<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1 to
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
August 2, 1999
Date of Report (Date of earliest event reported):
CRITICAL PATH, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California 000-25331 91-1788300
- --------------------------------------------------------------------------------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
320 First Street
San Francisco, California 94105
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 808-8800
N/A
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
================================================================================
<PAGE>
This Current Report on Form 8-K/A amends Item 7 of the Current Report on
Form 8-K filed with the Securities and Exchange Commission on August 2, 1999.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
---------------------------------
(a) dotOne Corporation Financial Statements
Report of Independent Accountants
Balance Sheets as of September 30, 1997, September 30, 1998 and June
30, 1999
Statements of Operations for the Period from January 1, 1997 to
September 30, 1997, the Year Ended September 30, 1998 and the Nine
Months Ended June 30, 1998 and June 30, 1999
Statements of Stockholders' Deficit for the Period from December 31,
1996 to September 30, 1997, the Year Ended September 30, 1998 and the
Nine Months Ended June 30, 1999
Statements of Cash Flows for the Period from January 1, 1997 to
September 30, 1997, the Year Ended September 30, 1998 and the Nine
Months Ended June 30, 1998 and June 30, 1999
Notes to Financial Statements
(b) Pro Forma Consolidated Financial Statements
Overview
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1999
Pro Forma Condensed Consolidated Statement of Operations for the Year
Ended December 31, 1998 and for the Six Month Period ended June 30,
1999
Notes to Pro Forma Condensed Consolidated Financial Statements
(c) Exhibits
23.1 Consent of Independent Accountants
-2-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned hereunto duly authorized.
Dated: October 1, 1999 CRITICAL PATH, INC.
/s/ David Thatcher
-----------------------------------
David Thatcher
Executive Vice President and Chief Financial
Officer
<PAGE>
dotOne Corporation
Financial Statements
September 30, 1997 and 1998
<PAGE>
[LETTERHEAD OF PRICEWATERHOUSECOOPERS APPEARS HERE]
Report of Independent Accountants
To the Board of Directors and
Stockholders of dotOne Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of dotOne Corporation (the "Company")
at September 30, 1997 and 1998, and the results of its operations and its cash
flows for the period from January 1, 1997 to September 30, 1997 and for the year
ended September 30, 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.
/s/ PricewaterhouseCoopers LLP
August 19, 1999
<PAGE>
dotOne Corporation
Balance Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, June 30,
------------------------
1997 1998 1999
----------- ----------- -------------
ASSETS (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 195,777 $ 142,409 $ 4,777,498
Accounts receivable, net 558,122 540,365 621,506
Other current assets 24,595 115,455 92,146
----------- ----------- -------------
Total current assets 778,494 798,229 5,491,150
Property and equipment, net 600,098 453,551 396,627
Deferred loss on sale-leaseback - 420,377 285,256
Other assets 6,631 553 -
----------- ----------- -------------
$ 1,385,223 $ 1,672,710 $ 6,173,033
=========== =========== =============
LIABILITIES AND STOCKHOLDERS'
DEFICIT
Current liabilities:
Accounts payable, trade $ 224,103 $ 355,814 $ 231,658
Accounts payable, related party 345,290 886,957 1,353,789
Accrued liabilities 182,410 215,585 387,638
Deferred revenue 40,764 99,787 111,119
Capital lease obligations, current 19,085 91,276 102,218
Notes payable, related party, current 57,520 620,496 620,496
Deposit from Critical Path - - 5,000,000
----------- ----------- -------------
Total current liabilities 869,172 2,269,915 7,806,918
Capital lease obligations, non-current 30,185 161,136 80,009
Notes payable, related party, non-current 562,976 - -
----------- ----------- -------------
1,462,333 2,431,051 7,886,927
=========== =========== =============
Commitments and contingencies (Note 6)
Stockholders' deficit:
Series A preferred stock, no par value; 200,000,000 shares
authorized, 79,268,080 shares issued and outstanding
(liquidation preference of $7,979,653, $8,613,798 and
$9,089,407 at September 30, 1997 and 1998 and June 30,
1999, respectively) 1,600,000 1,600,000 1,600,000
Common stock, no par value; 50,000,000 shares authorized,
6,000,000 shares issued and outstanding 100,000 216,338 359,807
Subscription receivable (100,000) - -
Unearned compensation - (109,427) (223,708)
Accumulated deficit (1,677,110) (2,465,252) (3,449,993)
----------- ----------- -------------
(77,110) (758,341) (1,713,894)
----------- ----------- -------------
$ 1,385,223 $ 1,672,710 $ 6,173,033
=========== =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
dotOne Corporation
Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
January 1 to Year ended Nine Months Ended
---------------------------
September 30, September 30, June 30, June 30,
1997 1998 1998 1999
-------------- -------------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Net service revenues $ 3,031,303 $ 3,626,677 $ 2,404,155 $ 2,790,203
Cost of net services revenues 1,992,003 1,905,548 1,380,869 1,725,093
------------ ------------ ----------- -----------
Gross profit 1,039,300 1,721,129 1,023,286 1,065,110
------------ ------------ ----------- -----------
Operating expenses:
Research and development 116,691 223,521 149,014 189,339
Sales and marketing 647,318 746,479 563,655 547,665
General and administrative 963,310 1,297,554 888,784 1,004,466
Stock-based compensation - 6,911 1,900 29,188
------------ ------------ ----------- -----------
Total operating expenses 1,727,319 2,274,465 1,603,353 1,770,658
------------ ------------ ----------- -----------
Loss from operations (688,019) (553,336) (580,067) (705,548)
Interest expense 100,293 234,806 157,572 279,193
------------ ------------ ----------- -----------
Net loss $ (788,312) $ (788,142) $ (737,639) $ (984,741)
------------ ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
dotOne Corporation
Statement of Stockholders' Deficit
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Teltrust Data
Services, LLC
Series A Preferred Stock Common Stock Members' Equity
---------------------------- -------------------------- -------------------------
Shares Amount Shares Amount Units Amount
------------- ------------ ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996 - $ - - $ - 1,000,000 $ 100,000
Debt converted to members' equity - - - - 233,397 1,500,000
Conversion of members' equity to
preferred stock at incorporation
of dotOne Corporation 79,268,080 1,600,000 - - (1,233,397) (1,600,000)
Issuance of common stock
for subscription receivable - - 6,000,000 100,000 - -
Net loss - - - - - -
------------- ------------ ------------ ----------- ---------- ------------
Balance at September 30, 1997 79,268,080 1,600,000 6,000,000 100,000 - -
Unearned compensation - - - 116,338 - -
Amortization of unearned compensation - - - - - -
Proceeds from subscription receivable - - - - - -
Net loss - - - - - -
------------- ------------ ------------ ----------- ---------- ------------
Balance at September 30, 1998 79,268,080 1,600,000 6,000,000 216,338 - -
Unearned compensation (unaudited) - - - 143,469 - -
Amortization of unearned compensation
(unaudited) - - - - - -
Net loss (unaudited) - - - - - -
------------- ------------ ------------ ----------- ---------- ------------
Balance at June 30, 1999 (unaudited) 79,268,080 $ 1,600,000 6,000,000 $ 359,807 - -
============= ============ ============ =========== ========== ============
<CAPTION>
Total
Subscription Accumulated Unearned Stockholders'
Receivable Amount Compensation Deficit
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
December 31, 1996 - $ (888,798) - $ (788,798)
Debt converted to members' equity - - - 1,500,000
Conversion of members' equity to
preferred stock at incorporation
of dotOne Corporation - - - -
Issuance of common stock
for subscription receivable (100,000) - - -
Net loss - 788,312 - (788,312)
------------- ------------ ------------ -----------
Balance at September 30, 1997 (100,000) (1,677,110) - (77,110)
Unearned compensation - - (116,338) -
Amortization of unearned compensation - - 6,911 6,911
Proceeds from subscription receivable 100,000 - - 100,000
Net loss - (788,142) - (788,142)
------------- ------------ ------------ -----------
Balance at September 30, 1998 - (2,465,252) (109,427) (758,341)
Unearned compensation (unaudited) - - (143,469) -
Amortization of unearned compensation
(unaudited) - - 29,188 29,188
Net loss (unaudited) - (984,741) - (984,741)
------------- ------------- ------------ -----------
Balance at June 30, 1999 (unaudited) - $ (3,449,993) $ (223,708) $(1,713,894)
============= ============= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
dotOne Corporation
Statement of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
January 1 to Year ended Nine Months Ended
-----------------------------
September 30, September 30, June 30, June 30,
1997 1998 1998 1999
--------------- --------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net Loss $ (788,312) $ (788,142) $ (737,639) $ (984,741)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activites:
Depreciation and amortization of equipment 124,528 188,425 99,772 246,850
Change in allowance for bad debt (400) 9,772 7,587 3,698
Amortization of deferred loss on sale-leaseback - 120,108 75,067 135,121
Amortization of unearned compensation - 6,911 1,900 29,188
Changes in assets and liabilities:
Accounts receivable 184,831 7,985 (246,116) (84,839)
Other assets 100,562 (84,782) (111,183) 23,862
Accounts payable, trade 81,167 131,711 16,302 (124,156)
Accounts payable, related party 632,909 541,667 451,524 466,832
Accured liabilities 76,984 33,175 (6,260) 172,053
Deferred revenues 40,293 59,023 318,061 11,332
--------------- --------------- ------------- -------------
Net cash provided by (used in) operating activities 452,562 225,853 (130,985) (104,800)
--------------- --------------- ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (339,825) (454,363) (160,042) (189,926)
Proceeds from sale of equipment - 150,000 150,000 -
--------------- --------------- ------------- -------------
Net cash used in investing activities (339,825) (304,363) (10,042) (189,926)
--------------- --------------- ------------- -------------
Cash flows from financing activities:
Payments on notes payable, related party 95,525 - - -
Payments on capital lease obligations (13,729) (74,858) (46,495) (70,185)
Proceeds from revolving line of credit 431,759 - - 2,563,055
Payments on revolving line of credit (431,759) - - (2,563,055)
Proceeds from deposit from Critical Path - - - 5,000,000
Proceeds from subscription receivable - 100,000 100,000 -
--------------- --------------- ------------- -------------
Net cash provided by financing activities 81,796 25,142 53,505 4,929,815
--------------- --------------- ------------- -------------
Net increase in cash and cash equivalents 194,533 (53,368) (87,522) 4,635,089
Cash and cash equivalents, beginning of period 1,244 195,777 195,777 142,409
--------------- --------------- ------------- -------------
Cash and cash equivalents, end of period $ 195,777 $ 142,409 $ 108,255 $ 4,777,498
=============== =============== ============= =============
Non-cash transactions:
- ---------------------
Common stock issued for subscription receivable $ 100,000 $ - $ - $ -
Debt exchanged for member equity $ 1,500,000 $ - $ - $ -
Preferred stock issued in exchange for member equity $ 1,600,000 $ - $ - $ -
Unearned compensation from issuance of stock options $ - $ 116,338 $ 60,842 $ 143,469
Equipment acquired through capital lease $ 26,960 $ 278,000 $ 278,000 $ -
Deferred loss on sale-leaseback of equipment $ - $ 540,485 $ 540,485 $ -
Accounts payable, related party exchange for notes
payable $ 620,496 $ - $ - $ -
Non-cash disclosures:
- --------------------
Cash paid for interest $ 93,346 $ 44,269 $ 29,199 $ 61,035
Cash paid for taxes $ - $ - $ - $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
dotOne Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
dotOne Corporation (the "Company") was incorporated in Utah on August 31, 1997.
The Company provides business class electronic messaging services to customers
throughout the United States. Prior to its incorporation, the Company operated
as Teltrust Data Services, LLC, a limited liability company, from October 21,
1994 to August 31, 1997.
The operations of both dotOne Corporation and Teltrust Data Services, LLC are
reflected in the statement of operations for the period from January 1 to
September 30, 1997. Upon incorporation, the Company changed its fiscal year end
from December 31 to September 30.
Interim financial information (Unaudited)
The interim financial statements as of June 30, 1999, and for the nine month
periods ended June 30, 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 nine months ended
June 30, 1998 and 1999. The financial data and other information disclosed in
these notes to financial statements related to these periods are unaudited. The
results of the nine months ended June 30, 1999 are not necessarily indicative of
the results to be expected for the year ending September 30, 1999.
Cash and cash equivalents
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 money market funds. The Company maintains its cash and cash equivalents with
a financial institution in Utah. Deposits may, at times, exceed federally
insured limits.
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, ranging from three to seven 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.
Upon retirement or other disposition of property and equipment, the cost and the
related accumulated depreciation or amortization are removed from the respective
accounts. Any resulting gain or loss is reflected in the statement of
operations. Maintenance, repairs and minor replacements are charged to expense
as incurred.
Deferred loss on sale-leaseback transaction
During the year ended September 30, 1998, the Company entered into a sale-
leaseback transaction with a financial corporation. In accordance with generally
accepted accounting principles, a deferred loss of $540,485 was recorded based
upon the difference between the carrying value of the property and equipment
sold and the lease proceeds received by the Company. The Company subsequently
entered into a capital lease for the equipment sold. The deferred loss will be
recognized as interest expense using the straight-line method over the three
year lives of the leased assets.
6
<PAGE>
dotOne Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue recognition
The Company derives revenue through outsourced electronic messaging. Billings
for such services are based on contractual rates per active user per month and
are recognized monthly in accordance with the respective contract. Amounts
billed or received in advance of service delivery are recorded as deferred
revenue.
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.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and also complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB Opinion No.
25, compensation expense is recorded 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 over the vesting period of the option.
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.
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.
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 adoption of SOP No. 98-1
will not have a material impact on the Company's financial statements.
7
<PAGE>
dotOne Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivatives
Instruments and Hedging Activities - Deferral of Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 133, as amended by SFAS 137, is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000, with
earlier applications encouraged. The Company does not currently nor does it
intend in the future to use derivative instruments and therefore does not expect
that the adoption of SFAS 133 will have any impact on its financial position or
results of operations.
Advertising Expense
Advertising costs are expenses as incurred and totaled $281,281 and $345,083
during the period from January 1, 1997 through September 30, 1997 and the year
ended September 30, 1998, respectively.
2. BALANCE SHEET COMPONENTS
Accounts receivable:
Accounts receivable consists of the following at September 30:
1997 1998
---------- ----------
Accounts receivable $ 573,420 $ 565,435
Less: Allowance for doubtful accounts (15,298) (25,070)
--------- ---------
$ 558,122 $ 540,365
========= =========
Property and equipment:
Property and equipment consists of the following at September 30:
Estimated
useful life 1997 1998
----------- ---------- ----------
Computer equipment and software 3-5 years $ 752,421 $ 497,146
Furniture and fixture 3-7 years 60,979 20,611
--------- ---------
813,400 517,757
Less: Accumulated depreciation (213,302) (64,206)
--------- ---------
$ 600,098 $ 453,551
========= =========
Property and equipment includes $67,372 and $343,841 of assets under capital
leases at September 31, 1997 and 1998, respectively. Accumulated amortization
related to assets under capital leases totaled $7,025 and $65,409 at September
30, 1997 and 1998, respectively.
8
<PAGE>
dotOne Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. BALANCE SHEET COMPONENTS (Continued)
Accrued liabilities:
Accrued liabilities consists of the following at September 30:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Compensation related $ 125,837 $ 123,228
Other 56,573 92,357
--------- ---------
$ 182,410 $ 215,585
========= =========
</TABLE>
3. RELATED PARTY TRANSACTIONS
The Company leases its office from a shareholder under an informal, month-to-
month lease arrangement. Rent expense under this arrangement was $140,000 and
$33,000 for the year ended September 30, 1998 and for the period from January 1
to September 30, 1997, respectively.
4. INCOME TAXES
The components of the net deferred tax asset are as follows at September 30:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Deferred tax asset:
Net operating loan carryforwards $ 85,614 $ 349,187
Accrued vacation 8,739 11,849
Bad debt allowance 20,798 9,772
Excess book amortization - 2,088
--------- ---------
Total deferred tax asset 115,151 372,896
--------- ---------
Deferred tax liability:
Excess tax depreciation and amortization (1,179) (2,595)
--------- ---------
Total deferred tax liability (1,179) (2,595)
--------- ---------
Net deferred tax asset before valuation allowance 113,972 370,301
Valuation allowance (113,972) (370,301)
--------- ---------
Net deferred tax asset $ - $ -
========= =========
</TABLE>
9
<PAGE>
dotOne Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
5. BORROWINGS
Notes payable, related party consist of the following at September 30:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Note payable to a stockholder, interest at 18%,
payment in full when the Company sells securities
in which net proceeds exceeds $3 million. $ 310,248 $ 310,248
Note payable to a stockholder, interest at 12%,
interest only payments due monthly beginning
October 1, 1997. Principal and interest
payments of $14,604 due monthly beginning April
1, 1998 with payment in full by March 1, 2000.
This note was in default at September 30, 1998. 310,248 310,248
--------- ---------
620,496 620,496
Less: current portion 57,520 620,496
--------- ---------
Notes payable, related party, non-current $ 562,976 $ -
========= =========
</TABLE>
At September 30, 1997, the Company maintained a revolving line of credit with a
bank. Total borrowing capacity under this line was $500,000. The line of credit
accrued interest at an initial rate of prime plus 2% and was collateralized by
the accounts receivable of the Company and was guaranteed by the two primary
stockholders. At September 30, 1997, the Company had no borrowings under this
agreement, which expired on April 15, 1998.
On October 15, 1998, the Company established a new revolving line of credit with
a bank. The total borrowing capacity under this line is $500,000. The line of
credit bears interest at prime rate plus 5% and is collateralized by accounts
receivable of the Company. The line of credit was terminated on July 21, 1999.
10
<PAGE>
dotOne Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
5. BORROWINGS (Continued)
Capital Leases
Future minimum lease payments under noncancelable capital leases are as follows:
<TABLE>
<CAPTION>
Year Ending
September 30,
<S> <C>
1999 $ 141,572
2000 122,864
2001 52,578
----------
Total minimum lease payments 317,014
Less: amount representing interest 64,602
----------
Present value of capital lease obligations 252,412
Less: current portion 91,276
----------
Capital lease obligations, non-current $ 161,136
==========
</TABLE>
6. COMMITMENTS
On April 13, 1999, the Company entered into a non-exclusive agreement with
MCIWorldCom to purchase telephone and network services for a three year period.
As part of the agreement, the Company has committed to purchase $360,000 of
services over the three year period.
7. MEMBERS' AND STOCKHOLDERS' EQUITY
Preferred Stock
On August 31, 1997, Teltrust Data Services, LLC and its members Teltrust, Inc.
and Premier Messaging Integrators, Inc., entered into a debt exchange and
reorganization agreement whereby:
. In exchange for the conversion of $1,500,000 of existing debt, Teltrust, Inc.
increased its existing ownership from 60.00% to 67.57%.
. Existing accounts payable of $620,496 were restructured into two separate
notes payable due to Teltrust, Inc. (See note 5).
Subsequent to this transaction, on August 31, 1997, the Company issued
79,268,080 shares of preferred stock to the two members in exchange for 100% of
the members' equity in Teltrust Data Services, LLC. These shares were
distributed to the former members in proportion to their individual ownership
percentage. Each share of preferred stock has voting rights equal to 1/30 of
one share of common stock and entitle the holder to receive 8% cumulative
dividends on the stated value per year when declared and a liquidation privilege
equal to $0.10 per share. At September 30, 1997 and 1998, undeclared cumulative
dividends totaled $52,845 and $686,990, respectively.
11
<PAGE>
dotOne Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
7. MEMBERS AND STOCKHOLDERS' EQUITY (Continued)
Common Stock
On August 31, 1997, the Company issued 6,000,000 shares of common stock to
seventeen stockholders in exchange for a subscription receivable of $100,000.
The subscription receivable was paid in full by December 1997.
8. STOCK OPTIONS AND WARRANTS
In February 1998, the Company adopted the 1998 Stock Option Plan. The Plan
provides for the granting of up to 900,000 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 considered employees). NSOs may be granted to Company employees or
consultants.
Options under the Plan may be granted for periods of up to ten years as
determined by the Board of Directors. Options generally vest 25% per year and
are exercisable for a maximum period of ten years from the date of grant.
The Company applies APB Opinion 25 and related interpretations in accounting for
its Plan. Accordingly, no compensation cost has been recognized for its fixed
stock option plan in excess of any intrinsic value (excess of minimum value over
exercise price). Unearned compensation of $0 and $116,338 was recorded for the
period from January 1 to September 30, 1997 and for the year ended September 30,
1998, respectively, to reflect the intrinsic value of options granted. This
unearned compensation will be recognized over the vesting period of the related
options using the straight-line method. Had compensation cost been recognized
for the minimum value of the stock options issued under the Plan, the Company's
net loss would have changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Period From Year Ended
January 1 to September 30,
September 30, 1997 1998
-------------------- --------------
<S> <C> <C>
Net loss: As reported $ (788,312) $ (788,142)
Pro forma $ (788,312) $ (788,501)
</TABLE>
12
<PAGE>
dotOne Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
8. STOCK OPTIONS AND WARRANTS (Continued)
Details regarding options issued and outstanding are presented as follows:
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1998
------------------------ --------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
--------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of period - $ - 613,000 $ 0.19
Granted 613,000 0.19 57,000 0.43
Exercised - - - -
Canceled - - - -
-------- -------- ------- -------
Outstanding at end of period 613,000 $ 0.19 670,000 $ 0.22
======== ======== ======= =======
Options exercisable at period end 69,250 $ 0.19 224,250 $ 0.19
======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Weighted average fair value of options granted:
All options $ - $ 2.16
Exercise price below market $ - $ 2.16
Exercise price above market $ - $ -
</TABLE>
The following table summarizes information about stock options outstanding at
September 30, 1998:
<TABLE>
<CAPTION>
Option Outstanding Options Exercisable
- --------------------------------------------------------------------------- -------------------------
Weighted
Average Weighted
Number of Remaining Average Number of Weighted
Shares Contractual Exercise Shares Average
Range of Exercise Price Outstanding Life Price Exercisable Price
- ------------------------ ----------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.15-$0.30 628,000 4.3 years $ 0.19 224,250 $ 0.19
$0.50-$1.25 42,000 5.7 years $ 0.70 - $ -
------- -------
670,000 224,250
======= =======
</TABLE>
13
<PAGE>
dotOne Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
8. STOCK OPTIONS AND WARRANTS (Continued)
The Company calculated the fair value of each options grant on the date of the
grant using the minimum value method as permitted under SFAS No.123 using the
following assumptions:
<TABLE>
<CAPTION>
Period From Year Ended
January 1 to September 30,
September 30, 1997 1998
------------------ -------------
<S> <C> <C>
Risk-free interest rates 5.9 % 5.5 %
Expected lives (in years) 4.0 4.0
Dividend yield 0.0 % 0.0 %
</TABLE>
Warrants
During 1998, the Company issued warrants to purchase 110,588 shares of preferred
stock with an exercise price of $0.10 per share in connection with the Company's
lease of equipment. The estimated fair value of these warrants at the time of
issuance totaled approximately $2,000. The Company repurchased these warrants
in July 1999 for approximately $2,000.
9. SUBSEQUENT EVENTS
In June 1999, the Company received a $5,000,000 refundable deposit from Critical
Path Inc., which upon consumation of the acquisition was included in the
aggregate cash consideration paid by Critical Path Inc. On July 21, 1999,
Critical Path, Inc. acquired all outstanding preferred and common shares of
dotOne Corporation in exchange for $17.5 million in cash and common stock valued
at $35 million.
14
<PAGE>
CRITICAL PATH, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Overview
On July 15, 1999, Critical Path, Inc. ("the Company") acquired dotOne
Corporation ("dotOne"), a leading corporate e-mail messaging service provider.
The acquisition was accounted for using the purchase method of accounting and
accordingly, the purchase price was allocated to the tangible and intangible net
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 valuation
using a combination of methods, including a cost approach for the acquired
existing technology, an income approach for the customer base and a replacement
cost approach for the value of the assembled workforce.
The total purchase price of approximately $57.0 million consisted of $17.5
million of cash, $35.0 million of the Company's Common Stock (706,486 shares),
assumed stock options with an estimated fair value of $3.2 million, and other
estimated acquisition related expenses of approximately $1.3 million, consisting
primarily of payments for finders fees and other professional fees. Of the total
estimated purchase price, approximately $1.7 million was allocated to net
tangible liabilities, and the remainder was allocated to intangible assets,
including assembled workforce ($1.5 million), customer base ($4.6 million),
existing technology ($600,000), and goodwill ($52.0 million). The acquired
intangible assets are being amortized over their estimated useful lives of
three to five years.
The accompanying unaudited pro forma condensed consolidated balance sheet gives
effect to this consummated acquisition as if it had occurred on June 30, 1999,
by consolidating the balance sheet of dotOne with the balance sheet of the
Company at June 30, 1999.
The accompanying unaudited pro forma condensed consolidated statement of
operations gives effect to this consummated acquisition as if it had occurred on
January 1, 1998, by consolidating the results of operations of:
. dotOne for the year ended September 30, 1998 and six months ended March
31, 1999, with the results of operations of the Company for the year
ended December 31,1998 and six months ended June 30,1999, respectively.
The unaudited pro forma condensed consolidated statement of operations is not
necessarily indicative of the operating results that would have been achieved
had the transaction been in effect as of beginning of the periods presented and
should not be construed as being representative of future operating results.
<PAGE>
CRITICAL PATH, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
June 30, 1999
---------------------------------------------------------------------------
Critical
Path dotOne Adjustments
Historical Historical (a) (b) Pro Forma
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 244,340 $ 4,777 $ - $ (18,800) $ 230,317
Restricted cash 325 - - - 325
Accounts receivable, net 1,815 622 - - 2,437
Prepaid expenses and other current assets 6,986 92 (5,000) 2,078
---------------------------------------------------------------------------
Total current assets 253,466 5,491 (5,000) (18,800) 235,157
Notes receivable from officers 700 - 700
Intangibles 19,050 - 58,700 77,750
Furniture and equipment, net 15,629 397 - - 16,026
Investments 17,489 - - - 17,489
Other assets 238 - - 238
Deferred Loss on sale-leaseback - 285 - - 285
---------------------------------------------------------------------------
$ 306,572 $ 6,173 $ (5,000) $ 39,900 $ 347,645
===========================================================================
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable and accrued liabilities $ 2,971 $ 1,585 $ - $ - $ 4,556
Accrued compensation and benefits 888 388 - - 1,276
Deferred revenue - 111 - - 111
Capital lease obligations, current 3,274 102 - - 3,376
Note payable, related party, current 621 - - 621
Deposit from Critical Path - 5,000 (5,000) -
---------------------------------------------------------------------------
Total Current Liabilities 7,133 7,807 (5,000) 9,940
-
Deferred revenue - - - - -
Capital lease obligations, long term 4,717 80 - - 4,797
---------------------------------------------------------------------------
11,850 7,887 (5,000) 14,737
---------------------------------------------------------------------------
Shareholders' Equity:
Preferred stock - 1,600 - (1,600) -
Common stock 38 360 - (360) 38
Additional paid-in capital 435,435 - - 38,410 473,845
Notes receivable from shareholders (1,126) - - - (1,126)
Unearned compensation (107,665) (224) - - (107,889)
Unrealized gain on investments 14,489 - - - 14,489
Cumulative translation adjustment - - - -
Accumulated deficit (46,450) (3,450) - 3,450 (46,450)
---------------------------------------------------------------------------
Total Shareholders' Equity 294,722 (1,714) - 39,900 332,908
---------------------------------------------------------------------------
$ 306,572 $ 6,173 $ (5,000) $ 39,900 $ 347,645
===========================================================================
</TABLE>
<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
------------------------------------------------------------
Pro
Critical Path dotOne Adjustments Forma
------------------------------------------------------------
Historical (c)
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 897 $ 3,627 $ - $ 4,524
Cost of net revenues (2,346) (1,906) - (4,252)
------------------------------------------------------------
(1,449) 1,721 - 272
------------------------------------------------------------
Operating Expenses:
Sales and marketing 1,687 746 - 2,433
Research and development 2,098 224 - 2,322
General and administrative 3,814 1,298 - 5,112
Amortization of intangible assets - - 19,000 19,000
Stock-based expenses 2,400 7 - 2,407
------------------------------------------------------------
Total Operating Expenses 9,999 2,275 19,000 31,274
Loss from operations (11,448) (554) (19,000) (31,002)
------------------------------------------------------------
Interest and other income, net (13) (235) - (248)
------------------------------------------------------------
Net loss $ (11,461) $ (789) $ (19,000) $ (31,250)
============================================================
Pro forma net loss per share
Net loss per share - basic and diluted (d) (2.10)
Weighted average shares - basic and diluted 14,900
<CAPTION>
Six months ended June 30, 1999
------------------------------------------------------------------
Pro
Critical Path dotOne Adjustments Forma
------------------------------------------------------------------
Historical (c)
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 3,055 $ 1,791 $ - $ 4,846
Cost of net revenues (6,337) (1,099) - (7,436)
------------------------------------------------------------------
(3,282) 692 - (2,590)
------------------------------------------------------------------
Operating Expenses:
Sales and marketing 5,203 381 - 5,584
Research and development 2,809 95 - 2,904
General and administrative 4,241 440 - 4,681
Amortization of intangible assets 550 - 9,500 10,050
Stock-based expenses 19,819 16 - 19,835
------------------------------------------------------------------
Total Operating Expenses 32,822 932 9,500 43,054
Loss from operations (35,904) (240) (9,500) (45,644)
------------------------------------------------------------------
Interest and other income, net 1,989 (240) - 1,749
------------------------------------------------------------------
Net loss $ (33,915) $ (480) $ (9,500) $ (43,895)
==================================================================
Pro forma net loss per share
Net loss per share - basic and diluted (d) (2.12)
Weighted average shares - basic and diluted 20,700
</TABLE>
See accompanying notes.
<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 dotOne to arrive at the pro forma condensed consolidated
financial information. The pro forma adjustments are preliminary and based upon
management's estimates and valuations of the intangible assets acquired.
(a) Reflects adjustments to eliminate intercompany assets, liabilities
and equity as a result of the acquisition by the Company.
(b) The allocation of the purchase price, assuming the acquisitions
occurred on June 30 ,1999, for pro forma purposes, is as follows:
(Amounts in thousands)
<TABLE>
<CAPTION>
dotOne
------
<S> <C>
Cash paid $ 17,500
Value of Stock 35,000
Value of options assumed 3,200
Estimated acquisition costs 1,300
---------
Total purchase price 57,000
Net tangible liabilities (1,700)
Intangible assets:
In-process technology -
Assembled workforce 1,500
Customer base 4,600
Existing technology 600
Goodwill 52,000
---------
Total purchase price allocation $ 57,000
=========
</TABLE>
(c) To record amortization of acquired assembled workforce totaling $1.5
million over the estimated period of benefit of three years, customer
base totaling $4.6 million over the estimated period of benefit of
five years, existing technology totaling $600,000 over the estimated
period of benefit of three years and goodwill totaling $52.0 million
over the estimated period of benefit of three years.
(d) Pro forma basic net loss per share for the year ended December 31,1998
and the six months ended June 30, 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 had occurred on January 1, 1998, or at the 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 the stock options and warrants and upon conversion of
Series A and B Convertible Preferred Stock. The adjustment to
historical weighted average shares outstanding results from inclusion
of estimated shares to be issued or actual shares issued in
conjunction with the consummated acquisition as if such shares were
outstanding from January 1,1998. In accordance with the definitive
purchase agreement, 15% of the stock consideration to dotOne
(approximately 105,973 shares) will be held in time lapsing escrow
accounts and have been excluded from the calculation of pro forma
basic and diluted net loss per share.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-87553) of Critical Path, Inc. of our report dated
August 19, 1999, relating to the financial statements of dotOne Corporation,
which appears in the Current Report on Form 8-K/A of Critical Path, Inc. dated
August 2, 1999.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Salt Lake City, Utah
September 30, 1999
