting on its behalf has
---------
paid or become obligated to pay any fee or commission to any broker, finder or
intermediary for or on account of the transactions contemplated by this
Agreement.
4.14 Leased Facility. Except as set forth in Schedule 4.15:
--------------
(a) There is no real property which is owned, leased or utilized by
the Seller and used in the Business, other than the Leased Facility .
(b) Seller currently leases the Leased Facility, with full right to
sublease the Leased Facility to Buyer subject only to the necessity of obtaining
the consent of Seller's Landlord .
(c) Seller has not granted any option or right of first refusal or
first opportunity to any party to lease, purchase or acquire any interest in any
of the Leased Facility.
(d) To Seller's knowledge, there are no material physical or
mechanical defects of the Leased Facility, including, without limitation, the
structural and load-bearing components thereof. To Seller's knowledge, the
buildings, structures and improvements, including without limitation the
roof(s), the parking lot(s), the plumbing, heating, air conditioning, water,
sewer, gas, and electrical and life safety systems of the Leased Facility, are
in good operating condition and repair, are in compliance in all material
respects with applicable Requirements of Laws, have been reasonably maintained
consistent in all material respects with standards generally followed by similar
businesses and buildings, and are structurally sound .
(e) The conduct of the Business at the Leased Facility is legally
permitted by all applicable Requirements of Laws and no governmental permit is
required for the continued conduct by Buyer of the Business at the Leased
Facility in a manner consistent with present operations on and after the Closing
Date. The Leased Facility complies in all material respects with any private
covenant, conditions, restrictions, and approvals applicable thereto.
(f) To Seller's knowledge, no condemnation, environmental, zoning,
land-use or other regulatory proceedings or rule-making procedures have been
instituted or are planned to be instituted with respect to the Leased Facility
or any portion thereof, nor has Seller received written
-15-
<PAGE>
notice of any to impose any new Taxes or operating restrictions upon the Leased
Facility. Seller shall notify Buyer promptly of any such proceedings of which
Seller becomes aware prior to the Closing.
(g) All water, sewer, gas, electric, telephone, and drainage
facilities and all other utilities required by Requirements of Laws or for the
conduct of the Business as presently conducted have been, (i) legally installed
to, and available for use in, the Leased Facility upon payment of market rate
consumption charges, (ii) connected to the Leased Facility in accordance with
all Requirements of Laws and pursuant to valid Governmental Permits, (iii)
separately metered and connected to the Leased Facility for public utility
mains, and (iv) in operational condition adequate for operation of the Business
as presently conducted.
(h) Seller has obtained all permits, licenses, variances, approvals,
authorizations, easements and rights of way required from all Governmental
Bodies having jurisdiction over the Leased Facility or from private parties to
insure vehicular and pedestrian ingress to and egress from the Leased Facility
and the parking of vehicles at the Leased Facility at current levels.
(i) There are no outstanding Contracts made by Seller for any
alterations or improvements on or to the Leased Facility which have not been
fully paid, and Seller has caused to be discharged all mechanics' and
materialmen's liens arising from any labor or materials furnished to the Leased
Facility .
(j) All documents, information and other records with respect to the
Leased Facility, which Seller has delivered to Buyer in connection with this
Agreement, are complete and correct in all material respects. All such documents
prepared by or at the request of Seller accurately represent in all material
respects the condition of the Leased Facility and its ownership operations and
management, as of the date and for the period identified in said documents.
4.15 Disclosure. None of the representations or warranties of Seller
----------
contained herein and none of the information contained in the exhibits and
schedules attached hereto or in the Additional Agreements (including exhibits
and schedules attached thereto) contains or will contain any untrue statement of
a material fact or omits or will omit to state a material fact necessary to make
the statements herein or therein, in light of the circumstances in which they
were made, not misleading.
4.16 Financial Statements. Section 4.16 sets forth the Seller's audited
--------------------
balance sheets as of September 30, 1998 and 1997 and the related audited
statements of income and cash flows for the 12 month periods ended December 31,
1998 and 1997 (the "Seller Audited Financials") and Seller's unaudited balance
sheet as of March 31, 1999 and the related unaudited statements of income and
cash flow for the six months then ended (the "Seller Unaudited Financials")
(collectively, such financial statements are sometimes referred to herein as
"Seller Financial Statements"). The Seller Audited Financials and the Seller
Unaudited Financials are correct in all material respects and have been prepared
in accordance with GAAP applied on a basis consistent throughout the periods
indicated and consistent with each other (except that the Seller Unaudited
Financials do not contain all the notes that may be required by GAAP). The
Seller Audited Financials and Seller Unaudited
-16-
<PAGE>
Financials present fairly the financial condition, operating results and cash
flows of the Seller as of the dates and during the periods indicated therein,
subject in the case of the Seller Unaudited Financials, to normal year-end
adjustments, which will not be material in amount.
4.17 WARRANTIES EXCLUSIVE. EXCEPT AS OTHERWISE SPECIFICALLY SET FORTH IN
--------------------
THIS AGREEMENT, SELLER MAKES NO EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE, OR ANY OTHER WARRANTY AS TO THE CONDITION
OR OPERATION OF ANY REAL, TANGIBLE OR INTANGIBLE PERSONAL PROPERTY OWNED, USED
OR LEASED BY SELLER AND TO BE SOLD, CONVEYED, ASSIGNED, SUBLEASED OR OTHERWISE
TRANSFERRED TO BUYER PURSUANT TO THIS AGREEMENT.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
As an inducement to Seller to enter into this Agreement and to consummate
the transactions contemplated hereby, Buyer hereby represents and warrants to
Seller and agrees as follows:
5.1 Organization of Buyer. Buyer is an entity duly organized, validly
---------------------
existing and in good standing under the laws of the State of California. Buyer
has full corporate power and authority to own or lease and to operate and use
its properties and assets and to carry on its business as now conducted.
5.2 Authorization.
-------------
(a) Buyer has full power and authority to execute, deliver and
perform this Agreement and all of the Additional Agreements and to consummate
the transactions contemplated hereby and thereby. The execution, delivery and
performance of this Agreement and the Additional Agreements by Buyer have been
duly authorized and approved by the board of directors of Buyer, and do not
require any further authorization or consent of Buyer. This Agreement has been,
and the Additional Agreements, upon execution and delivery by Buyer will be,
duly authorized, executed and delivered by Buyer and constitutes, or, with
respect to the Additional Agreements, upon execution and delivery by Buyer will
constitute, as the case may be, legal, valid and binding obligations of Buyer
enforceable against Buyer in accordance with their terms.
(b) Neither the execution and delivery of this Agreement or any of
the Additional Agreements or the consummation of any of the transactions
contemplated hereby or thereby nor compliance with or fulfillment of the terms,
conditions and provisions hereof or thereof will: (i) violate, conflict with,
result in a breach of the terms, conditions or provisions of, or constitute a
default, an event of default or an event creating rights of acceleration,
termination or cancellation or a loss of rights under (A) the organizational
documents of Buyer, (B) any Contract to which Buyer is a party or any of its
properties is subject or by which Buyer or any of its properties is bound, (C)
any
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<PAGE>
Governmental Order or Governmental to which Buyer is a party or any of its
properties is subject or by which Buyer or any of its properties is bound, or
(D) any Requirements of Laws affecting Buyer or its property; or (ii) except for
any filings required to be made under the HSR Act, require the approval,
consent, authorization or act of, or the making by Buyer of any declaration,
filing or registration with, any Person.
5.3 Capitalization.
--------------
(a) The authorized stock of Buyer consists of 150,000,000 shares of
Common Stock, of which 35,002,091 shares were issued and outstanding as of May
11, 1999, and 5,000,000 shares of Preferred Stock, none of which were issued and
outstanding as of May 11, 1999. All such shares have been duly authorized, and
such issued and outstanding shares have been validly issued, and are fully paid
and non-assessable.
(b) The Shares, when issued in accordance with this Agreement, will
be duly authorized, validly issued, fully paid and non-assessable and will be
free and clear of any and all Encumbrances other than Encumbrances created by or
imposed upon Seller or created by the Securities Act.
5.4 SEC Documents. Buyer has furnished to Seller true and complete copies
-------------
of all reports, registration statements and definitive proxy statements filed by
it with the SEC under the Securities Act of 1933 (the "1933 Act") and the
Securities Exchange Act of 1934 (the "Exchange Act") for all periods subsequent
to December 31, 1998, all in the form so filed (all of the foregoing being
collectively referred to as the "SEC Documents"). No reports, registration
statements or definitive proxy statements were required to be filed by Buyer
since December 31, 1998 except for those actually filed and furnished to Seller.
As of their respective filing dates, the SEC Documents complied in all material
respects with the requirements of the 1933 Act or the Exchange Act, as the case
may be, and none of the SEC Documents contained any untrue statement of material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances in
which they were made, not misleading, except to the extent corrected by a
subsequently filed document with the SEC. The financial statements of Buyer,
including the notes thereto, included in the SEC Documents (the "Buyer Financial
Statements") comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with GAAP consistently
applied (except as may be indicated in the notes thereto) and present fairly the
financial condition, operating results and cash flows of Buyer as of the dates
and periods indicated therein (subject, in the case of unaudited statements, to
normal year-end adjustments, which will not be material in amount). There has
been no change in Buyer's accounting policies except as described in the notes
to the Buyer Financial Statements.
5.5 No Litigation. There are no lawsuits, claims, suits, proceedings or
-------------
investigations pending, or, to the knowledge of Buyer, threatened in writing,
that challenges or seeks to prevent, enjoin, alter or materially delay any of
the transactions contemplated by this Agreement.
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<PAGE>
5.6 No Finder. Neither Buyer nor any Person acting on its behalf has paid
---------
or become obligated to pay any fee or commission to any broker, finder or
intermediary for or on account of the transactions contemplated by this
Agreement.
ARTICLE 6
ADDITIONAL AGREEMENTS
---------------------
6.1 Employment Matters.
------------------
(a) At or prior to Closing, Buyer will offer comparable employment
to all individuals who are listed on Schedule 6.1 (a) (the "Regular Personnel").
Such employment shall become effective immediately on the Closing Date.
(b) Seller shall terminate each of the Regular Personnel who has
accepted (and not withdrawn) an offer of employment extended pursuant to Section
6.1(a) above on and as of the Closing Date. Buyer reserves the right to redefine
job content or position description of any employee. Nothing contained in this
Section 6.1 is intended or shall be deemed to (i) require Buyer to employ New
Regular Personnel for any fixed or predetermined time after the Closing as all
such employment shall be "at will," or (ii) confer upon any employee of Seller,
past, present, or future, any rights of employment of any nature, it being
understood and agreed that the provisions of this Section 6.1 are intended to
set forth an agreement among Buyer and Seller, and are not intended to benefit
any Persons not party to this Agreement, including such employees.
(c) From the date hereof to the Closing Date, Seller shall assist
Buyer in identifying, recruiting and hiring Regular Personnel to establish
operations substantially comparable to the Business as of the Closing Date.
(d) Buyer shall offer employment to each new Regular Personnel on
substantially the same terms and conditions as such New Regular Personnel
enjoyed immediately prior to the termination of his employment by Seller. Buyer
reserves the right, in its sole discretion, to change elements of the employment
compensation and benefits provided its employees, including any New Regular
Personnel hired pursuant to this Section 6.1 provided that any such change is
made in the general employment practices and policies applicable to all
employees of Buyer. The employment relationship of each New Regular Personnel
with a Buyer shall be "at will" and nothing in this Agreement or the Related
Agreements shall be construed to grant any right of continued employment with
Buyer.
(e) Seller agrees to hold harmless and indemnify Buyer from and
against any severance pay, Worker Adjustment and Retraining Notification Act
("WARN") liability or damages, discrimination or other employee related claims
----
or damages arising or resulting from Seller's actions prior to, on or after the
Closing Date, as all such matters constitute Retained Liabilities. Buyer agrees
to hold harmless and indemnify Seller from and against any severance pay, WARN
Act
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<PAGE>
liability or damages, discrimination, labor law or other employee related
claims or damages arising or resulting from Buyer's actions after the Closing
Date with respect to New Regular Personnel; provided, however, that Buyer shall
not have any liability for severance pay or other benefits payable under
Seller's employee benefit plans or Benefit Arrangements solely as a result of
the transactions contemplated by this Agreement, including, but not limited to,
the termination by Seller of Seller's Regular Personnel pursuant to Section
6.1(b) above.
(f) Notwithstanding anything to the contrary herein, New Regular
Personnel who, on the Closing Date, are employed in the United States pursuant
to a work or training visa shall become New Regular Personnel of Buyer at such
times, and under such terms and conditions, as Seller and Buyer shall agree.
Prospective new employees of the Business to whom Seller has made offers prior
to the Closing, shall become New Regular Personnel of Buyer only if Seller and
Buyer so agree.
(g) Upon each offer of employment Buyer shall request from New
Regular Personnel and provide to Seller a signed release and consent to the
transfer by Seller to Buyer of the personnel records of such employee maintained
by Seller. All personnel records of each employee who signs such release and
consent shall be transferred by Seller to Buyer as soon as practicable after
such release and consent is provided to Seller; provided, however, that Seller
may retain a copy of such records. With respect to New Regular Personnel who do
not sign such release and consent, only the name, Seller employee number, social
security number, W-4 income tax withholding form information, current job
assignment, current rate of wages or salary, and the amount of service completed
with Seller and its subsidiaries shall be transferred. In the event any
applicable laws or regulations prohibit or restrict the transfer of personnel
information pursuant to this paragraph, the obligations of Seller shall be to
transfer only such information as shall be permitted by such laws or
regulations.
(h) Seller has undertaken reasonable efforts to complete and retain
legally prescribed I-9 employment forms on all New Regular Personnel hired by
Seller since the effective date of the requirements to complete such forms.
Seller will transfer all such forms to Buyer together with the personnel records
transferred pursuant to this paragraph (i).
6.2 Taxes.
-----
(a) Notwithstanding anything to the contrary in Article 9 below,
Seller shall be responsible for and pay all Taxes other than Transfer Taxes of
Seller, its Affiliates, the Business or the Purchased Assets arising at any time
with respect to periods ending on or prior to the Closing Date, including the
portion of real, personal or other property Taxes attributable to such periods
and all such Taxes shall constitute Retained Liabilities .
(b) To the extent relevant to the Purchased Assets and the Business,
Seller shall (i) provide Buyer with such assistance as may reasonably be
required in connection with the preparation of any Tax Return and the conduct of
any audit or other examination by any taxing authority or in connection with
judicial or administrative proceedings relating to any liability for
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<PAGE>
Taxes and (ii) retain and provide Buyer with all records or other information
that may be relevant to the preparation of any Tax Returns, or the conduct of
any audit or examination, or other tax proceeding. Seller shall retain all
relevant documents, including prior year's Tax Returns, supporting work
schedules and other records or information that may be relevant to such returns
and shall not destroy or otherwise dispose of any such records without the prior
written consent of Buyer.
6.3 Product Warranty. Buyer shall be responsible for repair or replacement
----------------
of all products sold by the Business prior to the Closing Date in accordance
with the product warranty terms of the Business and Seller shall promptly
reimburse Buyer for the costs incurred by Buyer in connection therewith.
6.4 Confidentiality. Beginning as of the Closing, Seller agrees, and shall
---------------
cause each Seller Group Member to agree to hold in strict confidence all
proprietary information directly related to the Purchased Assets and the
Business and all information provided by Buyer to Seller under the terms of this
Agreement and will not use such information except in furtherance of its
continuing business relationships with Buyer; provided, however, that each
Seller Group Member's obligations hereunder shall not apply to any information
or documents that are required by applicable law or the terms of this Agreement
to be disclosed, that are in the public domain at the time furnished, or that
become in the public domain thereafter through any means other than as a result
of any act of a Seller Group Member which constitutes a breach of this
Agreement.
6.5 Leased Facility Books, Records, and Reports. On or before May 26,
-------------------------------------------
1999, Seller shall deliver to Buyer true and correct copies of all records and
other documents relating to the Leased Facility. Such documents shall include,
but shall not be limited to, leases, brokerage agreements, rental agreements,
easements, service contracts, management contracts, utility statements, tax
bills, rental delinquency reports, maintenance and service requests, plans and
specifications for the Leased Facility, all environmental reports, soil and
water tests, physical inspections, insurance inspections, engineering studies
regarding the Leased Facility, and any other tests, evaluations, inspections and
reports in Seller's possession or under Seller's control concerning the Leased
Facility.
6.6 Preparation of Financials. The parties acknowledge that financial
-------------------------
statements have never been prepared and are not currently available for the
Business. Buyer has advised Seller of the form and content of the audited and
unaudited historical financial statements and other financial data of the
Business required by Buyer to comply with its filing obligations with the SEC
under the rules and regulations of the Exchange Act (including Regulation S-X)
in connection with the consummation of the transactions contemplated hereby
("Financial Statements"). Seller shall cause the Financial Statements to be
--------------------
prepared and delivered to Buyer within one (1) day after the date of this
Agreement with a view to enabling Buyer to timely file the Financial Statements
with the SEC. The Financial Statements will conform to the requirements of the
Exchange Act as set forth in the notice of Buyer. Seller and Buyer shall share
equally all Expenses incurred by Seller in connection with the preparation of
the Financial Statements.
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<PAGE>
6.7 Rule 144 Reporting. With a view to making available to Seller the
------------------
benefits of certain rules and regulations of the SEC which may permit the resale
of the Shares to the public without registration, Buyer agrees to use its Best
Efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 or any similar or analogous rule promulgated
under the Securities Act, at all times after the date hereof.
(b) File with the SEC, in a timely manner, all reports and other
documents required of the Buyer under the Exchange Act; and
(c) So long as Seller owns any Shares, furnish to Seller forthwith
upon request: a written statement by Buyer as to its compliance with the
reporting requirements of said Rule 144 of the Securities Act, and of the
Exchange Act (at any time after it has become subject to such reporting
requirements); a copy of the most recent annual or quarterly report of Buyer,
and such other reports and documents as Seller may reasonably request in
availing itself of any rule or regulation of the SEC allowing it to sell any
such securities without registration.
ARTICLE 7
CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER
--------------------------------------------
The obligations of Buyer under this Agreement shall be subject, at the
option of Buyer, to the satisfaction, on or prior to the Closing Date, of the
following conditions.
7.1 No Misrepresentation or Breach of Covenants and Warranties. Each of
----------------------------------------------------------
the representations and warranties of Seller contained herein shall be true and
correct in all material respects on the Closing Date as though made on the
Closing Date; Seller shall have materially complied with and not otherwise
breached the covenants set forth herein; and there shall have been delivered to
Buyer a certificate to such effect, dated the Closing Date, signed on behalf of
Seller by the President and the Chief Financial Officer.
7.2 No Restraint or Litigation. No action, suit, investigation or
--------------------------
proceeding shall have been instituted or overtly threatened to restrain or
prohibit or otherwise challenge the legality or validity of the transactions
contemplated hereby.
7.3 Necessary Approvals. The parties shall have received the approvals and
-------------------
consents set forth on Schedule 7.3.
7.4 Employees. The Key Employees shall have accepted (and not withdrawn)
---------
offers of employment by Buyer extended as contemplated by Section 6.1 above.
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<PAGE>
7.5 No Material Adverse Change. There shall have been no material adverse
--------------------------
change with respect to the Purchased Assets.
7.6 Deliveries. Seller shall have made the deliveries contemplated in
----------
Section 3.4.
ARTICLE 8
CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
---------------------------------------------
The obligations of Seller under this Agreement shall be subject, at the
option of Seller, to the satisfaction, on or prior to the Closing, of the
following conditions:
8.1 No Misrepresentation or Breach of Covenants and Warranties. Each of
----------------------------------------------------------
the representations and warranties of Buyer contained in this Agreement shall be
true and correct in all material respects on the Closing Date as though made on
the Closing Date; Buyer shall have materially complied with and not otherwise
breached the covenants set forth herein; and there shall have been delivered to
Seller a certificate or certificates to such effect, dated the Closing Date and
signed on behalf of Buyer by an authorized officer of Buyer.
8.2 No Restraint or Litigation. No action, suit, investigation or
--------------------------
proceeding shall have been instituted or overtly threatened to restrain,
prohibit or otherwise challenge the legality or validity of the transactions
contemplated hereby.
8.3 Necessary Governmental Approvals. The parties shall have received the
--------------------------------
approvals of all Governmental Bodies necessary to consummate the transactions
contemplated hereby, which are required to be obtained prior to the Closing by
applicable Requirements of Laws.
8.4 Deliveries. Buyer shall have made the deliveries contemplated in
----------
Section 3.3.
ARTICLE 9
INDEMNIFICATION
---------------
9.1 Indemnification by Seller. Seller shall indemnify and hold harmless
-------------------------
each Buyer Group Member from and against any and all Losses and Expenses
incurred by such Buyer Group Member in connection with or arising from:
(a) any breach by Seller of any of its covenants in this Agreement;
(b) any breach of any warranty or the inaccuracy of any
representation of Seller contained or referred to in this Agreement or any
certificate delivered by or on behalf of Seller pursuant hereto; and
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<PAGE>
(c) the Retained Liabilities.
9.2 Indemnification by Buyer. Buyer shall indemnify and hold harmless each
------------------------
Seller Group Member from and against any and all Losses and Expenses incurred by
such Seller Group Member in connection with or arising from:
(a) any breach by Buyer of any of its covenants in this Agreement;
(b) any breach of any warranty or the inaccuracy of any
representation of Buyer contained or referred to in this Agreement or any
certificate delivered by or on behalf of Buyer pursuant hereto; and
(c) the Assumed Liabilities.
9.3 Notice of Claims.
----------------
(a) Any Buyer Group Member or Seller Group Member (the "Indemnified
-----------
Party") seeking indemnification hereunder shall give to the party obligated to
- -----
provide indemnification to such Indemnified Party (the "Indemnitor") a notice
----------
(a "Claim Notice") describing in reasonable detail the facts then known with
------------
respect to such claim for indemnification hereunder and shall include in such
Claim Notice (i) the amount of such claim (to the extent then known), (ii) facts
pertaining to any insurance coverage that may be available to such Indemnified
Party with respect to such claim, including, without limitation, the name of the
insurer and the amount of the coverage, and (iii) a reference to the provision
of this Agreement or any other agreement, document or instrument executed
hereunder or in connection herewith upon which such claim is based; provided,
however, that a Claim Notice in respect of any action at law or suit in equity
by or against a third Person as to which indemnification will be sought shall be
given promptly after the action or suit is commenced; and provided, further,
that failure to give such notice shall not relieve the Indemnitor of its
obligations hereunder except to the extent it shall have been materially
prejudiced by such failure.
9.4 Third-Person Claims.
-------------------
The Indemnitor shall have the right to conduct and control, through
counsel of its choosing, the defense, compromise or settlement of any third
Person claim, action or suit against any Indemnified Party (each a "Third-Person
Claim") as to which indemnification will be sought by such Indemnified Party
from any Indemnitor hereunder, and in any such case the Indemnified Party shall
cooperate in connection therewith and shall furnish such records, information
and testimony and attend such conferences, discovery proceedings, hearings,
trials and appeals as may be reasonably requested by the Indemnitor in
connection therewith; provided, (a) that the Indemnified Party may participate,
through counsel chosen by it and at its own expense, in the defense of any such
Third-Person Claim as to which the Indemnitor has so elected to conduct and
control the defense thereof; (b) that the Indemnitor shall pay for the
reasonable fees and expenses of such Indemnified Party's counsel to the extent
that such Indemnified Party has been advised by counsel that there is a
reasonable likelihood of conflict of interest between the Indemnified Party and
the Indemnitor; (c) the Indemnitor shall not have the right to settle any Third-
Person Claim without the consent of
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<PAGE>
the Indemnified Party unless such settlement (i) releases the Indemnified Party
from all past and future liability concerning the subject matter of the action
and has (ii) no effect on the business or assets of the Indemnified Party; and
(d) the Indemnitor shall have no right to conduct or control any defense of a
claim brought by a Governmental Body without the consent of the Indemnified
Party. So long as the Indemnitor is defending in good faith any third Person
claim as to which indemnification has been sought hereunder, the Indemnified
Party shall not settle or compromise such third Person claim.
9.5 Survival. Except with respect to (i) the representations and
--------
warranties of Seller contained in Section 4.2 and of Buyer contained in Section
5.2 and 5.3(b) (all of which shall survive indefinitely), (ii) the
representations and warranties of Seller contained in Section 4.8 (which shall
survive until the second anniversary of the Closing Date), and (iii) the
representations and warranties of Seller contained in Section 4.4 (which shall
survive until thirty (30) days after the applicable statute of limitations for a
given tax period has expired), the representations and warranties of the parties
contained herein shall survive the Closing until the first anniversary of the
Closing Date (the "Survival Date"). No claim or action for indemnification may
be asserted or commenced pursuant to Section 9.1 or Section 9.2 after the first
anniversary of the Closing Date except a claim or action arising out of a breach
of the representations and warranties (i) of Seller contained in Section 4.2 and
of Buyer contained in Section 5.2 or 5.3(b) (which can be made at any time) or
(ii) of Seller contained in Section 4.8 (which must be asserted or commenced
prior to the second anniversary of the Closing Date).
9.6 Limits on Indemnification.
-------------------------
(a) Except with respect to breaches of Section 2.1, Section 2.2,
Section 2.3, Section 2.4, Section 2.5 and Section 2.6:
(i) an Indemnitor shall not be liable to an Indemnified Party
for any Losses that are indemnifiable pursuant to Section 9.1 or Section 9.2, as
the case may be, except to the extent that the Losses for any breach, with
respect to any individual claim, exceed $5,000 (such excess over $5,000 being
the "Threshold Damages" for such claim);
(ii) an Indemnitor shall not be liable to an Indemnified Party
pursuant to Section 9.1 or Section 9.2, as the case may be, until the aggregate
amount of the Threshold Damages to such Indemnified Party exceeds $200,000. Once
the aggregate amount of the Threshold Damages to such Indemnified Party exceeds
$200,000, such Indemnified Party shall be entitled to recover all Threshold
Damages; and
(iii) the total aggregate liability of each Indemnitor for any
claims for Losses arising under Section 9.1 or Section 9.2, as the case may be,
shall not exceed $2,000,000.
(b) An Indemnitor shall have no obligation to indemnify an
Indemnified Party for any Consequential Damages that are (i) caused by the
actions of any Indemnitor, or (ii) recovered by an Indemnified Party from any
third party (including insurers). If the amount of any Losses, at any
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<PAGE>
time subsequent to the payment thereof by an Indemnitor to an Indemnified Party
pursuant to this Article 9, is reduced by recovery, settlement or otherwise
under or pursuant to any insurance coverage or pursuant to any claim, recovery
or settlement against or with any third party (including any insurer), then the
amount of such reduction (net of any out-of-pocket costs incurred in connection
with obtaining such reduction) shall promptly be repaid by the Indemnified Party
to the Indemnitor.
(c) In the absence of the actual fraud, this Article 9 sets forth the
exclusive remedy for monetary Losses owing from the parties hereto to one
another that arise from the matters giving rise to indemnification hereunder set
forth in Section 9.1 and Section 9.2. The parties hereto hereby waive all claims
and causes of action for monetary Losses that they may assert against the one
another other than pursuant to this Article 9 in connection with actual fraud.
ARTICLE 10
TERMINATION
10.1 Termination. This Agreement may be terminated:
-----------
(a) At any time prior to the Closing by the mutual written agreement
of Buyer and Seller;
(b) By either Buyer or Seller upon written notice to the other party
if the Closing has not occurred on or before May 31, 1999 (the "Outside Date")
and the failure of the Closing to have occurred has not resulted from the
failure of the terminating party to comply with the terms of this Agreement or a
breach of the terminating party's representations and warranties made herein;
(c) By Buyer upon written notice to Seller if any condition set forth
in Article 7 cannot be satisfied prior to the Outside Date and has not been
waived by Buyer, provided that the inability of Seller to satisfy such condition
has not resulted from the failure of Buyer to comply with the terms of this
Agreement or from a breach by Buyer of its representations and warranties made
herein; or
(d) by Seller upon written notice to Buyer if any condition set forth
in Article 8 cannot be satisfied prior to the Outside Date and has not been
waived by Seller, provided that the inability of Buyer to satisfy such condition
has not resulted from the failure of Seller to comply with the terms of this
Agreement or from a breach by Seller of its representations and warranties made
herein.
10.2 Effect of Termination. If this Agreement is terminated pursuant to
---------------------
Section 10.1:
(a) Buyer shall promptly cause to be returned to Seller all documents
and information obtained in connection with this Agreement and the transactions
contemplated hereby, and all documents and information obtained in connection
with Buyer's investigation of Seller
-26-
<PAGE>
and/or the Business, including any copies made by Buyer or any of Buyer's
representatives of any such documents or information; and
(b) All obligations of the parties hereunder shall terminate, except
for the obligations set forth in Sections 10.2(a) and Article II hereof, which
shall survive the termination of this Agreement and except that no such
termination shall relieve any party from liability for any willful breach of
this Agreement.
ARTICLE 11
GENERAL PROVISIONS
------------------
11.1 Effect of Due Diligence. The respective representations and warranties
-----------------------
of each party hereto contained herein shall not be deemed waived or otherwise
affected by any investigation made by the other party hereto and shall survive
the Closing Date to the extent set forth in Section 9.5.
11.2 No Public Announcements. Except as heretofore made, neither Buyer nor
-----------------------
Seller shall, without the written approval of the other, make any press release
or other public announcement concerning this Agreement, its existence or the
transactions contemplated by this Agreement, except as and to the extent that
any such party shall be so obligated by law, in which case the other party shall
be advised and the parties shall use their reasonable efforts to cause a
mutually agreeable release or announcement to be issued.
11.3 Notices. All notices, requests, instructions or other communications
-------
or other documents required or permitted hereunder shall be in writing and shall
be deemed given or delivered when delivered personally via telecopier or five
(5) days after being sent, when sent by registered or certified mail, or one (1)
day after being sent, when sent by overnight courier, addressed as follows:
If to Buyer, to:
Critical Path, Inc.
320 First Street
San Francisco, CA 94105
Attn: Chief Financial Officer
Facsimile: (415) 808-8777
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
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<PAGE>
Palo Alto, California 94304
Attention: Alan K. Austin
Facsimile: (650) 493-6811
If to Seller, to:
FABRIK Communications, Inc.
100 Bush Street
Suite 1300
San Francisco, California 94104
Attention: Chief Financial Officer
Facsimile: (415) 438-7578
or to such other address as such party may indicate by a notice delivered to the
other parties hereto.
11.4 Successors and Assigns.
----------------------
(a) The rights of either party under this Agreement shall not be
assignable prior to the Closing Date without the written consent of the other.
(b) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their successors and permitted assigns. Nothing in this
Agreement, expressed or implied, is intended or shall be construed to confer
upon any Person other than the parties and successors and assigns permitted by
this Section 10.4 any right, remedy or claim under or by reason of this
Agreement.
11.5 Access to Records After Closing Date. For a period of five (5) years
------------------------------------
after the Closing Date, Buyer and its representatives shall have reasonable
access to all of the information, books and records of the Business which Seller
or any of its Affiliates shall retain after the Closing Date, in each case
subject to the Confidentiality Agreement executed by and between the parties
hereto and dated March 31, 1999 (the "Confidentiality Agreement"). Such access
shall be afforded by Seller and its Affiliates upon receipt of reasonable
advance notice and during normal business hours.
11.6 Entire Agreements; Amendments. This Agreement and the exhibits and
-----------------------------
schedules referred to herein and the documents delivered pursuant hereto contain
the entire understanding of the parties hereto with regard to the subject matter
contained herein or therein, and supersede all prior agreements or understanding
between or among any of the parties hereto. This Agreement shall not be amended,
modified or supplemented except by a written instrument signed by an authorized
representative of each of the parties hereto.
11.7 Waivers. Any term or provision of this Agreement may be waived, or the
-------
time for its performance may be extended, by the party or parties entitled to
the benefit thereof. Any such waiver shall be validly and sufficiently
authorized for the purposes of this Agreement if, as to any party, it is
authorized in writing by an authorized representative of such party. The failure
of any party hereto to enforce at any time any provision of this Agreement shall
not be construed to be a
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<PAGE>
waiver of such provision, nor in any way to affect the validity of this
Agreement or any part hereof or the right of any party thereafter to enforce
each and every such provision. No waiver of any breach of this Agreement shall
be held to constitute a waiver of any other or subsequent breach.
11.8 Expenses. Each party hereto will pay all Expenses incident to its
--------
negotiation and preparation of this Agreement and to its performance and
compliance with all agreements and conditions contained herein on its part to be
performed or complied with.
11.9 Partial Invalidity. Wherever possible, each provision hereof shall
------------------
be interpreted in such manner as to be effective and valid under applicable law,
but in case any one or more of the provisions contained herein shall be held to
be invalid, illegal or unenforceable in any respect, such provision shall be
ineffective to the extent, but only to the extent, of such invalidity,
illegality or unenforceability without invalidating the remainder of such
invalid, illegal or unenforceable provision or provisions or any other
provisions hereof, unless such a construction would be unreasonable.
11.10 Execution in Counterparts. This Agreement may be executed in one or
-------------------------
more counterparts, each of which shall be considered an original instrument, but
all of which shall be considered one and the same agreement, and shall become
binding when one or more counterparts have been signed by each of the parties
hereto and delivered to each of Seller and Buyer.
11.11 Further Assurances.
------------------
(a) On the Closing Date Seller shall (i) deliver to Buyer such
other bills of sale, deeds, endorsements, assignments and other good and
sufficient instruments of conveyance and transfer, in form reasonably
satisfactory to Buyer and its counsel, as Buyer may reasonably request or as may
be otherwise reasonably necessary to vest in Buyer all the right, title and
interest of Seller in, to or under any or all of the Purchased Assets, and (ii)
take all steps as may be reasonably necessary to put Buyer in actual possession
and control of all the Purchased Assets.
(b) From time to time following the Closing Date, Seller shall
execute and deliver, or cause to be executed and delivered, to Buyer such other
instruments of conveyance and transfer as Buyer may reasonably request or as
otherwise may be reasonably necessary to more effectively convey and transfer
to, and vest in, Buyer and put Buyer in possession of, any part of the Purchased
Assets.
11.12 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws (as opposed to the conflicts of law
provisions) of the State of California. The Additional Agreements shall be
governed by such laws as set forth therein.
11.13 Stock Certificate Legends. Each certificate representing any of the
-------------------------
Shares shall have endorsed thereon a legend substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED
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<PAGE>
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SHARES
MAY NOT BE SOLD, TRANSFERRED OR PLEDGED UNLESS (i) A REGISTRATION
STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH SHARES OR (ii) THE
COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL TO THE
COMPANY) REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE, TRANSFER
OR PLEDGE IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE ACT."
[Remainder of page intentionally left blank]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the date first above written.
CRITICAL PATH, INC.
By: /s/ DAVID A. THATCHER
------------------------------
Name: David A. Thatcher
----------------------------
Title: Executive Vice President and Chief Financial Officer
-----------------------------------------------------
FABRIK COMMUNICATIONS, INC
By: /s/ WILLIAM R> WINTERS
------------------------------
Name: William R. Winters
----------------------------
Title: Chief Executive Officer
---------------------------
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<PAGE>
EXHIBIT 5.1
[Wilson Sonsini Goodrich & Rosati letterhead]
May 26, 1999
Critical Path, Inc.
320 First Street
San Francisco, CA 94105
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on May 11, 1999 (the "Registration
Statement"), in connection with the registration under the Securities Act of
1933, as amended, of up to 4,000,000 shares of your Common Stock (the "Shares").
As your legal counsel, we have examined the proceedings taken, and are familiar
with the proceedings proposed to be taken, by you in connection with the sale of
the Shares.
It is our opinion that the Shares, when sold and issued in accordance with
the Registration Statement, will be legally issued, fully paid and non-
assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 (No.333-78197) of our report dated January
28, 1999, except for Note 9, which is as of March 26, 1999, relating to the
consolidated financial statements of Critical Path, Inc., which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
/s/ PricewaterhouseCoopers LLP
San Jose, California
May 27, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated November 6, 1998, with respect to the consolidated
financial statements of Fabrik Communications, Inc. included in the
Registration Statement, Amendment No. 1 (Form S-1 No. 333-78197) and related
Prospectus of Critical Path, Inc. for the registration of shares of its common
stock.
/s/ Ernst & Young LLP
Palo Alto, California
May 24, 1999
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Douglas T. Hickey and David A. Thatcher, and
each of them, his or her true and lawful attorneys-in-fact and agents, each
with full power of substitution and resubstitution, for him or her and in his
or her name, place and stead, in any and all capacities, to sign any and all
amendments, including post-effective amendments, to this Registration
Statement, and any registration statement relating to the offering covered by
this Registration Statement and filed pursuant to Rule 462(b) under the
Securities Act of 1933 and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that each of said attorneys-
in-fact and agents or their substitute or substitutes may lawfully do or cause
to be done by virtue hereof.
<TABLE>
<CAPTION>
Name Date
---- ----
<S> <C>
/s/ Douglas T. Hickey May 10, 1999
_____________________________________________
Douglas T. Hickey
/s/ David A. Thatcher May 10, 1999
_____________________________________________
David A. Thatcher
/s/ David C. Hayden May 10, 1999
_____________________________________________
David C. Hayden
/s/ Christos M. Cotsakos May 10, 1999
_____________________________________________
Christos M. Cotsakos
/s/ Lisa Gansky May 10, 1999
_____________________________________________
Lisa Gansky
/s/ Kevin R. Harvey May 10, 1999
_____________________________________________
Kevin R. Harvey
/s/ James A. Smith May 10, 1999
_____________________________________________
James A. Smith
/s/ George Zachary May 10, 1999
_____________________________________________
George Zachary
</TABLE>
