<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 6, 1999
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CRITICAL PATH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
CALIFORNIA 7389 91-1788300
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</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)
COPIES TO:
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<S> <C> <C>
ALAN K. AUSTIN, ESQ. ELIAS J. BLAWIE, ESQ. RICHARD V. SMITH, ESQ.
MARK L. REINSTRA, ESQ. LAURA A. DONALD, ESQ. IAIN MICKLE, ESQ.
JOHN L.G. WHITTLE, ESQ. VENTURE LAW GROUP MARIA GRAY, ESQ.
WILSON SONSINI GOODRICH & ROSATI A PROFESSIONAL CORPORATION ORRICK, HERRINGTON & SUTCLIFFE LLP
PROFESSIONAL CORPORATION 2800 SAND HILL ROAD OLD FEDERAL BUILDING
650 PAGE MILL ROAD MENLO PARK, CALIFORNIA 94025 400 SANSOME STREET
PALO ALTO, CALIFORNIA 94304 (650) 854-4488 SAN FRANCISCO, CALIFORNIA 94111
(650) 493-9300 (415) 392-1123
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
Upon consummation of the Critical Path-ISOCOR merger described herein.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED REGISTERED OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE
SHARE PRICE
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value....... 5,890,000 shares(1) $57.8125(2) $340,545,620 $32,053.12(3)
- ----------------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Represents the number of shares of the Common Stock of the Registrant which
may be issued to shareholders of ISOCOR, a California corporation, pursuant
to the transactions described herein, based on the number of shares of
ISOCOR Common Stock outstanding as of December 1, 1999.
(2) Pursuant to Rule 457(f)(2) under the Securities Act of 1933, as amended, the
maximum aggregate offering price has been calculated based on the average of
the high and low prices per share of Critical Path's Common Stock on
December 1, 1999 as reported on the Nasdaq National Market.
(3) A filing fee of $57,843 has previously been paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL 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> 2
ISOCOR
3420 OCEAN PARK BLVD.
SANTA MONICA, CALIFORNIA 90405
December , 1999
Dear Shareholders:
I am pleased to forward you the attached proxy statement/prospectus for a
special meeting of shareholders of ISOCOR to be held on Wednesday, January 19,
2000, at 10:00 a.m., local time, at the Fairmont Miramar Hotel, 101 Wilshire
Boulevard, Santa Monica, California 90401. The phone number there is (310)
576-7777.
At the special meeting, you will be asked to vote upon a reorganization
agreement between ISOCOR and Critical Path, Inc. and a related agreement of
merger. The reorganization agreement provides for the merger of ISOCOR with a
newly formed, wholly owned subsidiary of Critical Path. The agreement of merger
will be filed with the California Secretary of State to effect the merger if it
is approved. In the merger, each share of your ISOCOR common stock will be
exchanged for 0.4707 of a share of Critical Path common stock. The merger is
described more fully in the attached proxy statement/prospectus.
ISOCOR cannot complete the merger unless the holders of a majority of
ISOCOR common stock entitled to vote approve the reorganization agreement and
the agreement of merger. Please carefully read this proxy statement/prospectus
in its entirety and vote your shares as you desire. IN PARTICULAR, YOU SHOULD
REVIEW THE MATTERS REFERRED TO UNDER "RISK FACTORS" ON PAGE 13.
AFTER CAREFUL CONSIDERATION, ISOCOR'S BOARD OF DIRECTORS DETERMINED THE
MERGER TO BE FAIR TO YOU AND IN YOUR BEST INTERESTS. ISOCOR'S BOARD OF DIRECTORS
UNANIMOUSLY APPROVED THE REORGANIZATION AGREEMENT AND THE AGREEMENT OF MERGER
AND RECOMMENDS THEIR APPROVAL BY YOU.
Whether or not you plan to attend the special meeting, please complete,
sign, date and return the accompanying proxy card in the enclosed self-addressed
stamped envelope. Returning your proxy does NOT deprive you of your right to
attend the special meeting and to vote your shares in person. YOUR VOTE IS VERY
IMPORTANT.
Sincerely,
/s/ PAUL GIGG
Paul Gigg
President and Chief Executive Officer
THIS PROXY STATEMENT/PROSPECTUS IS DATED DECEMBER , 1999 AND IS FIRST
BEING MAILED TO SHAREHOLDERS ON OR ABOUT DECEMBER , 1999.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THE MERGER DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS OR THE CRITICAL PATH COMMON STOCK TO BE ISSUED IN
CONNECTION WITH THE MERGER, OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 3
ISOCOR
3420 OCEAN PARK BLVD.
SANTA MONICA, CALIFORNIA 90405
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
-------------------------
To our Shareholders:
ISOCOR will hold a special meeting of its shareholders on Wednesday,
January 19, 2000, at 10:00 a.m. local time, at the Fairmont Miramar Hotel, 101
Wilshire Boulevard, Santa Monica, California 90401, for the following purpose:
To consider and vote on a proposal to approve the agreement and
plan of reorganization, dated as of October 20, 1999, by and among
Critical Path, Inc., a wholly owned subsidiary of Critical Path, and
ISOCOR, a related agreement of merger, and the transactions
contemplated thereby, including the merger of a wholly owned
subsidiary of Critical Path with and into ISOCOR. ISOCOR will survive
the merger as a wholly owned subsidiary of Critical Path. At the
effective time of the merger, each outstanding share of ISOCOR common
stock, except for those shares owned by Critical Path and its
subsidiaries, fractional shares and shares as to which dissenters'
rights have been perfected, shall be converted into the right to
receive 0.4707 of a share of Critical Path common stock.
The attached proxy statement/prospectus contains a more complete
description of this item of business. A copy of the reorganization agreement
accompanies the proxy statement/prospectus as Annex A.
Only holders of record of ISOCOR common stock at the close of business on
December 8, 1999, the record date for the special meeting, are entitled to vote
on the matters listed in this notice of special meeting. You may vote in person
at the ISOCOR special meeting even if you have returned a proxy.
Holders of ISOCOR common stock as of the record date have the right to
dissent from the proposed merger and, subject to certain conditions, receive
payment of the "fair market value" of their shares of ISOCOR common stock, as
provided in Sections 1300 through 1312 of the California General Corporation
law. The right to dissent applies (1) to any shares that have any restriction on
transfer or (2) if demand for payment is made with respect to 5% or more of the
outstanding shares of ISOCOR common stock. Fair market value shall be determined
as of the day before the first announcement of the terms of the proposed merger,
excluding any appreciation or depreciation resulting from the proposed merger.
To perfect dissenters' rights, a shareholder must:
- vote his or her dissenting shares against the proposed merger;
- make written demand upon ISOCOR, on or before the date of the special
meeting, to purchase his or her shares for cash;
- within 30 days after the mailing by ISOCOR to shareholders who voted
against the proposed merger of a notice stating that the reorganization
agreement has been approved, submit the stock certificates representing
his or her dissenting shares to ISOCOR or its transfer agent for notation
that they represent dissenting shares; and
- if ISOCOR and the shareholder are unable to reach an agreement on the
price to be paid for the dissenting shares, file an action in court
within six months after the date on which notice stating that the
reorganization agreement has been approved is mailed to ISOCOR
shareholders who voted against the proposed merger.
Information on dissenters' rights is explained in greater detail in the
proxy statement/prospectus, under the caption "The Merger -- Dissenters'
rights."
By Order of the Board of Directors
/s/ ELIAS BLAWIE
Elias Blawie
Secretary
Santa Monica, California
December , 1999
YOUR VOTE IS IMPORTANT
IN ORDER TO ASSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, YOU ARE REQUESTED
TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE AND RETURN
IT IN THE ENVELOPE PROVIDED.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY..................................................... 3
RISK FACTORS................................................ 13
Risks related to the merger................................. 13
Risks related to the business of the combined company....... 14
Investment risks............................................ 24
TRADEMARKS.................................................. 25
THE SPECIAL MEETING......................................... 26
Date, time and place of the special meeting................. 26
Matters to be considered at the special meeting............. 26
Record date for voting on the merger; shareholders entitled
to vote................................................... 26
Voting and revocation of proxies............................ 26
ISOCOR shareholder vote is required to approve the merger... 26
Board recommendation........................................ 27
THE MERGER.................................................. 28
Background of the merger.................................... 28
Reasons for the merger...................................... 30
Opinion of Robertson Stephens, financial advisor to
ISOCOR.................................................... 32
Interests of certain persons in the merger.................. 39
Governmental and regulatory matters......................... 40
Anticipated accounting treatment............................ 43
Dissenters' rights.......................................... 43
Delisting and deregistration of ISOCOR common stock......... 45
Listing of Critical Path common stock to be issued in the
merger.................................................... 45
Restriction on resales of Critical Path common stock........ 45
THE REORGANIZATION AGREEMENT................................ 47
The merger.................................................. 47
The effective time.......................................... 47
Directors and officers of ISOCOR after the merger........... 47
Conversion of shares in the merger.......................... 47
ISOCOR's stock option and stock purchase plans.............. 47
The exchange agent.......................................... 48
Procedures for exchanging stock certificates................ 48
Distributions with respect to unexchanged shares............ 48
No fractional shares........................................ 48
Representations and warranties.............................. 49
ISOCOR's conduct of business before completion of the
merger.................................................... 49
Critical Path's conduct of business before completion of the
merger.................................................... 50
No solicitation............................................. 51
Director and officer indemnification........................ 52
Conditions to completion of the merger...................... 52
Termination of the reorganization agreement................. 53
Payment of termination fee.................................. 54
Extension, waiver and amendment of the reorganization
agreement................................................. 54
THE STOCK OPTION AGREEMENT.................................. 55
Exercise events............................................. 55
Termination................................................. 55
Registration rights......................................... 56
</TABLE>
i
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<TABLE>
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PAGE
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<S> <C>
VOTING AGREEMENTS........................................... 56
DESCRIPTION OF ISOCOR CAPITAL STOCK......................... 57
Common stock................................................ 57
Preferred stock............................................. 57
DESCRIPTION OF CRITICAL PATH CAPITAL STOCK.................. 57
Common stock................................................ 57
Preferred stock............................................. 58
Warrant..................................................... 58
COMPARISON OF RIGHTS OF SHAREHOLDERS OF CRITICAL PATH AND
SHAREHOLDERS OF ISOCOR.................................... 59
Number of directors......................................... 59
Filling of vacancies on the board of directors.............. 59
Amendment of bylaws by shareholders......................... 59
BUSINESS OF CRITICAL PATH................................... 60
Company overview............................................ 60
Recent developments......................................... 60
Critical Path solution...................................... 61
Services.................................................... 62
Customers................................................... 66
Target markets.............................................. 66
Strategic relationships..................................... 67
Sales and marketing......................................... 68
Technology.................................................. 69
Competition................................................. 72
Intellectual property....................................... 72
Employees................................................... 73
Facilities.................................................. 73
Legal proceedings........................................... 73
CRITICAL PATH'S MANAGEMENT.................................. 74
Compensation committee interlocks and insider
participation............................................. 77
Director compensation....................................... 77
Executive compensation...................................... 77
CRITICAL PATH MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 82
Overview.................................................... 82
Nine months ended September 30, 1999 compared to nine months
ended September 30, 1998.................................. 85
Net revenues................................................ 86
Cost of net revenues........................................ 87
Acquisition-related bonus program........................... 88
Stock-based expenses........................................ 88
Interest and other income and interest expense.............. 88
Income taxes................................................ 89
Year ended December 31, 1998 compared to year ended December
31, 1997.................................................. 89
Net revenues................................................ 89
Cost of net revenues........................................ 89
Operating expenses.......................................... 89
Sales and marketing......................................... 89
General and administrative.................................. 89
Stock-based expenses........................................ 90
Interest and other income and interest expense.............. 90
Income taxes................................................ 90
</TABLE>
ii
<PAGE> 6
<TABLE>
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PAGE
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Liquidity and capital resources............................. 90
Year 2000 issues............................................ 91
CRITICAL PATH SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................ 93
BUSINESS OF ISOCOR.......................................... 95
General..................................................... 95
Products.................................................... 95
Message server products..................................... 95
Directory products.......................................... 96
Marketing, sales and distribution........................... 96
Customers................................................... 97
Customer and reseller support and services.................. 97
Product development......................................... 98
Competition................................................. 98
Proprietary rights.......................................... 99
Manufacturing............................................... 99
Employees................................................... 99
Properties.................................................. 100
ISOCOR'S MANAGEMENT......................................... 101
Compensation committee interlocks and insider
participation............................................. 103
ISOCOR MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 107
Results of operations for the nine months ended September
30, 1999 and 1998......................................... 107
Results of operations for years ended December 31, 1996,
1997 and 1998............................................. 108
Liquidity and capital resources............................. 112
Year 2000 issues............................................ 112
Euro impact................................................. 114
Quantitative and qualitative disclosures about market
risk...................................................... 114
ISOCOR SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 116
FUTURE SHAREHOLDER PROPOSALS................................ 117
EXPERTS..................................................... 117
LEGAL MATTERS............................................... 117
WHERE YOU CAN FIND MORE INFORMATION......................... 117
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
Annex A -- Agreement and Plan of Reorganization............. A-1
Annex B -- Stock Option Agreement........................... B-1
Annex C -- Opinion of BancBoston Robertson Stephens......... C-1
Annex D -- Chapter 13 of the California General Corporation
Law....................................................... D-1
</TABLE>
iii
<PAGE> 7
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT IS THE MERGER?
A: The boards of directors of Critical Path and ISOCOR have voted to combine the
businesses of Critical Path and ISOCOR. To combine the companies, a
subsidiary of Critical Path will merge into ISOCOR, resulting in ISOCOR
becoming a wholly-owned subsidiary of Critical Path.
After the merger, the shareholders of ISOCOR will own approximately 10% of
Critical Path, assuming completion of the FaxNet and docSpace acquisitions by
Critical Path as discussed below.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: If the merger is completed, you will receive 0.4707 of a share of Critical
Path common stock for each share of ISOCOR common stock you own. For example,
if you own 100 shares of ISOCOR common stock, you will receive 47 shares of
Critical Path common stock in exchange for your ISOCOR shares.
Critical Path will not issue fractional shares of common stock. Instead of
fractional shares, you will receive cash based on the average closing price
of Critical Path common stock for the ten most recent days that Critical Path
common stock has traded prior to the completion of the merger, as reported on
the Nasdaq National Market System.
The number of shares of Critical Path common stock to be issued for each
share of ISOCOR common stock is fixed and will not be adjusted based upon
changes in the value of these shares. As a result, the value of the shares
you receive in the merger will not be known at the time you vote on the
merger and may go up or down as the market price for Critical Path common
stock goes up or down. ISOCOR is not permitted to withdraw from the merger or
resolicit the vote of its shareholders based solely on changes in the value
of the Critical Path common stock.
Critical Path's stock price has been volatile, and economic and market
circumstances are subject to change. As an example, the following table sets
forth the high and low closing sale prices per share of Critical Path common
stock on the Nasdaq National Market during the indicated months of 1999.
<TABLE>
<CAPTION>
CLOSING SALE PRICES PER
SHARE OF CRITICAL PATH
COMMON STOCK
------------------------
MONTH HIGH LOW
----- ----------- ----------
<S> <C> <C>
September............ $ 41.38 $ 30.94
October.............. $ 50.00 $ 35.06
November............. $ 78.50 $ 45.00
</TABLE>
Q: WHAT DO I NEED TO DO NOW?
A: Following your review of this proxy statement/prospectus, mail your signed
proxy card in the enclosed return envelope as soon as possible so that your
shares can be voted at the special meeting of ISOCOR shareholders. You may
also vote by attending the special meeting.
Q: WHAT HAPPENS IF I DON'T INDICATE HOW TO VOTE MY PROXY?
A: If you mail your properly signed proxy but do not include instructions on how
your shares are to be voted, your shares will be voted FOR adoption of the
reorganization agreement and approval of the merger.
Q: WHAT HAPPENS IF I DON'T RETURN A PROXY CARD?
A: Not returning your proxy card will have the same effect as voting against the
merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You can change your vote at any time before your proxy is voted at the
special meeting. You can do this in one of three ways. First, you can send a
written notice to the Secretary of ISOCOR stating that you would like to
revoke your proxy. Second, you can complete and submit a new proxy card.
Third, you can attend the special meeting, file a written notice of
revocation of your proxy with the Secretary of ISOCOR and vote in person.
Your attendance alone will not revoke your proxy.
Q: IF MY BROKER HOLDS MY SHARES IN STREET NAME, WILL MY BROKER VOTE MY SHARES
FOR ME?
A: No. Your broker will not be able to vote your shares without instructions
from you. If you do not provide your broker with voting instruc-
1
<PAGE> 8
tions, your shares will be considered present at the special meeting for
purposes of determining a quorum but will not be considered to have been
voted on the reorganization agreement or the agreement of merger. If you have
instructed a broker to vote your shares, you must follow directions received
from your broker to change those instructions.
Q: SHOULD I SEND MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, Critical Path will send you written
instructions for exchanging your ISOCOR stock certificates for Critical Path
stock certificates. Please do not send your stock certificates with your
proxy.
Q: WHAT ARE THE FAXNET AND DOCSPACE TRANSACTIONS?
A: In early November 1999, Critical Path entered into agreements to acquire
FaxNet Corporation, a provider of Internet fax and messaging solutions and a
leading supplier of carrier-class enhanced fax and integrated messaging
solutions, and The docSpace Company, Inc., a provider of web-based file
management services. The estimated purchase price for FaxNet is $199.3
million in cash and Critical Path stock, and that transaction is expected to
close in early December 1999, subject to conditions. The estimated purchase
price for docSpace is $274.0 million in cash and Critical Path stock, and
that transaction is expected to close in late January 2000, subject to
conditions.
Q: WHOM SHOULD I CALL IF I HAVE ANY ADDITIONAL QUESTIONS OR WANT TO REQUEST A
COPY OF THIS DOCUMENT?
A: You may contact D.F. King & Co., our proxy solicitor with respect to
questions regarding voting or to request a copy of this document:
D.F. King & Co., Inc.
77 Water Street
New York, NY 10005
(800) 714-3306
2
<PAGE> 9
SUMMARY
The following summary highlights selected information which is provided in
greater detail elsewhere in this document. Even though Critical Path and ISOCOR
have highlighted what Critical Path and ISOCOR feel is the most important
information to you, Critical Path and ISOCOR encourage you to read this document
in its entirety for a complete understanding of the reorganization agreement and
the proposed merger.
THE COMPANIES
Critical Path, Inc.
320 First Street
San Francisco, California 94105
(415) 808-8800
Critical Path is 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. It has built an industry
leading global infrastructure with data centers connected to key Internet
exchange points, and currently reaches millions of end-users through its
partnership agreements. Critical Path provides reliable, secure and scalable
email, and a flexible suite of enhanced messaging services to more than 800
customers, and has strategic partnerships with companies such as E*TRADE,
Network Solutions, US WEST, Sprint, and ICQ, a subsidiary of America Online.
Critical Path was incorporated in California in February 1997 and has been
a public company since March 29, 1999. It is traded on the Nasdaq National
Market under the symbol "CPTH."
ISOCOR
3420 Ocean Park Blvd.
Santa Monica, California 90405
(310) 581-8100
ISOCOR develops, markets and supports electronic messaging and directory
infrastructure software products and services that enable businesses to engage
in electronic communications over corporate networks and the Internet. ISOCOR's
products are available either as a complete, integrated package or as individual
components. ISOCOR's business strategy is to provide a focused range of
products, targeted at large corporations and Internet service providers.
ISOCOR was incorporated in California in February 1991 and has been a
public company since March 13, 1996. It is traded on the Nasdaq National Market
under the symbol "ICOR."
FORWARD-LOOKING STATEMENTS IN THIS PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus contains forward-looking statements. These
statements include statements with respect to the financial condition, results
of operations and businesses of Critical Path and ISOCOR and on the expected
impact of the merger described in this proxy statement/prospectus on their
financial performance. Words such as anticipates, expects, intends, plans,
believes, seeks, estimates and similar expressions identify forward-looking
statements.
These forward-looking statements are not guarantees of future performance
and are subject to risks and uncertainties that could cause actual results to
differ materially from the results contemplated by such forward-looking
statements. These risks and uncertainties include:
- the possibility that the merger will not be consummated;
- the possibility that the anticipated benefits from the merger will not be
fully realized;
- the possibility that costs or difficulties related to the integration of
ISOCOR and Critical Path will be greater than expected; and
- other risk factors as may be detailed in public announcements and filings
with the Securities and Exchange Commission by Critical Path and ISOCOR.
In evaluating the merger, you should carefully consider the discussion of these
and other factors in the section entitled "Risk Factors" on page 13 of this
proxy statement/prospectus.
3
<PAGE> 10
THE MERGER
If all the conditions to the merger are satisfied or waived, ISOCOR will
merge with a subsidiary of Critical Path and become a wholly owned subsidiary of
Critical Path. As a shareholder of ISOCOR, you will become a shareholder of
Critical Path following the merger unless you perfect your dissenters' rights in
accordance with California law.
The reorganization agreement, including the related agreement of merger, is
the legal document that governs the merger. This document is attached as Annex A
to this proxy statement/ prospectus. We encourage you to read the reorganization
agreement and the related agreement of merger attached as Exhibit D to the
reorganization agreement carefully.
SHAREHOLDER APPROVAL
The holders of a majority of the outstanding shares of ISOCOR common stock
must approve the reorganization agreement and the agreement of merger and the
transactions contemplated thereby, including the merger, at the special meeting.
Critical Path shareholders are not required to approve the reorganization
agreement and will not vote on the merger.
You are entitled to cast one vote per share of ISOCOR common stock you held
as of December 8, 1999, the record date.
RECOMMENDATION OF ISOCOR'S BOARD OF DIRECTORS
After careful consideration, ISOCOR's board of directors unanimously
approved the reorganization agreement and the related agreement of merger and
determined the merger to be fair to you and in your best interests. ISOCOR's
board of directors recommends that you vote in favor of and approve the
reorganization agreement, including the related agreement of merger, and the
transactions contemplated thereby, including the merger, at the special meeting.
VOTING AGREEMENTS
ISOCOR shareholders beneficially owning approximately 932,823 shares or
8.8% of the outstanding ISOCOR common stock have entered into voting agreements
with Critical Path. All of the shares of ISOCOR common stock held by directors
and executive officers of ISOCOR and their affiliates are subject to voting
agreements. The voting agreements require these ISOCOR shareholders to vote all
shares of ISOCOR common stock they beneficially own in favor of approval of the
reorganization agreement and the agreement of merger at the special meeting.
These ISOCOR shareholders were not paid additional consideration in connection
with the voting agreements.
VOTING SHARES HELD BY YOUR BROKER IN STREET NAME
Your broker will vote your shares only if you provide instructions on how
to vote by following the information provided to you by your broker. If you do
not provide your broker with voting instructions, your shares will not be voted
at the ISOCOR special meeting and it will have the same effect as voting against
approval of the reorganization agreement and the agreement of merger.
COMPLETION OF THE MERGER
Critical Path and ISOCOR will complete the merger when all of the
conditions to completion of the merger are satisfied or waived. The merger will
become effective when Critical Path and ISOCOR file an agreement of merger with
the Secretary of State of the State of California.
Critical Path and ISOCOR are working toward completing the merger as
quickly as possible and, assuming approval of the merger and the satisfaction or
waiver of all other conditions of the reorganization agreement, expect to
complete the merger promptly after the special meeting.
EXCHANGING YOUR STOCK CERTIFICATES
When the merger is completed, Critical Path's exchange agent will mail to
ISOCOR shareholders a letter of transmittal and instructions for use in
surrendering ISOCOR stock certificates in exchange for Critical Path stock
certificates. When an ISOCOR shareholder delivers an ISOCOR stock certificate to
the exchange agent along with an executed letter of transmittal and any other
required documents, the ISOCOR stock certificate will be canceled and the ISOCOR
shareholder will receive Critical Path stock certificates representing the
number of full shares of Critical Path common stock to which the shareholder is
entitled under the reorganization agreement. An ISOCOR shareholder will receive
payment in cash, without interest, in
4
<PAGE> 11
lieu of any fractional shares of Critical Path common stock which would have
been otherwise issuable to the shareholder in the merger.
ISOCOR'S REASONS FOR THE MERGER
ISOCOR's board of directors has determined that the merger is fair to, and
in the best interests of, ISOCOR and its shareholders. In reaching its decision,
ISOCOR's board of directors identified several potential benefits of the merger,
the most important of which included:
- - ISOCOR shareholders will have the opportunity to participate in the potential
for growth of the combined company after the merger;
- - The combined company will be able to provide a full range of messaging
solutions, including in-house, outsourced and combination messaging solutions;
- - The exchange ratio in the merger represented a premium of approximately 140%
over the average closing price for ISOCOR common stock over the 30-day trading
period ending on October 20, 1999, the date on which the reorganization
agreement was signed; and
- - By combining with Critical Path, ISOCOR shareholders will be afforded
substantially increased trading liquidity for their investment.
OPINION OF ISOCOR'S FINANCIAL ADVISOR, ROBERTSON STEPHENS
In deciding to approve the merger, ISOCOR's board of directors considered
the opinion of its financial advisor, BancBoston Robertson Stephens, Inc., that,
as of the date ISOCOR and Critical Path signed the reorganization agreement, the
exchange ratio was fair from a financial point of view to ISOCOR shareholders.
This opinion was provided to ISOCOR's board of directors for its information and
assistance in evaluating the merger and does not constitute a recommendation as
to how any ISOCOR shareholder should vote with respect to the merger. The full
text of the written opinion of Robertson Stephens, which is attached as Annex C,
sets forth the assumptions made, matters considered and limitations on the
review undertaken in connection with such opinion. You are urged to read this
opinion in its entirety.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of ISOCOR's board of directors that you
vote to approve the merger, you should note that certain officers and directors
of ISOCOR have interests in the merger that are different from, or in addition
to, your interests. These interests relate to accelerated vesting of stock
options, indemnification rights, and for officers, employment benefits. As a
result, directors and officers may be more likely to vote to approve the merger
than ISOCOR shareholders generally.
CONDITIONS TO CLOSING
The respective obligations of Critical Path and ISOCOR to complete the
merger are subject to the prior satisfaction or waiver of conditions. If ISOCOR
waives any conditions, ISOCOR will consider the facts and circumstances at that
time and make a determination whether it will resolicit proxies from ISOCOR
shareholders.
For a detailed description of the conditions to completion of the merger,
see the section entitled "The Reorganization Agreement -- Conditions to
completion of the merger."
TERMINATION OF THE REORGANIZATION AGREEMENT
The reorganization agreement may be terminated under limited circumstances.
For a detailed description of the manner in which the reorganization
agreement may be terminated, see the section entitled "The Reorganization
Agreement -- Termination of the reorganization agreement."
TERMINATION FEES AND EXPENSES
Critical Path and ISOCOR will share equally all fees and expenses incurred
by them in relation to the printing and filing with the Securities and Exchange
Commission of this proxy statement/ prospectus and the registration statement.
If Critical Path terminates the reorganization agreement in limited
instances, ISOCOR must pay Critical Path an $11,484,800 termination fee. These
instances include, among others, ISOCOR entering into a letter of intent or
contract with a third party providing for an acquisition transaction or ISOCOR's
board of directors withdrawing or materially modifying its recommendation or
approving or recommending a third party's acquisition proposal. In the event a
termination fee is payable, ISOCOR also must reimburse up to $2,000,000 of
Critical Path's expenses incurred in connection with the reorganization
agreement and the transactions contemplated thereby.
5
<PAGE> 12
STOCK OPTION GRANTED TO CRITICAL PATH
As a condition to entering into the reorganization agreement, ISOCOR
granted Critical Path an irrevocable stock option to purchase up to 19.9% of the
issued and outstanding common stock of ISOCOR at a price of $23.54 per share
under a Stock Option Agreement attached to this document as Annex C and
incorporated herein. The stock option is exercisable at any time if the merger
is not consummated by June 30, 2000, or the required approval of ISOCOR
shareholders is not obtained, or if a "triggering event" occurs. The events
qualifying as "triggering events" are described under "The Stock Option
Agreement."
ISOCOR may be required to pay Critical Path up to an additional $2,871,000
to cancel Critical Path's option.
The stock option, the termination fee and the non-solicitation provisions
set forth in the reorganization agreement may discourage third parties who are
interested in acquiring a significant stake in ISOCOR and are intended by
Critical Path to increase the likelihood that the merger will be completed.
NO SOLICITATION
ISOCOR has generally agreed not to initiate or engage in discussions with
another party regarding a business combination with that party while the merger
is pending. However, ISOCOR may provide nonpublic information regarding ISOCOR
and its subsidiaries in response to an acquisition proposal that ISOCOR's board
of directors concludes is a superior offer as compared to the present merger.
GOVERNMENTAL AND REGULATORY MATTERS
The merger is subject to antitrust laws. Critical Path and ISOCOR have made
the required filings with the U.S. Department of Justice and the Federal Trade
Commission, and the applicable waiting periods have been terminated. The
Department of Justice or the Federal Trade Commission, as well as a foreign
regulatory agency or government, may challenge the merger at any time before or
after its completion.
FEDERAL INCOME TAX CONSEQUENCES
Critical Path and ISOCOR have structured the merger so that, in general,
Critical Path, ISOCOR and their respective shareholders will not recognize gain
or loss for U.S. federal income tax purposes in the merger, except with respect
to cash received by ISOCOR shareholders in lieu of fractional shares or with
respect to shares that qualify as dissenting shares under California General
Corporation Law. It is a waivable condition to the merger that Critical Path and
ISOCOR receive legal opinions to this effect.
ANTICIPATED ACCOUNTING TREATMENT
It is anticipated that the merger will be accounted for as a "purchase
method" business combination in accordance with U.S. generally accepted
accounting principles.
DISSENTERS' RIGHTS
If holders of five percent or more of the outstanding shares of ISOCOR
common stock entitled to vote at the ISOCOR special meeting vote against the
approval of the reorganization agreement and make a demand for payment of the
fair market value of the shares pursuant to the provisions of Chapter 13 of the
California General Corporation Law, those ISOCOR shareholders will be entitled
to exercise dissenters' rights. In accordance with these provisions, dissenting
ISOCOR shareholders will have the right to be paid the fair market value of
their shares of ISOCOR common stock as set forth in and by fully complying with
the procedures specified in the California General Corporation Law. The failure
of a dissenting ISOCOR shareholder to timely and properly comply with these
procedures will result in the termination or waiver of these rights. For a more
detailed description, see "The Merger -- Dissenters' rights."
6
<PAGE> 13
COMPARATIVE PER SHARE DATA
The following tables reflect (a) the historical net loss and book value per
share of Critical Path common stock and the historical net loss and book value
per share of ISOCOR common stock in comparison with the unaudited pro forma net
loss and book value per share after giving effect to the proposed merger and
after giving effect to the acquisition by Critical Path of substantially all of
the operating assets of the Connect Service business of Fabrik Communications,
Inc., and the stock of dotOne Corporation, and Amplitude Software Corporation,
and the pending acquisitions by Critical Path of the stock of FaxNet Corporation
and The docSpace Company, Inc., and (b) the equivalent historical net loss and
book value per share attributable to 0.4707 of a share of Critical Path common
stock which will be received for each share of ISOCOR common stock. The
information presented in the following tables should be read in conjunction with
the selected historical and selected unaudited pro forma condensed combined
financial data, the unaudited pro forma condensed combined financial data and
the separate historical consolidated financial statements and related notes of
Critical Path and ISOCOR which are included elsewhere in this proxy
statement/prospectus. The unaudited pro forma condensed combined financial data
are not necessarily indicative of the operating results that would have been
achieved had the merger been consummated as of the beginning of the periods
presented and should not be construed as representative of future operations.
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
HISTORICAL CRITICAL PATH DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------------ ----------------- ------------------
<S> <C> <C>
Net loss per common share -- basic and diluted.............. $(0.81) $ (2.26)
Book value per share(1)..................................... $ 1.85 $ 10.98
</TABLE>
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
HISTORICAL ISOCOR DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ----------------- ------------------
<S> <C> <C>
Net loss per common share -- basic and diluted.............. $(0.63) $(0.28)
Book value per share(1)..................................... $ 2.00 $ 1.75
</TABLE>
<TABLE>
<CAPTION>
YEAR NINE MONTHS
CRITICAL PATH AND ISOCOR ENDED ENDED
PRO FORMA COMBINED PER SHARE DATA DECEMBER 31, 1998 SEPTEMBER 30, 1999
--------------------------------- ----------------- ------------------
<S> <C> <C>
Net loss per Critical Path share -- basic and diluted....... $(11.31) $ (6.97)
Net loss per equivalent ISOCOR share -- basic and
diluted(3).................................................. $ (5.32) $ (3.28)
Book value per Critical Path share(2)....................... $ 23.53
Book value per equivalent ISOCOR share(2)(3)................ $ 11.08
</TABLE>
- -------------------------
(1) The historical book value per share amounts are computed by dividing
Critical Path's and ISOCOR's shareholders' equity, respectively, by their
actual common shares outstanding as of September 30, 1999 and December 31,
1998.
(2) The pro forma combined book value per share amounts are computed by dividing
pro forma shareholders' equity by the pro forma number of common shares of
Critical Path outstanding as of September 30, 1999, assuming the merger had
occurred as of that date.
(3) The equivalent pro forma combined per ISOCOR share amounts are calculated by
multiplying the pro forma combined share amounts by the Exchange Ratio of
0.4707 shares of Critical Path common stock for each share of ISOCOR common
stock.
7
<PAGE> 14
The following table sets forth the closing sales prices per share of
Critical Path common stock on the Nasdaq National Market and the closing sales
prices per share of ISOCOR common stock on the Nasdaq National Market on (1)
October 20, 1999, the last full trading date prior to the public announcement of
the merger, and (2) December , 1999, the latest practicable trading day before
the printing of this proxy statement/prospectus. The equivalent ISOCOR per share
price as of any given date, including the dates indicated, is determined by
multiplying the price of one share of Critical Path common stock as of such date
by 0.4707, the exchange ratio set forth in the reorganization agreement, and
represents what the market value of one share of ISOCOR common stock would have
been if the merger had been consummated on or prior to such day.
<TABLE>
<CAPTION>
EQUIVALENT
CRITICAL ISOCOR
PATH ISOCOR PER
COMMON COMMON SHARE
STOCK STOCK PRICE
-------- ------- ----------
<S> <C> <C> <C>
October 20, 1999............................................ $50.00 $ 10.13 $ 23.54
December , 1999........................................... $ $ $
</TABLE>
No assurance can be given as to the market prices of Critical Path common
stock or ISOCOR common stock at any time before the closing of the merger or as
to the market price of Critical Path common stock at any time thereafter. The
exchange ratio is fixed and will not be adjusted to reflect increases or
decreases in the market price of Critical Path common stock that could occur
before the merger becomes effective. If the market price of Critical Path common
stock decreases or increases prior to the effective time of the merger, the
market value of the Critical Path common stock to be received in the merger in
exchange for ISOCOR common stock will correspondingly decrease or increase.
SHAREHOLDERS OF ISOCOR ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS OF ISOCOR
COMMON STOCK AND CRITICAL PATH COMMON STOCK.
8
<PAGE> 15
SELECTED HISTORICAL AND SELECTED UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following selected historical financial data of Critical Path and
ISOCOR have been derived from their respective historical consolidated financial
statements, and should be read in conjunction with those financial statements
and the related notes which are included elsewhere in this proxy
statement/prospectus. The selected unaudited pro forma condensed combined
financial data of Critical Path and ISOCOR are derived from the unaudited pro
forma condensed combined financial information, which gives effect to the merger
as a purchase, and should be read in conjunction with the unaudited pro forma
condensed combined financial information and related notes, which are included
elsewhere in this proxy statement/prospectus.
For pro forma purposes, Critical Path's historical consolidated statement
of operations for the year ended December 31, 1998, after giving effect to the
acquisitions of substantially all of the operating assets of the Connect Service
business of Fabrik Communications, Inc. ("Fabrik"), and the stock of dotOne
Corporation, Amplitude Software Corporation, and FaxNet Corporation and the
pending acquisitions of the stock of The docSpace Company, Inc., and ISOCOR's
historical consolidated statement of operations for the year ended December 31,
1998 have been combined to give effect to the merger as if it had occurred on
January 1, 1998.
Critical Path's historical consolidated statement of operations for the
nine months ended September 30, 1999, after giving effect to the acquisitions of
Fabrik, dotOne, FaxNet, and Amplitude, the pending acquisitions of docSpace, and
ISOCOR's historical consolidated statement of operations for the nine months
ended September 30, 1999 have been combined to give effect to the merger as if
it had occurred on January 1, 1998.
The unaudited pro forma condensed combined balance sheet data assumes that
the merger took place on September 30, 1999, and combines Critical Path's
historical consolidated balance sheet data as of September 30, 1999, after
giving effect to the consummated acquisition of FaxNet and the pending
acquisitions of docSpace, and ISOCOR's historical consolidated balance sheet as
of September 30, 1999.
Management of Critical Path believes that the pending acquisition of
docSpace is a probable acquisition.
The total estimated purchase price of the merger has been allocated on a
preliminary basis to assets and liabilities based on Critical Path's
management's best estimate of its fair value with the excess over the net
tangible and identified intangible assets acquired allocated to goodwill. These
allocations are subject to change pending a final determination and analysis of
the total purchase price and the fair value of the assets acquired and
liabilities assumed. The impact of such changes could be material.
The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have actually occurred if the merger
had been consummated as of the dates indicated, nor is it necessarily indicative
of future operating results or financial condition of the combined company.
9
<PAGE> 16
ISOCOR'S SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1998 1997 1996 1995 1994 1999 1998
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues......................................... $23,279 $22,018 $26,394 $20,774 $13,541 $24,272 $16,358
Income/(loss) from operations.................... (7,158) (9,068) (33) 586 (120) (2,766) (5,430)
Net income/(loss)................................ (6,165) (7,904) 483 319 (10) (2,893) (4,479)
Net income/(loss) per share:
Basic.......................................... $ (0.63) $ (0.83) $ 0.06 $ 0.19 $ (0.01) $ (0.28) $ (0.46)
Diluted........................................ $ (0.63) $ (0.83) $ 0.05 $ 0.04 $ (0.01) $ (0.28) $ (0.46)
Weighted average shares:
Basic.......................................... 9,737 9,485 7,733 1,652 1,567 10,251 9,767
Diluted........................................ 9,737 9,485 9,808 7,783 1,567 10,251 9,767
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------- SEPTEMBER 30,
1998 1997 1996 1995 1994 1999
------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities..... $19,112 $20,461 $25,113 $ 5,880 $ 5,281 $19,267
Working capital...................................... 16,603 23,148 30,058 9,653 6,359 13,837
Total assets......................................... 33,125 34,223 41,298 19,494 12,484 33,944
Long-term obligations, net of current portion........ 146 133 187 606 110 151
Total shareholders' equity........................... 19,765 25,684 33,204 12,487 8,697 18,250
</TABLE>
CRITICAL PATH'S SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 19, NINE MONTHS
1997 ENDED
YEAR ENDED (INCEPTION) TO SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -------------------
1998 1997 1999 1998
------------ -------------- -------- -------
<S> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues................................................ $ 897 $ -- $ 7,968 $ 292
Loss from operations........................................ (11,448) (1,056) (62,903) (5,990)
Net loss.................................................... (11,461) (1,074) (58,240) (6,132)
Net loss per share -- basic and diluted..................... $ (2.94) $ (0.54) $ (2.26) $ (1.78)
Weighted average shares -- basic and diluted................ 3,899 1,994 25,715 3,445
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1998 1997 1999
------- ------- -------------
<S> <C> <C> <C>
HISTORICAL CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $14,791 $ 1 $146,833
Working capital/(deficit)................................... 12,524 (1,524) 155,596
Total assets................................................ 20,663 550 493,194
Long-term obligations, net of current portion............... 2,454 42 4,664
Total stockholders' equity (deficit)........................ 15,358 (1,021) 472,646
</TABLE>
10
<PAGE> 17
ISOCOR/CRITICAL PATH SELECTED UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF
OPERATIONS DATA:
Net revenues................................................ $ 54,154 $ 54,717
Loss from operations........................................ (337,289) (301,114)
Net loss.................................................... (337,140) 297,338
Net loss per share -- basic and diluted..................... $ (11.31) $ (6.97)
Weighted average shares -- basic and diluted................ 29,815 42,678
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $ 88,036
Working capital............................................. 72,733
Total assets................................................ 1,225,014
Long-term obligations, net of current portion............... 7,341
Total shareholders' equity.................................. $1,131,446
</TABLE>
- ---------------
(1) For detailed information see "Pro Forma Condensed Combined Financial Data"
on pages F-3 through F-10.
11
<PAGE> 18
MARKET PRICE AND DIVIDEND INFORMATION
Critical Path common stock has traded on the Nasdaq National Market under
the symbol "CPTH" since March 29, 1999. The following table sets forth the range
of high and low intra-day sales prices reported on the Nasdaq National Market
for Critical Path common stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
FISCAL 1999
First Quarter (from March 29, 1999)......................... $ 77.00 $65.88
Second Quarter.............................................. 134.88 49.44
Third Quarter............................................... 53.88 30.94
Fourth Quarter (through November 30, 1999).................. 80.50 35.00
</TABLE>
ISOCOR common stock has traded on the Nasdaq National Market under the
symbol "ICOR" since March 13, 1996. The following table sets forth the range of
high and low intra-day sales prices reported on the Nasdaq National Market for
ISOCOR common stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
FISCAL 1997
First Quarter............................................... $ 6.75 $3.75
Second Quarter.............................................. 3.50 2.00
Third Quarter............................................... 3.63 2.19
Fourth Quarter.............................................. 3.63 1.75
FISCAL 1998
First Quarter............................................... $ 3.75 $1.69
Second Quarter.............................................. 3.63 2.25
Third Quarter............................................... 3.81 2.00
Fourth Quarter.............................................. 4.75 1.25
FISCAL 1999
First Quarter............................................... $10.69 $3.06
Second Quarter.............................................. 12.81 4.81
Third Quarter............................................... 8.75 5.38
Fourth Quarter (through November 30, 1999).................. 33.56 7.88
</TABLE>
Neither Critical Path nor ISOCOR has ever paid any cash dividends on their
stock, and both anticipate that they will continue to retain any earnings for
the foreseeable future for use in the operation of their respective businesses.
As of November 30, 1999, there were 91 shareholders of record who held
shares of ISOCOR common stock and 633 shareholders of record who held shares of
Critical Path common stock.
12
<PAGE> 19
RISK FACTORS
By voting in favor of the merger, you are making a decision to invest in
Critical Path common stock. An investment in Critical Path common stock involves
a high degree of risk. In addition to the other information contained in this
proxy statement/prospectus, you should carefully consider the following risk
factors in deciding whether to vote for the merger.
RISKS RELATED TO THE MERGER
YOU WILL RECEIVE 0.4707 OF A SHARE OF CRITICAL PATH COMMON STOCK FOR EACH OF
YOUR SHARES OF ISOCOR COMMON STOCK, REGARDLESS OF INCREASES IN MARKET VALUE OF
ISOCOR COMMON STOCK, DECREASES IN THE MARKET VALUE OF CRITICAL PATH COMMON STOCK
OR BOTH.
Upon completion of the merger, each share of ISOCOR common stock will be
exchanged for 0.4707 of a share of Critical Path common stock. There will be no
adjustment for changes in the market price of either ISOCOR or Critical Path
common stock, and ISOCOR is not permitted to withdraw from the merger or
resolicit the vote of its shareholders solely because of changes in the market
value of Critical Path or ISOCOR common stock. Accordingly, the specific dollar
value of Critical Path common stock you will receive upon completion of the
merger will depend on the market value of Critical Path common stock at the time
of the completion of the merger. This value may decrease compared to the market
value of ISOCOR common stock based on decreases in the value of Critical Path
common stock, increases in the value of ISOCOR common stock or both.
THE FAILURE TO EFFECTIVELY INTEGRATE CRITICAL PATH AND ISOCOR COULD HAVE A
MATERIAL ADVERSE EFFECT ON THE BUSINESS OF THE COMBINED COMPANY.
Achieving the anticipated benefits of the merger will depend in part on the
integration of the two businesses in an efficient manner, and there can be no
assurance that this will occur. For example, Critical Path may not be able to
retain key executives and employees of ISOCOR after the merger. Also, the
integration of Critical Path and ISOCOR will require substantial attention from
management. Diversion of management's attention from ongoing operations and any
difficulties encountered in the transition and integration process could have a
material adverse effect on the revenues, expenses and operating results of the
combined company. There can be no assurance that Critical Path will realize any
of the anticipated benefits of the merger.
THE MERGER COULD CAUSE CRITICAL PATH AND ISOCOR TO LOSE CUSTOMERS OR STRATEGIC
PARTNERS.
Some of ISOCOR's existing customers or strategic partners may view
themselves as competitors of some of Critical Path's customers or of Critical
Path itself and therefore determine that the merger is competitively
disadvantageous to them. As a result, the merger could adversely affect ISOCOR's
relationship with these customers or strategic partners and they could terminate
their relationships with ISOCOR as a result of the merger. In addition, the
merger could adversely affect Critical Path's relationships with some of its
customers and strategic partners that compete with some of ISOCOR's customers or
with ISOCOR itself, and Critical Path's relationship with those customers and
strategic partners could end as a result of the merger.
13
<PAGE> 20
RISKS RELATED TO THE BUSINESS OF THE COMBINED COMPANY
BECAUSE CRITICAL PATH HAS A LIMITED OPERATING HISTORY, IT IS DIFFICULT TO
EVALUATE THE BUSINESS OF THE COMBINED COMPANY, AND THE COMBINED COMPANY MAY FACE
VARIOUS RISKS, EXPENSES AND DIFFICULTIES ASSOCIATED WITH EARLY STAGE COMPANIES.
Because Critical Path has only a limited operating history upon which you
can evaluate its business and prospects, when making your investment decision,
you should consider the risks, expenses and difficulties that Critical Path may
encounter. These risks include Critical Path's ability to:
- acquire businesses and technologies;
- expand sales and marketing activities;
- create and maintain strategic relationships;
- expand its customer base and retain key clients;
- introduce new services;
- manage growing operations;
- compete in a highly competitive market;
- upgrade its systems and infrastructure to handle any increases in
messaging traffic; and
- reduce service interruptions.
Critical Path expects that its operating expenses will increase as it
spends resources on building its business and that this increase may have a
negative effect on Critical Path's operating results and financial condition in
the near term.
Critical Path has spent substantial amounts on technology and
infrastructure development. Critical Path expects to continue to spend
substantial financial and other resources to develop and introduce new email
service offerings, and to expand its sales and marketing organizations,
strategic relationships and operating infrastructure. Critical Path expects that
its 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 revenues do not correspondingly increase,
Critical Path's operating results and financial condition could be negatively
affected.
CRITICAL PATH HAS A HISTORY OF LOSSES AND EXPECTS CONTINUING LOSSES, AND THE
COMBINED COMPANY MAY NEVER ACHIEVE PROFITABILITY.
As of September 30, 1999, Critical Path had an accumulated deficit of
approximately $70.8 million. Critical Path has not achieved profitability in any
period and expects that the combined company will continue to incur net losses.
If the combined company continues to incur net losses in future periods, it may
not be able to increase the number of employees or investments in capital
equipment, sales and marketing programs, and research and development in
accordance with its present plans. The combined company may need to obtain
additional financing sooner than it anticipates. This financing may not be
available in sufficient amounts, or on acceptable terms, and may dilute existing
shareholders. The combined company may never obtain sufficient revenues to
achieve profitability. If the combined company does achieve profitability, it
may not sustain or increase profitability in the future. This may, in turn,
cause its stock price to decline.
DUE TO CRITICAL PATH'S LIMITED OPERATING HISTORY AND THE EMERGING NATURE OF THE
EMAIL SERVICES MARKET, FUTURE REVENUES ARE UNPREDICTABLE AND THE COMBINED
COMPANY'S QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
Critical Path cannot accurately forecast its revenues as a result of its
limited operating history and the emerging nature of the Internet-based email
services market. The combined company's revenues could fall
14
<PAGE> 21
short of expectations if it experiences delays or cancellations of even a small
number of orders. Critical Path often offers volume-based pricing, which may
affect operating margins. A number of factors are likely to cause fluctuations
in operating results, including, but not limited to:
- changes in continued growth of the Internet in general and of email usage
in particular;
- changes in demand for outsourced email services;
- the combined company's ability to attract and retain customers and
maintain customer satisfaction;
- the combined company's ability to upgrade, develop and maintain its
systems and infrastructure;
- the amount and timing of operating costs and capital expenditures
relating to expansion of business and infrastructure;
- technical difficulties or system outages;
- the announcement or introduction of new or enhanced services by
competitors;
- the combined company's ability to attract and retain qualified personnel
with Internet industry expertise, particularly sales and marketing
personnel;
- the pricing policies of competitors;
- the combined company's ability to integrate their operations, technology
and personnel and that of acquired companies that may be acquired in the
future;
- failure to increase international sales; and
- governmental regulation surrounding the Internet, and email in
particular.
In addition to the factors set forth above, operating results will be
impacted by the extent to which the combined company incurs non-cash charges
associated with stock-based arrangements. In particular, Critical Path expects
to incur substantial non-cash charges associated with the grant of a warrant to
America Online. In addition to amortization of the initial fair market value of
this warrant, which is $16.5 million, Critical Path expects that future changes
in the trading price of its common stock at the end of each quarter and when
certain milestones are achieved will result in substantial changes in the
ultimate amount of this amortization. For example, Critical Path recognized a
$12.2 million non-cash charge to advertising expense during the nine months
ended September 30, 1999 in connection with the amortization of the America
Online warrant.
Due to lead times required to purchase, install and test equipment,
Critical Path typically needs 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 operating results are not a good indication
of future performance. It is likely that operating results in some quarters will
be below market expectations. In this event, the price of the combined company's
common stock is likely to decline.
FURTHER ACQUISITIONS COULD RESULT IN OPERATING DIFFICULTIES AND OTHER HARMFUL
CONSEQUENCES FOR THE COMBINED COMPANY.
Critical Path expects that the combined company will acquire or invest in
additional businesses, products, services and technologies that complement or
augment its service offerings and customer base. On May 26, 1999, Critical Path
acquired substantially all of the operating assets at the Connect Service
business of Fabrik Communications, Inc. for a total purchase price of
approximately $20.1 million. On July 21, 1999, Critical Path acquired dotOne
Corporation for a total purchase price of approximately $57.0 million. On August
31, 1999, Critical Path acquired Amplitude Software Corp. for a total purchase
price of approximately $214.4 million. On December 6, 1999, Critical Path
acquired FaxNet Corporation. The total purchase price is estimated to be
approximately $199.3 million in
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accordance with the emerging issues task force pronouncement 95-19, which takes
into account Critical Path's stock price before and after the announcement of
the acquisition. On November 3, 1999, Critical Path entered into an agreement to
acquire The docSpace Company, Inc. The total purchase price is estimated to be
approximately $274.0 million. Critical Path is currently engaged in discussions
with a number of companies regarding strategic acquisitions or investments.
Although these discussions are ongoing, Critical Path has not signed any
definitive agreements and cannot assure you that any of these discussions will
result in actual acquisitions. To be successful, the combined company will need
to identify suitable acquisition candidates, integrate disparate technologies
and corporate cultures and manage a geographically dispersed company. There can
be no assurance that the combined company will be able to do this successfully.
Acquisitions could divert attention from other business concerns and could
expose the combined company to unforeseen liabilities. In addition, the combined
company may lose key employees while integrating acquired companies.
The combined company may also use cash to make acquisitions. As a result,
it may be necessary for the combined company to raise additional funds through
public or private financings. There can be no assurance that the combined
company will be able to raise such additional funds or do so on favorable terms.
In addition, the combined company may be required to amortize significant
amounts of goodwill and other intangible assets in connection with future
acquisitions, which would materially increase operating expenses.
IF THE COMBINED COMPANY FAILS TO EXPAND SALES AND MARKETING ACTIVITIES, IT MAY
BE UNABLE TO EXPAND ITS BUSINESS.
The combined company's ability to increase revenues will depend on its
ability to successfully recruit, train and retain sales and marketing personnel.
As of September 30, 1999, Critical Path had 120 sales and marketing personnel
and ISOCOR had 61. It is likely that the combined company will continue to
invest significant resources to expand sales and marketing organizations.
Competition for additional qualified personnel is intense and the combined
company may not be able to hire and retain personnel with relevant experience.
The complexity and implementation of the combined company's Internet
messaging services require highly trained sales and marketing personnel to
educate prospective customers regarding the use and benefits of the combined
company's services. Current and prospective customers, in turn, must be able to
educate their end-users. With Critical Path's relatively brief operating history
and its plans for expansion, Critical Path has considerable need to recruit,
train, and retain qualified staff. Any delays or difficulties encountered in
these staffing efforts would impair its ability to attract new customers and to
enhance its relationships with existing customers. This in turn would adversely
impact the timing and extent of revenues. Because the majority of Critical
Path's sales and marketing personnel have recently joined Critical Path and have
limited experience working together, Critical Path's sales and marketing
organizations may not be able to compete successfully against bigger and more
experienced sales and marketing organizations of its competitors. If Critical
Path does not successfully expand sales and marketing activities, its business
could suffer and its stock price could decline.
UNPLANNED SYSTEM INTERRUPTIONS AND CAPACITY CONSTRAINTS COULD REDUCE THE
COMBINED COMPANY'S ABILITY TO PROVIDE EMAIL SERVICES AND COULD HARM ITS BUSINESS
AND REPUTATION.
Critical Path's customers have in the past experienced some interruptions
in their email service. Critical Path believes that these interruptions will
continue to occur from time to time. These interruptions are due to hardware
failures, unsolicited bulk email, or "spam," attacks and operating system
failures. For example, in May 1999, Critical Path's customers experienced an
interruption in service due to the failure of a hardware component of its
network. Critical Path's revenues depend on the number of end-users who use its
email services. Critical Path's business will suffer if it experiences frequent
or extended system interruptions that result in the unavailability or reduced
performance of systems or networks or reduce its ability to provide email
services. Critical Path expects to experience occasional temporary capacity
constraints due to sharply increased traffic, which may cause unanticipated
system disruptions, slower
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response times, impaired quality and degradation in levels of customer service.
If this were to continue to happen, the combined company's business and
reputation could suffer dramatically.
Critical Path has entered into service agreements with some customers that
require certain minimum performance standards, including standards regarding the
availability and response time of email services. If Critical Path fails to meet
these standards, its customers could terminate their relationships with Critical
Path and it could be subject to contractual monetary penalties. Any unplanned
interruption of services may adversely affect the combined company's ability to
attract and retain customers.
CRITICAL PATH DEPENDS ON STRATEGIC RELATIONSHIPS AND OTHER SALES CHANNELS AND
THE LOSS OF ANY OF THESE STRATEGIC RELATIONSHIPS COULD HARM ITS BUSINESS AND
HAVE AN ADVERSE IMPACT ON REVENUES.
Critical Path largely depends on strategic relationships to expand
distribution channels and to undertake joint product development and marketing
efforts. Critical Path's ability to increase revenues depends upon marketing
services through new and existing strategic relationships. Critical Path has
entered into written agreements with ICQ, a subsidiary of America Online, Inc.,
E*TRADE Group, Inc., Network Solutions, Inc., Sprint Communications Company L.P.
and US West Communication Services, Inc., among others. Critical Path depends on
a broad acceptance of outsourced email services on the part of potential
partners and acceptance of Critical Path as the supplier for these outsourced
email services. Critical Path also depends on joint marketing and product
development through strategic relationships to achieve market acceptance and
brand recognition. Critical Path's agreements with strategic partners typically
do not restrict them from introducing competing services. These agreements
typically have terms of one to three years, and automatically renew for
additional one-year periods unless either party gives prior notice of its intent
to terminate the agreement. In addition, these agreements are terminable by
Critical Path's partners without cause and some agreements are terminable by
Critical Path 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 Critical Path's 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 Critical Path loses any
strategic relationships, fails to renew these agreements or relationships or
fails to develop new strategic relationships, business will suffer. The loss of
any key strategic relationships would have an adverse impact on current and
future revenue. For example, for the nine months ended September 30, 1999,
E*TRADE accounted for approximately 23% of Critical Path's net revenues,
excluding the value of stock purchase rights received by customers. In addition
to strategic relationships, Critical Path also depends on the ability of
customers to sell and market Critical Path services to their end-users.
CRITICAL PATH HAS EXPERIENCED RAPID GROWTH WHICH HAS PLACED A STRAIN ON
RESOURCES AND CRITICAL PATH'S FAILURE TO MANAGE GROWTH COULD CAUSE THE COMBINED
COMPANY'S BUSINESS TO SUFFER.
Critical Path has expanded operations rapidly and intends to continue this
expansion. The number of Critical Path's employees increased from 17 on December
31, 1997 to 93 on December 31, 1998. As of September 30, 1999, Critical Path had
369 employees and ISOCOR had 246 employees. This expansion has placed, and is
expected to continue to place, a significant strain on managerial, operational
and financial resources. To manage any further growth, Critical Path will need
to improve or replace its existing operational, customer service and financial
systems, procedures and controls. Any failure to properly manage these system
and procedural transitions could impair Critical Path's ability to attract and
service customers and could cause it to incur higher operating costs and delays
in the execution of its business plan. Critical Path will also need to continue
the expansion of its operations and employee base. Critical Path's management
may not be able to hire, train, retain, motivate and manage required personnel.
In addition, Critical Path's management may not be able to successfully
identify, manage and exploit existing and potential market opportunities. If
Critical Path cannot manage growth effectively, the combined company's business
and operating results could suffer.
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THE FAILURE OF THE COMBINED COMPANY TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE
OF THE INTERNET MESSAGING INDUSTRY COULD MATERIALLY ADVERSELY AFFECT ITS
BUSINESS.
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 the combined
company's existing services, proprietary technology and systems obsolete. The
combined company must continually improve the performance, features and
reliability of its services, particularly in response to competitive offerings.
The combined company's success depends, in part, on its ability to enhance its
existing email and messaging services and to develop new services, functionality
and technology that address the increasingly sophisticated and varied needs of
prospective customers. If the combined company doesn't properly identify the
feature preferences of prospective customers, or if the combined company fails
to deliver email features which meet the standards of these customers, the
combined company's ability to market its service successfully and to increase
revenues could be impaired. The development of proprietary technology and
necessary service enhancements entail significant technical and business risks
and require substantial expenditures and lead-time. The combined company may not
be able to keep pace with the latest technological developments and also may not
be able to use new technologies effectively or adapt services to customer
requirements or emerging industry standards.
IF THE COMBINED COMPANY'S SYSTEM SECURITY IS BREACHED, ITS 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 the combined company's security or that of its customers. If
these attempts are successful, customers' confidential information, including
customers' profiles, passwords, financial account information, credit card
numbers or other personal information, could be breached. The combined company
may be liable to its customers for any breach in security and such breach could
harm its reputation. Critical Path relies on encryption technology licensed from
third parties. Although Critical Path has implemented network security measures,
its servers are vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions, which could lead to interruptions, delays or loss of
data. The combined company may be required to expend significant capital and
other resources to license encryption technology and additional technologies to
protect against security breaches or to alleviate problems caused by any breach.
Failure to prevent security breaches may have a material adverse effect on
business and operating results.
CRITICAL PATH DEPENDS 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. Critical
Path cannot estimate the size or growth rate of the potential market for its
service offerings, and Critical Path does not know whether its services will
achieve broad market acceptance. To date, substantially all of Critical Path's
revenues have been derived from sales of email service offerings and Critical
Path currently expects that email service offerings will account for
substantially all of its revenues for the foreseeable future. Critical Path
largely depends 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 Critical Path currently anticipates, its business
would suffer dramatically.
THE EMAIL SERVICES MARKET IS VERY COMPETITIVE AND THE COMBINED COMPANY MAY NOT
COMPETE SUCCESSFULLY IN THIS MARKET.
The market for Internet-based email services is intensely competitive. In
addition to competing with companies that develop and maintain in-house
solutions, Critical Path competes 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. Critical Path believes 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
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Wide Web sites intended to be major starting sites for users when they connect
to the Internet, commonly referred to as web portals, and corporations, may
leverage Critical Path's existing relationships and capabilities to offer email
services.
Critical Path believes competition will increase as current competitors
increase the sophistication of their offerings and as new participants enter the
market. Many current and potential competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than Critical Path 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 Critical Path's competitive
position. Any such delay would allow 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
Critical Path's target markets. Increased competition could result in pricing
pressures, reduced operating margins and loss of market share, any of which
could cause Critical Path's business to suffer.
A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF CRITICAL PATH
REVENUES, AND THE LOSS OF A MAJOR CUSTOMER OR FAILURE TO ATTRACT NEW CUSTOMERS
COULD HARM ITS BUSINESS.
For the nine months ended September 30, 1999, E*TRADE accounted for
approximately 23% of Critical Path's net revenues excluding the value of stock
purchase rights received by customers. Critical Path expects that sales to a
limited number of customers will continue to account for a high percentage of
revenue for the foreseeable future. Critical Path's future success depends on
its ability to retain current customers and attract new customers in target
markets. The loss of a major customer or Critical Path's inability to attract
new customers could have a material adverse effect on its business. Agreements
with Critical Path's 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 CRITICAL PATH DOES NOT SUCCESSFULLY ADDRESS SERVICE DESIGN RISKS, THE
REPUTATION OF THE COMBINED COMPANY COULD BE DAMAGED AND ITS BUSINESS AND
OPERATING RESULTS COULD SUFFER.
Critical Path must accurately forecast the features and functionality
required by target customers. In addition, Critical Path must design and
implement service enhancements that meet customer requirements in a timely and
efficient manner. Critical Path may not successfully foresee customer
requirements and may be unable to satisfy customer demands. Furthermore, it 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 Critical Path
launches is not favorably received by customers and end-users, Critical Path's
reputation could be damaged. If Critical Path fails to accurately foresee
customer feature requirements or service enhancements or to market services
containing such features or enhancements in a timely and efficient manner, its
business and operating results could suffer materially.
THE COMBINED COMPANY WILL NEED TO UPGRADE ITS SYSTEMS AND INFRASTRUCTURE TO
ACCOMMODATE INCREASES IN EMAIL TRAFFIC.
The combined company will need to continue to expand and adapt its network
infrastructure as the number of users and the amount of information that the
combined company wishes to transmit increases and as their requirements change.
The expansion and adaptation of the combined company's network infrastructure
will require substantial financial, operational and management resources. Due to
the limited deployment of services to date, the ability of its network to
connect and manage a substantially larger number of customers at high
transmission speeds is unknown and the combined company faces 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, the combined
company will need to make additional investments in its infrastructure, which
may be expensive. In addition, the combined company
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may not be able to accurately project the rate or timing of email traffic
increases or upgrade its systems and infrastructure to accommodate future
traffic levels. In addition, the combined company may not be able to achieve or
maintain a sufficiently high capacity of data transmission to accommodate
customer usage increases. Customer demand for the combined company's services
could be greatly reduced if the combined company fails to maintain high capacity
data transmission. In addition, as the combined company upgrades its network
infrastructure to increase capacity available to customers, it is likely to
encounter equipment or software incompatibility which may cause delays in
implementations. The combined company may not be able to expand or adapt its
network infrastructure to meet additional demand or customers' changing
requirements in a timely manner or at all.
THE COMBINED COMPANY WILL BE DEPENDENT ON REVENUES FROM INTERNATIONAL OPERATIONS
AND ITS RESULTS OF OPERATIONS COULD SUFFER IF THE COMBINED COMPANY DOES NOT
SUCCESSFULLY ADDRESS THE RISKS INHERENT IN THE EXPANSION OF ITS INTERNATIONAL
OPERATIONS.
At present, Critical Path has sales and operations subsidiaries in Germany
and the United Kingdom. In addition, ISOCOR currently has significant operations
internationally, including in Ireland, Germany, Switzerland, Italy, Denmark,
France and the United Kingdom. Approximately 58% of the revenues from ISOCOR
were from international operations in the three months ended September 30, 1999.
Critical Path intends to continue to expand into international markets and to
spend significant financial and managerial resources to do so. Critical Path has
limited experience in international operations and may not be able to compete
effectively in international markets. The combined company will face risks
inherent in conducting business internationally, such as:
- Difficulties and costs of staffing and managing international operations;
- Fluctuations in currency exchange rates;
- Imposition of currency exchange controls;
- Differing technology standards;
- Difficulties in collecting accounts receivable and longer collection
periods;
- Unexpected changes in regulatory requirements;
- Political and economic instability;
- Potentially adverse tax consequences; and
- Potentially reduced protection for intellectual property rights.
Any of these factors could adversely affect the combined company's
international operations and, consequently, business and operating results.
Specifically, failure to successfully manage international growth could result
in higher operating costs than anticipated or could delay or preclude altogether
the combined company's ability to generate revenues in key international
markets.
BECAUSE CRITICAL PATH PROVIDES EMAIL MESSAGING SERVICES OVER THE INTERNET, ITS
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, Critical Path has not experienced a significant adverse
effect from these interruptions. However, because Critical Path provides email
messaging services over the Internet, interruptions or delays in Internet
transmissions will adversely affect customers' ability to send or receive their
email messages. Critical Path relies on the speed and reliability of the
networks operated by third parties. Therefore, Critical Path's market depends on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion.
Critical Path depends on telecommunications network suppliers such as MCI
WorldCom and Sprint to transmit email messages across their networks. In
addition, to deliver its services, Critical Path relies on
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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, Critical Path's ability to
transmit email traffic would be reduced. If Critical Path were to increase its
current prices to accommodate any increase in the cost of providing access, it
could negatively impact sales. If Critical Path did not increase prices in
response to rising access costs, margins would be negatively affected.
Furthermore, if additional capacity is not added as traffic increases, Critical
Path's ability to distribute content rapidly and reliably through these networks
will be adversely affected.
IF THE COMBINED COMPANY ENCOUNTERS SYSTEM FAILURES, IT MAY NOT BE ABLE TO
PROVIDE ADEQUATE SERVICE AND OUR BUSINESS AND REPUTATION COULD BE DAMAGED.
Critical Path's ability to successfully receive and send email messages and
provide acceptable levels of customer service largely depends on the efficient
and uninterrupted operation of computer and communications hardware and network
systems. Substantially all of its computer and communications systems are
located in Palo Alto and San Francisco, California, Sterling, Virginia, London,
England, and Munich, Germany. Critical Path's 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 Critical Path to contractual monetary penalties if
it fails to meet minimum performance standards and could have a material adverse
effect on business and operating results of the combined company and could
damage its reputation.
THE COMBINED COMPANY WILL NEED TO RECRUIT AND RETAIN ITS KEY EMPLOYEES TO EXPAND
ITS BUSINESS.
The combined company's success depends on the skills, experience and
performance of senior management and other key personnel, many of whom have
worked together for only a short period of time. For example, Critical Path's
Chief Executive Officer, Chief Financial Officer, Vice President of Sales and
Vice President and Chief Information Officer have joined Critical Path within
the past eighteen months. Pursuant to an offer letter issued in connection with
the merger, it is anticipated that Paul Gigg, the current President and Chief
Executive Officer of ISOCOR, will join Critical Path as its Executive Vice
President and Chief Operating Officer. The loss of the services of any senior
management or other key personnel, including the founder, David Hayden, and the
President and Chief Executive Officer, Douglas Hickey, could materially and
adversely affect business results. Critical Path does not have long-term
employment agreements with any senior management and other key personnel.
Critical Path's success also depends on its ability to recruit, retain and
motivate other highly skilled sales and marketing, technical and managerial
personnel. Competition for these people is intense and Critical Path may not be
able to successfully recruit, train or retain qualified personnel. In
particular, Critical Path may not be able to hire a sufficient number of
qualified software developers.
UNKNOWN SOFTWARE DEFECTS COULD DISRUPT THE COMBINED COMPANY'S SERVICES AND HARM
ITS BUSINESS AND REPUTATION.
The combined company's service offerings will 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. The combined company may not discover software defects that affect
new or current services or enhancements until after they are deployed. Although
the combined company has not experienced any material software defects to date,
it is possible that, despite testing, defects may occur in the software. These
defects could cause service interruptions, which could damage the combined
company's reputation or increase service costs, cause them to lose revenue,
delay market acceptance or divert development resources, any of which could
cause business to suffer.
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THE SUCCESS OF THE COMBINED COMPANY WILL DEPEND SIGNIFICANTLY ON THE PROTECTION
OF ITS INTELLECTUAL PROPERTY.
Critical Path and ISOCOR each regard its copyrights, service marks,
trademarks, trade secrets and similar intellectual property as critical to its
success. Despite these precautions, unauthorized third parties may copy certain
portions of Critical Path's or ISOCOR's services or reverse engineer or obtain
and use information that they 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. Critical Path has one patent pending
in the United States and may seek additional patents in the future. Critical
Path does not know if the patent application or any future patent application
will be issued with the scope of the claims sought, if at all, or whether any
patents received will be challenged or invalidated. In addition, the laws of
some foreign countries do not protect proprietary rights to the same extent as
do the laws of the United States. Critical Path's and ISOCOR's means of
protecting 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 copyrights, trademarks and
similar proprietary rights belonging to the combined company. In addition, other
parties have asserted and may assert infringement claims against Critical Path.
For example, Critical Path recently received a letter alleging that its name
infringed the trade name of another company. Although Critical Path and ISOCOR
have not received notice of any alleged patent infringement, they cannot be
certain that their products do not infringe issued patents that may relate to
their 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 the combined company's software products. The
combined company may be subject to legal proceedings and claims from time to
time in the ordinary course of business, including claims of alleged
infringement of 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 operating the combined company's
business.
THE COMBINED COMPANY MAY NEED TO LICENSE THIRD PARTY TECHNOLOGIES AND IT FACES
RISKS IN DOING SO.
The combined company intends to continue to license certain technology from
third parties, including web server and encryption technology. The market is
evolving and the combined company may need to license additional technologies to
remain competitive. The combined company may not be able to license these
technologies on commercially reasonable terms or at all. In addition, the
combined company may fail to successfully integrate any licensed technology into
its services. These third-party licenses may expose the combined company to
increased risks, including risks related to the integration of new technology,
the diversion of resources from the development of proprietary technology and an
inability to generate revenues from new technology sufficient to offset
associated acquisition and maintenance costs. An inability to obtain any of
these licenses could delay product and service development until equivalent
technology can be identified, licensed and integrated. Any such delays in
services could cause the combined company's business and operating results to
suffer.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES COULD IMPAIR THE GROWTH OF THE
INTERNET AND DECREASE DEMAND FOR THE COMBINED COMPANY'S SERVICES OR INCREASE ITS
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 the combined company's
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services and increase its cost of doing business, or otherwise harm 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 THE COMBINED COMPANY DOES NOT ADEQUATELY ADDRESS "YEAR 2000" ISSUES, IT MAY
INCUR SIGNIFICANT COSTS AND ITS 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 to resolve the "Year 2000 issue." Critical Path and
ISOCOR are in the process of testing internally developed software. Many of
their respective customers maintain their Internet operations on commercially
available operating systems, which may be impacted by Year 2000 complications.
In addition, Critical Path and ISOCOR rely on third-party vendors for certain
software and hardware included within their respective services, which may not
be Year 2000 compliant. Failure of internal computer systems or third-party
equipment or software, or of systems maintained by Critical Path's and ISOCOR's
suppliers, to operate properly with regard to the Year 2000 and thereafter could
require the combined company to incur significant unanticipated expenses to
remedy any problems and could cause system interruptions and loss of data. Any
of these events could harm the combined company's reputation, business and
operating results. Neither Critical Path nor ISOCOR have yet developed a
comprehensive contingency plan to address the issues that could result from Year
2000 complications. See Critical Path's and ISOCOR's "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Year 2000
issues."
THE COMBINED COMPANY MAY HAVE LIABILITY FOR INTERNET CONTENT AND IT MAY NOT HAVE
ADEQUATE LIABILITY INSURANCE.
As a provider of email services, the combined company faces 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. The combined company does not and cannot screen all of
the content generated by its users and the combined company 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 Critical Path carries general liability and umbrella liability
insurance, its insurance may not cover claims of these types or may not be
adequate to indemnify the combined company for all liability that may be
imposed. There is a risk that a single claim or multiple claims, if successfully
asserted against the combined company, could exceed the total of its coverage
limits. There is also a risk that a single claim or multiple claims asserted
against the combined company may not qualify for coverage under its insurance
policies as a result of coverage exclusions that are contained within these
policies. Any imposition of liability, particularly liability that is not
covered by insurance or is in excess of insurance coverage, could have a
material and adverse effect on the combined company's reputation and business
and operating results or could result in the imposition of criminal penalties.
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INVESTMENT RISKS
CRITICAL PATH'S STOCK PRICE HAS BEEN VOLATILE AND IT EXPECTS THAT THIS
VOLATILITY WILL CONTINUE.
Critical Path's stock price has been highly volatile since its initial
public offering on March 29, 1999. Critical Path expects that this volatility
will continue in the future due to factors such as:
- Actual or anticipated fluctuations in results of operations;
- Changes in or failure to meet securities analysts' expectations;
- Announcements of technological innovations;
- Introduction of new services by Critical Path or its competitors;
- Developments with respect to intellectual property rights;
- Conditions and trends in the Internet and other technology industries;
and
- General market conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have affected the market prices for the
common stock of technology companies, particularly Internet companies. These
broad market fluctuations may result in a material decline in the market price
of Critical Path 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. Critical Path 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 business and operating results.
CRITICAL PATH MAY NEED ADDITIONAL CAPITAL OR ACQUIRE OTHER COMPANIES, AND
RAISING ADDITIONAL CAPITAL OR ACQUIRING OTHER COMPANIES MAY DILUTE EXISTING
SHAREHOLDERS.
Critical Path believes that existing capital resources will enable it to
maintain current and planned operations for at least the next 12 months.
However, Critical Path may be required to raise additional funds due to
unforeseen circumstances. If capital requirements vary materially from those
currently planned, Critical Path may require additional financing sooner than
anticipated. Such financing may not be available in sufficient amounts or on
terms acceptable to Critical Path and may be dilutive to existing shareholders.
Also, Critical Path expects to pay for some acquisitions by issuing additional
shares of common stock and this would dilute existing shareholders.
FUTURE SALES OF CRITICAL PATH COMMON STOCK MAY DEPRESS THE STOCK'S PRICE.
After this merger, Critical Path will have approximately 49 million shares
of common stock outstanding. Many of these shares will become available for sale
at various times thereafter upon the expiration of holding periods. Sales of a
substantial number of shares of common stock in the public market after this
merger or after the expiration of the holding periods could cause the market
price of Critical Path common stock to decline.
CRITICAL PATH'S DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS WILL BE
ABLE TO EXERT SIGNIFICANT INFLUENCE OVER THE COMBINED COMPANY.
After this merger, Critical Path directors, executive officers and
shareholders who currently own over 5% of its common stock will beneficially own
approximately [ ]% of the combined company's 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 significant corporate transactions. This
concentration of ownership may also delay or prevent a change in control of the
combined company.
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CRITICAL PATH'S ARTICLES OF INCORPORATION AND BYLAWS CONTAIN PROVISIONS WHICH
COULD DELAY OR PREVENT A CHANGE IN CONTROL.
Critical Path's 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 its 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;
- 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; and
- Require the approval of 66 2/3% of the outstanding shares entitled to
vote in order to adopt new bylaws or amend existing bylaws.
See "Description of Critical Path capital stock" for additional discussion
of these provisions.
TRADEMARKS
This document contains trademarks of ISOCOR and Critical Path and may
contain trademarks of others.
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THE SPECIAL MEETING
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The special meeting of shareholders of ISOCOR will be held on Wednesday,
January 19, 2000, at 10:00 a.m., local time, at The Fairmont Miramar Hotel, 101
Wilshire Boulevard, Santa Monica, California 90401.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the special meeting, shareholders of ISOCOR will be asked to consider
and vote upon a proposal to approve the reorganization agreement, the related
agreement of merger, and the transactions contemplated thereby, including the
merger.
RECORD DATE FOR VOTING ON THE MERGER; SHAREHOLDERS ENTITLED TO VOTE
Only shareholders of record of ISOCOR common stock at the close of business
on December 8, 1999 are entitled to notice of and to vote at the special
meeting. As of the close of business on that record date, there were
shares of ISOCOR common stock outstanding and entitled to vote,
held of record by shareholders. Each ISOCOR shareholder is
entitled to one vote for each share of ISOCOR common stock held as of the record
date.
VOTING AND REVOCATION OF PROXIES
The ISOCOR proxy accompanying this document is solicited on behalf of
ISOCOR's board of directors. Shareholders are requested to complete, date and
sign the accompanying proxy and promptly return it in the accompanying envelope
or otherwise mail it to ISOCOR. All properly executed proxies received by ISOCOR
prior to the special meeting that are not revoked will be voted at the special
meeting in accordance with the instructions indicated on the proxies. If no
direction is indicated on a properly executed proxy, it will be voted to approve
the reorganization agreement. An ISOCOR shareholder who has given a proxy may
revoke it at any time before it is exercised at the special meeting by:
- delivering to the Secretary of ISOCOR a written notice, bearing a date
later than the date of the proxy, stating that the proxy is revoked;
- signing and delivering a proxy relating to the same shares and bearing a
later date than the date of the previous proxy prior to the vote at the
special meeting; or
- attending the special meeting, filing a written notice of rejection of
the previous proxy with the Secretary of ISOCOR and voting in person.
SOLICITATION OF PROXIES
ISOCOR will bear the cost of soliciting proxies for the upcoming special
meeting. ISOCOR will ask banks, brokerage houses, fiduciaries and custodians
holding stock in their names for others to send proxy materials to and obtain
proxies from the beneficial owners of such stock, and ISOCOR will reimburse them
for their reasonable expenses in doing so. In addition to soliciting proxies by
mail, ISOCOR and its directors, officers and regular employees may also solicit
proxies personally, by telephone or other appropriate means. No additional
compensation will be paid to directors, officers or other regular employees for
such services. ISOCOR has also retained D.F. King & Co., Inc., a professional
proxy solicitation firm, to assist in the solicitation of proxies at an
estimated cost of $6,000, plus certain out-of-pocket expenses.
ISOCOR SHAREHOLDER VOTE IS REQUIRED TO APPROVE THE MERGER
A majority of the outstanding shares of ISOCOR common stock entitled to
vote at the special meeting must be represented, either in person or by proxy,
to constitute a quorum at the special meeting.
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The affirmative vote of the holders of a majority of the shares of ISOCOR common
stock outstanding and entitled to vote at the special meeting is required to
adopt the reorganization agreement, the related agreement of merger and the
transactions contemplated thereby, including the merger. Abstentions and broker
non-votes are not affirmative votes and, therefore, will have the same effect as
votes against approval of the reorganization agreement.
ISOCOR shareholders holding approximately 932,823 shares of the ISOCOR
common stock agreed to vote their shares of ISOCOR common stock in favor of
approval of the reorganization agreement and agreement of merger. Such shares
comprise 8.8% of the outstanding shares of ISOCOR common stock entitled to vote
for the merger. All of the shares of ISOCOR common stock held by directors and
executive officers of ISOCOR and their affiliates are subject to voting
agreements.
Critical Path shareholders are not required to approve the reorganization
agreement and will not vote on the merger.
BOARD RECOMMENDATION
ISOCOR'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT, THE RELATED AGREEMENT OF MERGER AND THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING THE MERGER. THE BOARD HAS DETERMINED THAT THE MERGER, ON THE
TERMS SET FORTH IN THE REORGANIZATION AGREEMENT, IS FAIR TO, AND IN THE BEST
INTERESTS OF, ISOCOR AND ITS SHAREHOLDERS. THE BOARD RECOMMENDS THAT THE
SHAREHOLDERS APPROVE THE REORGANIZATION AGREEMENT, THE RELATED AGREEMENT OF
MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER.
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THE MERGER
BACKGROUND OF THE MERGER
The industry in which Critical Path and ISOCOR operate is experiencing a
period of consolidation. Recently Critical Path has considered strategic
acquisitions, and, from time to time as opportunities arose in the past, Paul
Gigg, President and Chief Executive Officer of ISOCOR, explored potential
combinations of ISOCOR with other companies and discussed these preliminary
explorations with the ISOCOR board of directors. During late 1998 and 1999,
ISOCOR held discussions with respect to several potential business combinations
in addition to ISOCOR's discussions with Critical Path.
ISOCOR's and Critical Path's initial contacts occurred through a series of
product sales meetings between ISOCOR's sales representatives and Critical
Path's technical personnel commencing in June 1998.
On August 25, 1999, Paul Gigg telephoned David Hayden, Chairman of the
board of directors of Critical Path, and discussed the possibility of a
combination of the two companies and a process for further discussions.
On August 26, 1999, Mr. Gigg met Douglas Hickey, the President and Chief
Executive Officer of Critical Path, at Critical Path's offices for preliminary
discussions concerning some critical business terms of a combination of the two
companies. Separately, ISOCOR technical personnel met with Critical Path
technical personnel at Critical Path's offices to discuss technical issues
involved with licensing ISOCOR products.
On August 27, 1999, David Thatcher, Executive Vice President and Chief
Financial Officer of Critical Path, sent Paul Gigg a draft letter of intent
proposing a purchase price of $13 to $16 per share of ISOCOR common stock and
other terms of such a combination. At an ISOCOR board of directors meeting on
September 7, 1999, Mr. Gigg summarized the opportunity and answered questions
from the board members. After a discussion of the preliminary terms and issues,
the board of directors authorized management to continue discussions with
Critical Path.
On September 8, 1999, Paul Gigg and Douglas Hickey met at Critical Path's
offices to continue their discussion of the terms of the proposed merger.
On September 10, 1999, Paul Gigg and Janine Bushman, Chief Financial
Officer of ISOCOR, met at the ISOCOR offices with representatives of Robertson
Stephens for preliminary discussions concerning the possibility of Robertson
Stephens acting as ISOCOR's financial advisor.
On September 16, 1999, Paul Gigg and Janine Bushman met at the ISOCOR
offices with representatives of Robertson Stephens and engaged Robertson
Stephens to provide ISOCOR with strategic investment banking services.
On September 21, 1999, Paul Gigg and Douglas Hickey met at the ISOCOR
offices and continued discussions.
At an ISOCOR board of directors meeting on September 22, 1999, Mr. Gigg
reviewed the status of recent discussions with Critical Path and the retention
of Robertson Stephens as financial advisor. Mr. Gigg answered questions from the
members of the board and a discussion ensued. The board of directors authorized
Mr. Gigg to continue discussions with Critical Path and to consider approaching
other parties that might also be potential acquirors of ISOCOR.
During late September 1999, Robertson Stephens provided information to
ISOCOR regarding several other companies in the industry where ISOCOR's business
might provide a strategic fit. After consideration by ISOCOR, Robertson Stephens
made preliminary inquiries with two companies. After consideration of the
responses to these preliminary inquiries, ISOCOR and its financial advisors
decided not to pursue these efforts further.
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On September 28, 1999, Paul Gigg, Douglas Hickey and David Thatcher met to
continue negotiations.
On September 29, 1999, Critical Path engaged Goldman, Sachs & Co. to
provide Critical Path with investment banking services with respect to its
potential acquisition of ISOCOR.
On October 4, 1999, Critical Path and ISOCOR entered into a confidentiality
agreement with respect to the exchange of information between the two companies.
The confidentiality agreement also contained an agreement that until the earlier
of October 27, 1999, and the date the parties agreed to terminate their
negotiations, ISOCOR would not engage in discussions with any other party with
respect to an acquisition of ISOCOR. ISOCOR stopped all activities related to an
acquisition of ISOCOR.
Attorneys for Critical Path prepared and provided to ISOCOR and its
advisors a draft reorganization agreement on October 5, 1999.
On October 6, 1999, a meeting was held in Santa Monica at which due
diligence presentations were made by both ISOCOR and Critical Path. Attendees at
the meeting included representatives of Critical Path, ISOCOR, Robertson
Stephens and Goldman Sachs. This meeting was continued on October 8, 1999 in San
Francisco.
From October 6, 1999 through October 20, 1999, the companies continued to
conduct additional technical, legal and financial due diligence. The companies
also discussed senior management roles and integration. Throughout this period,
representatives of ISOCOR, Critical Path and their financial and legal advisors
exchanged and discussed business, personnel, legal and financial information
relating to ISOCOR and Critical Path. During this period, Messrs. Hickey and
Gigg continued discussions on the terms of a potential combination including
price, structure and timing.
On October 12, 1999, representatives of ISOCOR and Critical Path and their
respective financial and legal advisors met at the offices of Goldman Sachs in
San Francisco to discuss additional due diligence matters and the drafting of a
definitive reorganization agreement.
At an ISOCOR board of directors meeting on October 13, 1999, Mr. Gigg
reviewed the status of recent discussions and negotiations with Critical Path,
answered questions and participated in a discussion with the other members of
the board of directors concerning aspects of the proposed transaction.
During September and early October 1999, Critical Path's management kept
its board apprised of its discussions and negotiations with ISOCOR, and at a
Critical Path board meeting on October 14, 1999, Mr. Hickey reviewed the status
of those discussions and negotiations, answered questions and participated in a
discussion with other board members concerning aspects of the proposed
transaction.
At an ISOCOR board of directors meeting on October 19, 1999, ISOCOR's legal
advisors reviewed the principal terms of the reorganization agreement and
related agreements and the status of negotiations. Representatives of Robertson
Stephens then summarized for the board the material financial analyses that it
performed related to the proposed transactions.
At a Critical Path board of directors meeting on October 20, 1999, Critical
Path's legal advisors further discussed the principal terms of the
reorganization agreement and related agreements. Representatives of Goldman
Sachs were present at the meeting and answered questions from the board of
directors. Following discussion, the Critical Path board unanimously approved
the reorganization agreement and the agreement of merger and the transactions
contemplated thereby.
At an ISOCOR board of directors meeting on October 20, 1999, ISOCOR's legal
advisors further discussed the principal terms of the reorganization agreement
and related agreements. Representatives of Robertson Stephens reviewed financial
analyses relating to the proposed merger. In addition, at the meeting Robertson
Stephens provided its opinion that the exchange ratio pursuant to the merger
agreement was, as of that date, fair from a financial point of view to holders
of ISOCOR common stock. Following discussion, the ISOCOR board of directors
unanimously determined that the proposed merger was advisable and unanimously
approved the reorganization agreement and the agreement of merger, and
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resolved to recommend that ISOCOR shareholders approve the reorganization
agreement and the agreement of merger.
Both parties signed the reorganization agreement as of October 20, 1999. On
the morning of October 21, 1999, prior to the commencement of trading, ISOCOR
and Critical Path announced the execution of the reorganization agreement.
REASONS FOR THE MERGER
Critical Path's reasons for the merger. Critical Path's board of directors
has determined that the terms of the merger and the reorganization agreement are
fair to, and in the best interests of, Critical Path and its shareholders.
Accordingly, Critical Path's board of directors has approved the reorganization
agreement, the agreement of merger and the consummation of the merger. In
reaching its decision, Critical Path's board of directors identified several
potential business benefits to the merger, including the ability:
- to create an end-to-end messaging solution company for the enterprise,
ISP and portal markets offering customers the ultimate in flexibility,
functionality and choice;
- to expand Critical Path's penetration of high value, corporate, and large
ISP customers;
- to accelerate Critical Path's global presence through ISOCOR's strong
international customer base, 8 locations and over 75 associates and
partners worldwide; and
- to capitalize on ISOCOR's substantial global presence with a strong
customer base in Europe.
Critical Path's board of directors also identified and considered a variety
of potential negative factors in its deliberations concerning the merger,
including, but not limited to:
- the risk to Critical Path's shareholders that the value to be received by
ISOCOR shareholders in the merger could increase significantly due to the
fixed exchange ratio;
- the risk that the potential benefits sought in the merger might not be
fully realized;
- the ability of ISOCOR to negotiate with other companies regarding an
alternative transaction; and
- the possibility that the merger might not be consummated.
Among other factors considered by Critical Path's board in its deliberations
were the following:
- historical information concerning Critical Path's and ISOCOR's respective
financial performance, results of operations, assets, liabilities,
operations, technology, management and competitive position, including
public reports for each company filed with the Securities and Exchange
Commission;
- Critical Path's management's view of the financial condition, results of
operations, businesses and prospects of the combined company after giving
effect to the merger;
- current market conditions and historical trading information with respect
to Critical Path and ISOCOR common stock;
- comparable merger transactions in the Internet messaging market;
- the terms and conditions of the reorganization agreement, the stock
option agreement and the voting agreements and the percentage of ISOCOR
shares represented by the shareholders who signed the voting agreements;
and
- the expectation that the merger will be accounted for as a purchase.
After due consideration, Critical Path's board of directors believed that
the overall risks associated with the proposed merger were outweighed by the
potential benefits of the merger. Critical Path's board of directors does not
intend the foregoing discussion of information and factors to be exhaustive but
believes
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the discussion to include the material factors that it considered. In view of
the complexity and wide variety of information and factors, both positive and
negative, that it considered, Critical Path's board of directors did not find it
practical to quantify or otherwise assign relative or specific weights to the
factors considered. However, after taking into consideration all of the factors
set forth above, Critical Path's board of directors concluded that the
reorganization agreement and merger were fair to, and in the best interests of,
Critical Path and its shareholders and that Critical Path should proceed with
the merger.
ISOCOR's reasons for the merger. ISOCOR's board of directors has determined
that the terms of the merger and the reorganization agreement are fair to, and
in the best interests of, ISOCOR and its shareholders. Accordingly, ISOCOR's
board of directors has approved the reorganization agreement, the agreement of
merger and the consummation of the merger, and recommends that you vote for
approval of the reorganization agreement, the agreement of merger and the
merger.
In reaching its decision, ISOCOR's board of directors identified several
potential benefits of the merger, the most important of which included:
- ISOCOR shareholders will have the opportunity to participate in the
potential for growth of the combined company after the merger;
- the combined company will be able to provide a full range of messaging
solutions, including in-house, outsourced and combination messaging
solutions;
- the exchange ratio in the merger represented a premium of approximately
140% over the average closing price for ISOCOR common stock over the
30-day trading period ending on October 20, 1999, the date of the signing
of the reorganization agreement; and
- by combining with Critical Path, ISOCOR shareholders will alleviate the
difficulty of increasing ISOCOR's public stock price due to limited
public float and limited daily trading volume, and they will be afforded
substantially increased trading liquidity for their investment.
ISOCOR's board of directors consulted with ISOCOR's senior management, as
well as its legal counsel and financial advisers, in reaching its decision to
approve the merger. Among the factors considered by ISOCOR's board of directors
in its deliberations were the following:
- historical information concerning Critical Path's and ISOCOR's respective
financial performance, results of operations, assets, liabilities,
operations, technology, management and competitive position, including
public reports covering the most recent fiscal year and two fiscal
quarters for each company filed with the Securities and Exchange
Commission;
- the complementary nature of the companies' product offerings across a
range of products and possible synergies from combining Critical Path and
ISOCOR;
- ISOCOR's management's view of the financial condition, results of
operations, assets, liabilities, businesses and prospects of Critical
Path and ISOCOR after giving effect to the merger;
- current market conditions and historical trading information with respect
to Critical Path and ISOCOR common stock;
- comparable merger transactions in the Internet messaging market;
- the terms and conditions of the reorganization agreement, including the
expected tax-free treatment to ISOCOR shareholders;
- the analysis prepared by Robertson Stephens and presented to ISOCOR's
board of directors and the written opinion of Robertson Stephens, that,
as of the date ISOCOR and Critical Path signed the reorganization
agreement, the exchange ratio was fair, from a financial point of view,
to ISOCOR shareholders, as described more fully in the text of the entire
opinion attached to this document as Annex C;
- the expectation that the merger will be accounted for as a purchase;
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- Critical Path's track record, which demonstrated an ability to compete in
the Internet messaging market; and
- the ability of ISOCOR's board of directors to enter into discussions with
another party in response to an unsolicited superior offer to the merger
if ISOCOR's directors believed in good faith, after consultation with its
legal counsel, that such action was required in order to comply with its
fiduciary obligations.
In the course of deliberations, ISOCOR's board of directors also considered
the fairness to ISOCOR of the terms of the reorganization agreement and the
stock option agreement, a copy of which is attached to this document as Annex B,
which were the product of extensive arm's-length negotiations. In particular,
ISOCOR's board of directors considered the stock option granted to Critical
Path, the events triggering payment of the termination fee and the limitations
on the ability of ISOCOR to negotiate with other companies regarding an
alternative transaction, and the potential effect these provisions would have on
ISOCOR receiving alternative proposals that could be superior to the merger.
Because ISOCOR's board of directors conducted an extensive review of its
strategic alternatives prior to entering into the reorganization agreement, and
because these provisions were required by Critical Path for it to enter into the
reorganization agreement, ISOCOR's board of directors determined that the value
for ISOCOR's shareholders represented by the merger justified these
requirements.
ISOCOR's board of directors also identified and considered a variety of
potential negative factors in its deliberations concerning the merger,
including, but not limited to:
- the risk to ISOCOR shareholders that the value to be received in the
merger could decline significantly due to the fixed exchange ratio;
- the loss of control over the future operations of ISOCOR following the
merger;
- the impact of the loss of ISOCOR's status as an independent company on
ISOCOR shareholders, employees, and clients;
- the risk that the potential benefits sought in the merger might not be
fully realized;
- the possibility that the merger might not be consummated and the
potential adverse effects of the public announcement of the merger on:
- ISOCOR's sales and operating results;
- ISOCOR's ability to attract and retain key employees; and
- ISOCOR's overall competitive position.
After due consideration, ISOCOR's board of directors believed that ISOCOR
could avoid or mitigate some of these risks, and that overall, the risks
associated with the proposed merger were outweighed by the potential benefits of
the merger.
ISOCOR's board of directors does not intend the foregoing discussion of
information and factors to be exhaustive but believes the discussion to include
all of the material factors that it considered. In view of the complexity and
wide variety of information and factors, both positive and negative, that it
considered, ISOCOR's board of directors did not find it practical to quantify or
otherwise assign relative or specific weights to the factors considered.
However, after taking into consideration all of the factors set forth above,
ISOCOR's board of directors concluded that the reorganization agreement and
merger were fair to, and in the best interests of, ISOCOR and its shareholders
and that ISOCOR should proceed with the merger.
OPINION OF ROBERTSON STEPHENS, FINANCIAL ADVISOR TO ISOCOR
Pursuant to an engagement letter dated September 16, 1999, ISOCOR engaged
BancBoston Robertson Stephens Inc. to act as financial advisor to identify
potential transactions, evaluate alternative
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transactions, and render an opinion as to the fairness of the exchange ratio,
from a financial point of view, to holders of shares of ISOCOR common stock,
other than Critical Path or any of its affiliates.
On October 20, 1999, at a meeting of the ISOCOR board held to evaluate the
proposed merger, Robertson Stephens delivered to the ISOCOR board its written
opinion that, as of that date and based on the assumptions made, the matters
considered and the limitations on the review undertaken described in the
opinion, the exchange ratio was fair, from a financial point of view, to the
holders of shares of ISOCOR common stock, other than Critical Path or any of its
affiliates. The exchange ratio was determined through negotiations between the
respective managements of ISOCOR and Critical Path. Although Robertson Stephens
did assist the management of ISOCOR in these negotiations, it was not asked to,
and did not, recommend to ISOCOR that any specific exchange ratio constituted
the appropriate exchange ratio for the merger. Robertson Stephens assisted
ISOCOR's management in the negotiations leading to an agreement on the principal
structural terms of the merger.
The full text of the Robertson Stephens opinion, which sets forth
assumptions made, matters considered and limitations on the review undertaken,
is attached as Annex C and is incorporated in this proxy statement/prospectus by
reference. ISOCOR urges ISOCOR shareholders to read the Robertson Stephens
opinion in its entirety. The Robertson Stephens opinion was prepared for the
benefit and use of the ISOCOR board in connection with its evaluation of the
merger and does not constitute a recommendation to shareholders of ISOCOR as to
how they should vote, or take any other action, with respect to the merger.
The Robertson Stephens opinion does not address:
- the relative merits of the merger and the other business strategies that
the ISOCOR board has considered; or
- the underlying business decision of the ISOCOR board to proceed with the
merger.
The summary of the Robertson Stephens opinion set forth in this
prospectus/proxy statement is qualified in its entirety by reference to the full
text of the Robertson Stephens opinion.
In connection with the preparation of the Robertson Stephens opinion,
Robertson Stephens:
- reviewed certain publicly available financial statements and other
business and financial information of ISOCOR and Critical Path;
- reviewed with ISOCOR and Critical Path certain publicly available
estimates of research analysts relating to ISOCOR and Critical Path;
- held discussions with the respective managements of ISOCOR and Critical
Path concerning the businesses, past and current operations, financial
condition and future prospects of both ISOCOR and Critical Path,
independently and combined, including discussions with the managements of
ISOCOR and Critical Path concerning cost savings and other synergies that
are expected to result from the merger, as well as their views regarding
the strategic rationale for the merger;
- reviewed the financial terms and conditions set forth in the
reorganization agreement;
- reviewed the stock price and trading history of ISOCOR common stock and
Critical Path common stock;
- compared the financial performance of ISOCOR and Critical Path and the
prices and trading activity of ISOCOR common stock and Critical Path
common stock with that of certain other publicly traded companies it
deemed comparable with ISOCOR and Critical Path;
- compared the financial terms of the merger with the financial terms, to
the extent publicly available, of other transactions that it deemed
relevant;
- reviewed the pro forma impact of the merger on Critical Path's revenue
and earnings per share;
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- prepared an analysis of the relative contributions of ISOCOR and Critical
Path to the combined company;
- participated in discussions and negotiations among representatives of
ISOCOR and Critical Path and their financial and legal advisors; and
- made such other studies and inquiries, and reviewed such other data, as
it deemed relevant.
In its review and analysis, and in arriving at its opinion, Robertson
Stephens assumed and relied upon the accuracy and completeness of all of the
financial and other information provided to it, including information furnished
to it orally or otherwise discussed with it by the managements of ISOCOR and
Critical Path, or publicly available and neither attempted to verify, nor
assumed responsibility for verifying, any of this information. Robertson
Stephens relied upon the assurances of managements of ISOCOR and Critical Path
that they were not aware of any facts that would make this information
inaccurate or misleading. Furthermore, Robertson Stephens did not obtain or
make, or assume any responsibility for obtaining or making, any independent
evaluation or appraisal of the properties, assets or liabilities, contingent or
otherwise, of ISOCOR or Critical Path, nor was Robertson Stephens furnished with
any such evaluation or appraisal.
With respect to the financial forecasts and projections and the assumptions
and bases therefor for each of ISOCOR and Critical Path that Robertson Stephens
reviewed, upon the advice of the managements of ISOCOR and Critical Path,
Robertson Stephens assumed that these forecasts and projections:
- had been reasonably prepared in good faith on the basis of
reasonable assumptions;
- reflected the best available estimates and judgments as to the
future financial condition and performance of ISOCOR and
Critical Path; and
- will be realized in the amounts and in the time periods
estimated.
In this regard, Robertson Stephens noted that each of ISOCOR and Critical
Path face exposure to the Year 2000 issue. Robertson Stephens did not undertake
any independent analysis to evaluate the reliability or accuracy of the
assumptions made with respect to the potential effect that the Year 2000 issue
might have on their respective forecasts.
In addition, Robertson Stephens assumed that:
- the merger will be consummated upon the terms set forth in the
reorganization agreement without material alteration, including,
among other things, that the merger will be accounted for as a
"purchase method" business combination in accordance with U.S.
generally accepted accounting principles;
- the merger will be treated as a tax-free reorganization pursuant
to the Internal Revenue Code of 1986, as amended; and
- the historical financial statements of each of ISOCOR and
Critical Path reviewed by it had been prepared and fairly
presented in accordance with U.S. generally accepted accounting
principles consistently applied.
Robertson Stephens relied as to all legal matters relevant to rendering its
opinion on the advice of counsel.
Although developments following the date of the Robertson Stephens opinion
may affect the opinion, Robertson Stephens assumed no obligation to update,
revise or reaffirm its opinion. The Robertson Stephens opinion is necessarily
based upon market, economic and other conditions as in effect on, and
information made available to Robertson Stephens as of, the date of the
Robertson Stephens opinion. It should be understood that subsequent developments
may affect the conclusion expressed in the Robertson Stephens opinion and that
Robertson Stephens disclaims any undertaking or obligation to advise any person
of any change in any matter affecting the opinion which may come or be brought
to its attention
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after the date of the opinion. The Robertson Stephens opinion is limited to the
fairness, from a financial point of view and as of its date, of the exchange
ratio to holders of shares of ISOCOR common stock, other than Critical Path or
any of its affiliates. Robertson Stephens does not express any opinion as to:
- the value of any employee agreement or other arrangement entered into in
connection with the merger;
- any tax or other consequences that might result from the merger; or
- what the value of Critical Path common stock will be when issued to
ISOCOR shareholders pursuant to the merger or the price at which the
shares of Critical Path common stock that are issued pursuant to the
merger may be traded in the future.
The following is a summary of the material financial analyses performed by
Robertson Stephens in connection with rendering the Robertson Stephens opinion.
The summary of the financial analyses is not a complete description of all of
the analyses performed by Robertson Stephens. Portions of this section are
presented in a tabular form. TO BETTER UNDERSTAND THE FINANCIAL ANALYSES
PERFORMED BY ROBERTSON STEPHENS, THESE TABLES MUST BE READ TOGETHER WITH THE
TEXT OF EACH SUMMARY. THE ROBERTSON STEPHENS OPINION IS BASED UPON THE TOTALITY
OF THE VARIOUS ANALYSES PERFORMED BY ROBERTSON STEPHENS AND NO PARTICULAR
PORTION OF THE ANALYSES HAS ANY MERIT STANDING ALONE. Robertson Stephens noted
that based on the closing price of Critical Path common stock on October 18,
1999 of $41.63, the exchange ratio in the merger of 0.4707 implied an ISOCOR
equity value of approximately $238 million and an ISOCOR equity value per share
of $19.59.
Exchange ratio analyses. Robertson Stephens compared the average ratio of
the closing price of ISOCOR common stock to the closing price of Critical Path
common stock over various periods ending October 18, 1999. The following table
sets forth the average ratio of the closing prices of ISOCOR common stock
compared to Critical Path common stock for the various periods ending October
18, 1999:
<TABLE>
<CAPTION>
AVERAGE RATIO OF CLOSING PRICE OF
ISOCOR COMMON STOCK
COMPARED TO CRITICAL PATH
PERIOD ENDING OCTOBER 18, 1999 COMMON STOCK
------------------------------ ---------------------------------
<S> <C>
1 trading day............................................... 0.198
10 trading days............................................. 0.230
20 trading days............................................. 0.216
30 trading days............................................. 0.212
60 trading days............................................. 0.199
90 trading days............................................. 0.180
142 trading days (the period since the Critical Path initial
public offering).......................................... 0.152
</TABLE>
Comparable companies analysis. Using publicly available information,
Robertson Stephens analyzed, among other things, the trading multiples of ISOCOR
and selected publicly traded companies in the messaging, web application server
software and middleware/EAI/data management industries, including:
Messaging Companies:
- Exodus Communications
- Software.com, Inc.
- Critical Path
- Mail.com
- MessageMedia, Inc.
- Yesmail.com, Inc.
Web Application Server Software Companies:
- Art Technology Group
- Allaire Corporation
- SilverStream Software
- Bluestone Software, Inc.
- Persistence Software
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<PAGE> 42
Middleware/EAI/Data Management Companies:
- BEA Systems, Inc.
- Clarify, Inc.
- New Era of Networks, Inc.
- TSI International Software Ltd.
- Pervasive Software
- Forte Software, Inc.
- Iona Technologies PLC
- Unify Corporation
Multiples compared by Robertson Stephens included total enterprise value to
estimated revenues for calendar years 1999 and 2000. All multiples were based on
closing stock prices as of October 18, 1999.
Using the ranges of multiples set forth in the table below that Robertson
Stephens derived from multiples for the comparable companies, with a focus
primarily on the middleware/EAI/data management companies, the following ISOCOR
equity values, ISOCOR equity values per share and exchange ratios are implied:
<TABLE>
<CAPTION>
IMPLIED
IMPLIED ISOCOR IMPLIED
ESTIMATED MULTIPLE ISOCOR EQUITY VALUE EXCHANGE
REVENUES RANGE EQUITY VALUE PER SHARE RATIO
--------- --------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
1999................... 4.0 -- 8.0 $156 -- $293 million $13.25 -- $24.88 0.3184 -- 0.5976
2000................... 3.0 -- 6.0 $157 -- $295 million $13.34 -- $25.05 0.3205 -- 0.6019
</TABLE>
Precedent acquisition analysis. Using publicly available information,
Robertson Stephens analyzed the consideration offered, the premiums paid and the
implied transaction value multiples paid or proposed to be paid in selected
acquisition transactions in the Internet and software industries, including:
- Novera/TSI International Software Ltd. (October 11, 1999)
- Forte Software, Inc./Sun Microsystems (August 23, 1999)
- NetGravity Inc./DoubleClick, Inc. (July 13, 1999)
- Alta Vista/CMGI, Inc. (June 29, 1999)
- Market Guide, Inc./Multex.com Inc. (June 22, 1999)
- Abacus Corporation/DoubleClick, Inc. (June 14, 1999)
- Smart Technologies/I2 Technologies, Inc. (May 12, 1999)
- Braid Group Ltd./Time Company (March 18, 1999)
- Zip2/Compaq Computer Corporation (Alta Vista) (February 16, 1999)
- WebLogic, Inc./BEA Systems, Inc. (September 28, 1998)
- CKS Group, Inc./USWeb Corporation (September 2, 1998)
- WhoWhere?/Lycos, Inc. (August 11, 1998)
- NetDynamics/Sun Microsystems, Inc. (July 1, 1998)
- Software Artistry/Tivoli Systems (December 18, 1997)
In analyzing these "precedent transactions", Robertson Stephens compared
the total consideration in such transactions as a multiple of the last twelve
months, or "LTM," revenues and estimated calendar year 2000 revenues. All
multiples for the precedent transactions were based on public information
available at the time of the announcement. Based on this information and other
publicly available information, the following table illustrates the implied
ISOCOR equity valuations, ISOCOR equity valuations per share
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<PAGE> 43
and exchange ratios derived from applying a range of multiples that Robertson
Stephens derived from the precedent transactions:
<TABLE>
<CAPTION>
IMPLIED
IMPLIED ISOCOR IMPLIED
MULTIPLE ISOCOR EQUITY VALUE EXCHANGE
RANGE EQUITY VALUE PER SHARE RATIO
---------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
LTM revenues.......... 6.5 -- 10.0 $195 -- $290 million $16.59 -- $24.64 0.3985 -- 0.5920
2000 estimated
revenues.............. 4.0 -- 7.0 $203 -- $341 million $17.24 -- $28.96 0.4143 -- 0.6957
</TABLE>
Robertson Stephens also considered the premiums paid in the precedent
transactions over the target's closing share price the day before the
transaction was announced and 30 days prior to the announcement. Based on this
information and other publicly available information, the following table
illustrates the implied ISOCOR equity valuation, ISOCOR equity valuations per
share and exchange ratios derived from applying a range of premiums that
Robertson Stephens derived from the precedent transaction:
<TABLE>
<CAPTION>
ISOCOR IMPLIED
CLOSING IMPLIED ISOCOR IMPLIED
TRADING PREMIUM ISOCOR EQUITY VALUE EXCHANGE
PRICE RANGE EQUITY VALUE PER SHARE RATIO
------- ------------ ------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
1 day prior.......... $8.25 25.0% -- 50.0% $121 -- $146 million $10.31 -- $12.38 0.2477 -- 0.2973
30 days prior........ $6.94 50.0% -- 75.0% $122 -- $143 million $10.41 -- $12.14 0.2500 -- 0.2917
</TABLE>
No company, business or transaction compared in the comparable companies
analysis or precedent transaction analysis is identical to ISOCOR or Critical
Path. Accordingly, an analysis of the results of the foregoing is not entirely
mathematical; rather it involves complex considerations and judgments concerning
differences in financial and operating characteristics and other factors that
could affect the acquisition, public trading and other values of the comparable
companies, precedent transactions or the business segment, company or
transactions to which they are being compared.
Relative contribution analysis. Based upon financial analyst estimates for
ISOCOR and Critical Path, Robertson Stephens analyzed the respective
contributions of ISOCOR and Critical Path to the estimated revenues of the
combined company for calendar year 2000. Such analysis indicated that ISOCOR's
contribution to estimated calendar year 2000 revenues was approximately 46.3%,
which implied an ISOCOR equity valuation of $1,503 million and an ISOCOR equity
value per share of $127.75. Robertson Stephens discounted this implied equity
valuation by 5.5 to reflect the revenue growth rate disparity between comparable
messaging companies and ISOCOR. The discounted implied equity value was $289.9
million and the discounted implied equity value per share was $24.63.
Pro forma analysis. Robertson Stephens analyzed certain pro forma effects
resulting from the merger, including, among other things, the impact of the
merger on the projected revenues per share and earnings per share of the
combined company for fiscal year 2000. The following table summarizes the
results of such analysis:
<TABLE>
<S> <C>
Fiscal year 2000 estimated revenue per share accretion...... 69.1%
Fiscal year 2000 estimated earnings per share accretion..... 37.5%
</TABLE>
The actual results achieved by the combined company may vary from projected
results and the variations may be material.
Other factors and comparative analyses. In rendering its opinion, Robertson
Stephens considered certain other factors and conducted certain other
comparative analyses, including, among other things, a review of:
- the history of trading prices and volume for ISOCOR common stock
for the period from October 16, 1998 to October 18, 1999;
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<PAGE> 44
- the history of trading prices and volume for Critical Path
common stock for the period from March 29, 1999 to October 18,
1999; and
- selected published analysts' reports on ISOCOR and Critical
Path.
While the foregoing summary describes certain analyses and factors that
Robertson Stephens deemed material in its presentation to the ISOCOR board, it
is not a comprehensive description of all analyses and factors considered by
Robertson Stephens. The preparation of a fairness opinion is a complex process
that involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Robertson Stephens believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all analyses
and factors, would create an incomplete view of the evaluation process
underlying the Robertson Stephens opinion. Several analytical methodologies were
employed and no one method of analysis should be regarded as critical to the
overall conclusion reached by Robertson Stephens. Each analytical technique has
inherent strengths and weaknesses, and the nature of the available information
may further affect the value of particular techniques. The conclusions reached
by Robertson Stephens are based on all analyses and factors taken as a whole and
also on application of Robertson Stephens' own experience and judgment. These
conclusions may involve significant elements of subjective judgment and
qualitative analysis. Robertson Stephens therefore gives no opinion as to the
value or merit standing alone of any one or more parts of the analysis that it
performed. In performing its analyses, Robertson Stephens considered general
economic, market and financial conditions and other matters, many of which are
beyond the control of ISOCOR and Critical Path. The analyses performed by
Robertson Stephens are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than those suggested
by such analyses. Accordingly, analyses relating to the value of a business do
not purport to be appraisals or to reflect the prices at which the business
actually may be purchased. Furthermore, no opinion is being expressed as to the
prices at which shares of ISOCOR common stock or Critical Path common stock may
be traded at any future time.
The engagement letter between Robertson Stephens and ISOCOR provides that
Robertson Stephens is entitled to receive a fee for its services, a substantial
portion of which is contingent upon the consummation of the merger. ISOCOR has
also agreed to reimburse Robertson Stephens for certain of its out-of-pocket
expenses, including legal fees, and to indemnify and hold harmless Robertson
Stephens and its affiliates and any director, employee or agent of Robertson
Stephens or any of its affiliates, or any person controlling Robertson Stephens
or its affiliates for certain losses, claims, damages, expenses and liabilities
relating to or arising out of services provided by Robertson Stephens as
financial advisor to ISOCOR. The terms of the fee arrangement with Robertson
Stephens, which ISOCOR and Robertson Stephens believe are customary in
transactions of this nature, were negotiated at arm's length between ISOCOR and
Robertson Stephens, and the ISOCOR board was aware of such fee arrangements,
including the fact that a significant portion of the fees payable to Robertson
Stephens is contingent upon completion of the merger. In the past, Robertson
Stephens has provided certain investment banking services to Critical Path for
which it has been paid fees, including lead managing Critical Path's initial
public offering and follow-on offering. Robertson Stephens maintains a market in
the shares of Critical Path common stock. In the ordinary course of its
business, Robertson Stephens may trade in ISOCOR's securities and Critical
Path's securities for its own account and the account of its customers and,
accordingly, may at any time hold a long or short position in ISOCOR's
securities or Critical Path's securities.
Robertson Stephens was retained based on Robertson Stephens' experience as
a financial advisor in connection with mergers and acquisitions and in
securities valuations generally.
Robertson Stephens is an internationally recognized investment banking
firm. As part of its investment banking business, Robertson Stephens is
frequently engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and other purposes.
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<PAGE> 45
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of ISOCOR's board of directors with
respect to the merger, you should be aware that members of ISOCOR's board of
directors and management have interests in the merger that are in addition to,
and that may be different from, your interests as a holder of ISOCOR common
stock generally. ISOCOR's board of directors was aware of these interests and
considered the following matters, among others, in approving the merger.
Assumption and acceleration of stock options
Pursuant to the reorganization agreement, Critical Path will assume each
outstanding stock option under the ISOCOR 1992 Stock Option Plan, 1996
Directors' Stock Option Plan and 1999 Stock Option Plan.
Under the pre-existing terms of option agreements entered into with
officers and directors of ISOCOR, the consummation of the merger will cause the
vesting of a portion of the outstanding options granted to accelerate. This will
allow each officer or director to exercise the vested portion of such options
immediately prior to the effective time of the merger. As of the record date,
the following officers and directors held stock options subject to accelerated
vesting:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
AS TO WHICH
VESTING WILL
NAME AND POSITION ACCELERATE
----------------- -----------------------
<S> <C>
Janine Bushman.............................................. 11,250
Vice President, Finance and Administration, Chief Financial
Officer and Director
Andy De Mari................................................ 0
Chairman of the Board of Directors
Paul Gigg................................................... 72,492
President, Chief Executive Officer and Director
Karl Klessig................................................ 28,125
Vice President, Marketing and Strategic Alliances
Alex Lazar.................................................. 24,375
Vice President, North American Sales
Abraham Levine.............................................. 37,500
Vice President, Professional Services
David Longley............................................... 27,188
Vice President, International Sales and Marketing
Barry Wyse.................................................. 10,938
Vice President, Engineering
Dennis Cagan................................................ 7,500
Director
Andre De Fusco.............................................. 25,000
Director
G. Bradford Jones........................................... 10,000
Director
Bill Yundt.................................................. 15,625
Director
-------
Total:............................................ 264,369
</TABLE>
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<PAGE> 46
Employment offers
On October 20, 1999, Critical Path and officers and key employees of ISOCOR
entered into letter agreements whereby these employees were offered employment
with Critical Path. The table below lists the names of such employees and the
title of the position offered by Critical Path to each such employee.
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
Paul Gigg................................................... Executive Vice President and
Chief Operating Officer
Janine Bushman.............................................. Vice President
Karl Klessig................................................ Vice President
Alex Lazar.................................................. Vice President
David Longley............................................... Vice President
Barry Wyse.................................................. Vice President
Eric Forsberg............................................... Chief Technical Architect
Fleming Pederson............................................ Architect
David Sutton................................................ Architect
Frank Somers................................................ Architect
Henry Avetisyan............................................. Software Engineer
Eamon Doyle................................................. Software Engineer
</TABLE>
Other benefits
The employees listed in the above table were also offered options to
purchase stock of Critical Path subject to the consummation of the merger. These
employees were also offered bonuses in the event the merger is consummated and
such employee remains in the employ of Critical Path for one year following the
merger. The aggregate amount of such potential retention bonuses is $741,000.
Paul Gigg, President and Chief Executive Officer of ISOCOR, was offered a base
salary of $300,000 per year and a bonus targeted at 50% of salary, as well as a
retention bonus.
Indemnification arrangements
Under the reorganization agreement, Critical Path has agreed that, from and
after the effective time of the merger, Critical Path will cause ISOCOR to
fulfill and honor in all respects the obligations of ISOCOR under (1) any
indemnification agreements that exist between ISOCOR and its officers and
directors at the effective time of the merger and (2) any indemnification
provisions under ISOCOR's articles of incorporation or bylaws that were in
effect on the date of the reorganization agreement. The reorganization agreement
also provides that the articles of incorporation and bylaws of ISOCOR following
the effective time will contain provisions regarding exculpation and
indemnification that are at least as favorable to the indemnified parties as
those contained in ISOCOR's articles of incorporation and bylaws on the date of
the reorganization agreement. In addition, the reorganization agreement provides
that, for a period of at least six years after the effective time of the merger,
these exculpation and indemnification provisions will not be amended, repealed
or otherwise modified in any manner that would adversely affect the rights of
individuals who, immediately prior to the effective time of the merger, were
directors, officers, employees or agents of ISOCOR, unless such modification is
required by law. Critical Path has also agreed to cause ISOCOR to use
commercially reasonable efforts to maintain directors' and officers' liability
insurance for a period of three years after the effective time of the merger.
GOVERNMENTAL AND REGULATORY MATTERS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
and the rules of the Federal Trade Commission promulgated thereunder, the merger
may not be consummated until notifications have been given and required
information has been furnished to the FTC and the Antitrust Division of the
United States Department of Justice and specified waiting period requirements
have been satisfied. ISOCOR and Critical Path each filed notification and report
forms with the FTC and the Department of Justice on November 8, 1999, and the
specified waiting period was terminated on November 23, 1999.
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<PAGE> 47
At any time before or after the consummation of the merger, the FTC, the
Department of Justice or any state could take such action under applicable
antitrust laws as it deems necessary or desirable. Such action could include
seeking to enjoin the consummation of the merger or seeking divestiture of
particular assets or businesses of Critical Path or ISOCOR. Private parties may
also initiate legal actions under the antitrust laws under limited
circumstances. IN ADDITION, UNDER THE LAWS OF IRELAND, A SHORT FORM NOTIFICATION
IS BEING MADE TO THE DEPARTMENT OF ENTERPRISE, TRADE AND EMPLOYMENT SEEKING
CONFIRMATION FROM SUCH DEPARTMENT THAT THE MERGER IS NOT SUBJECT TO THE IRISH
MERGERS AND TAKEOVER ACT.
The following are the material U.S. federal income tax consequences of the
merger, assuming that you hold your shares of ISOCOR common stock as capital
assets. The following discussion is based on and subject to the Internal Revenue
Code of 1986, as amended, its legislative history, applicable Treasury
regulations, administrative rulings and court decisions currently in effect, all
of which are subject to change at any time, possibly with retroactive effect,
and assumptions, limitations, representations and covenants, including those
contained in certificates of officers of Critical Path and ISOCOR expected to be
executed as of the date of the completion of the merger. This discussion does
not address all aspects of U.S. federal income taxation that may be important to
you in light of your particular circumstances, or if you are subject to special
rules, such as rules relating to:
- Shareholders who are not citizens or residents of the United States;
- Financial institutions;
- Tax-exempt organizations;
- Insurance companies;
- Dealers in securities;
- Shareholders who acquired their shares of ISOCOR common stock by
exercising employee stock options or rights or otherwise as compensation;
and
- Shareholders who hold their shares of ISOCOR common stock as part of a
hedge, straddle or conversion transaction.
On the date that the merger is completed, each of Orrick, Herrington &
Sutcliffe LLP, counsel to ISOCOR, and Wilson Sonsini Goodrich & Rosati,
Professional Corporation, counsel to Critical Path, will, subject to the
qualifications discussed below, deliver to ISOCOR and Critical Path,
respectively, its opinion, dated the date that the merger is completed, to the
effect that, for U.S. federal income tax purposes, the merger will be treated as
a reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. Based on these closing tax opinions and the advice of Critical Path's and
ISOCOR's respective counsel, provided that the merger qualifies as a
reorganization, the following federal income tax consequences will result:
- No gain or loss will be recognized by Critical Path or ISOCOR as a result
of the merger.
- No gain or loss will be recognized by holders of Critical Path stock as a
result of the merger.
- No gain or loss will be recognized by you when you exchange all of your
ISOCOR common stock solely for Critical Path common stock in the merger,
except that gain or loss may be recognized by you with respect to cash
received in lieu of a fractional share interest in Critical Path common
stock.
- The aggregate tax basis of the Critical Path common stock you receive in
the merger will be the same as your aggregate tax basis in the ISOCOR
common stock you surrender in the merger, except that your aggregate tax
basis in Critical Path common stock will be reduced by the tax basis
allocable to any fractional share interest in Critical Path common stock
for which you receive cash.
- You will recognize gain or loss for U.S. federal income tax purposes with
respect to the cash you receive instead of a fractional share interest in
Critical Path common stock, measured by the difference between the amount
of cash you receive and the portion of the tax basis of your shares
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<PAGE> 48
of ISOCOR common stock that is allocable to the fractional share interest
in Critical Path common stock. This gain or loss will be capital gain or
loss and will be a long-term capital gain or loss if your shares of
ISOCOR common stock have been held for more than one year at the time the
merger is completed.
- The tax holding period of the Critical Path common stock you receive in
the merger, including any fractional interest for which you receive cash
as described above, will include the period during which you held the
ISOCOR common stock surrendered in the merger.
If you exercise dissenters' rights with respect to the merger and receive
cash in exchange for all of your shares of ISOCOR common stock you will
generally recognize gain or loss for federal income tax purposes measured by the
difference between the amount of cash you receive in the exchange and your tax
basis in your shares of ISOCOR common stock, provided that the payment is not
treated as a dividend for U.S. federal income tax purposes. A sale of your
shares of ISOCOR common stock pursuant to the exercise of dissenters' rights
generally will not be treated as a dividend if you do not own any shares of
Critical Path common stock after the merger, after giving effect to constructive
ownership rules, or certain other conditions are satisfied. Such gain or loss
will be capital gain or loss and will be a long-term capital gain or loss if
your holding period of your shares of ISOCOR common stock exceeds one year. Any
interest you receive will be taxable as ordinary income.
The parties' obligations to complete the merger are conditioned on, subject
to waiver by Critical Path and ISOCOR, receipt of a closing tax opinion (1) by
ISOCOR from Orrick, Herrington & Sutcliffe LLP and (2) by Critical Path from
Wilson Sonsini Goodrich & Rosati, Professional Corporation, regarding the U.S.
federal income tax treatment of the merger in each case in form and substance
reasonably satisfactory to the party to whom the applicable closing tax opinion
is addressed. The closing tax opinions (1) will be based on facts,
representations and assumptions set forth or referred to in the closing tax
opinions that are consistent with the facts existing at the time that the merger
occurs and (2) may rely on representations and covenants including those
contained in certificates of officers of Critical Path, ISOCOR and others,
reasonably satisfactory in form and substance to the counsel issuing such
opinions. The closing tax opinions are not binding on the IRS or the courts, and
Critical Path and ISOCOR do not intend to request a ruling from the IRS with
respect to the merger. Accordingly, there can be no assurance that the IRS will
not challenge the conclusions set forth in the closing tax opinions or that a
court will not sustain such a challenge. Neither ISOCOR nor Critical Path
currently intends to waive the condition relating to the receipt of a closing
tax opinion.
If you exercise dissenters' rights or receive cash in lieu of a fractional
share interest in Critical Path stock, you may be subject to backup withholding
at a rate of 31% on the cash payments you receive. Backup withholding will not
apply, however, if you are an exempt recipient (such as a corporation or
financial institution) or are otherwise exempt from backup withholding, if you
furnish your taxpayer identification number and certify that you are not subject
to backup withholding on the substitute Form W-9 included in the Transmittal
Letter, or you provide a certificate of foreign status on Form W-8. If you fail
to provide your correct TIN on Form W-9, you may be subject to a $50 penalty
imposed by the IRS.
You will be required to retain records and file with your U.S. federal
income tax return a statement setting forth certain facts relating to the
merger.
This discussion is not intended to be a complete analysis or description of
all potential U.S. federal income tax consequences or any other consequences of
the merger. In addition, this discussion does not address tax consequences that
may vary with, or are contingent on, your individual circumstances. Moreover,
this discussion does not address any non-income tax or any foreign, state or
local tax consequences of the merger. Accordingly, you are strongly urged to
consult with your tax advisor to determine the particular U.S. federal, state,
local or foreign income or other tax consequences to you of the merger.
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<PAGE> 49
ANTICIPATED ACCOUNTING TREATMENT
Critical Path and ISOCOR intend to account for the merger as a purchase for
financial reporting and accounting purposes, under U.S. generally accepted
accounting principles. After the merger, the results of operations of ISOCOR
will be included in the consolidated financial statements of Critical Path. The
purchase price will be allocated based on the fair values of the assets acquired
and the liabilities assumed. Any excess of cost over fair value of the net
tangible assets of ISOCOR acquired will be recorded as goodwill and other
intangible assets and will be amortized by charges to operations under U.S.
generally accepted accounting principles. These allocations will be made based
upon valuations and other studies that have not yet been finalized.
DISSENTERS' RIGHTS
The required procedure for exercising dissenters' rights set forth in Chapter 13
of the California General Corporation Law must be followed exactly or any
dissenters' rights may be lost.
Your rights to dissent from the merger and demand payment for your shares
are governed by Chapter 13 of the California General Corporation Law. The full
text of Chapter 13 is reprinted as Annex D. The summary of these rights set
forth below is not intended to be complete and is qualified in its entirety by
reference to Annex D.
Under California law, ISOCOR shareholders will not have any dissenters'
rights with respect to the merger unless demands for payment are duly filed with
respect to 5% or more of the outstanding shares of ISOCOR common stock. If the
holders of 5% or more of the outstanding shares of ISOCOR common stock vote
against the merger, file demands for payment and fully comply with Chapter 13 of
the California General Corporation Law, they will have dissenters' rights
consisting of the right to be paid in cash the fair market value of their
shares. If holders of less than 5% of the outstanding shares of ISOCOR common
stock vote against the merger and exercise dissenters' rights, no ISOCOR
shareholders will be entitled to dissenters' rights.
Under California law, fair market value is determined as of October 20,
1999, the day before the first announcement of the terms of the reorganization
agreement and the merger, excluding any appreciation or depreciation as a
consequence of the merger, but adjusted for any stock split, reverse stock split
or share dividend becoming effective after that date. If the parties are unable
to agree on a fair market value or ISOCOR denies that the shares are dissenting
shares, the dissenting shareholder may request the Superior Court for the County
of Los Angeles to determine the fair market value of the shares. The court's
decision would be subject to appellate review.
The terms of the reorganization agreement were publicly announced on
October 21, 1999. On October 20, 1999, the last trading day prior to the public
announcement, the high and low sales prices for ISOCOR common stock were $10.63
and $9.88, respectively.
Dissenters' rights cannot be validly exercised by persons other than
shareholders of record regardless of the beneficial ownership of the shares.
Persons who are beneficial owners of shares held of record by another
person, such as a broker, a bank or a nominee, should instruct the record holder
to follow the procedures outlined below if the beneficial owners wish to dissent
from the approval of the merger.
As described more fully below, to perfect their dissenters' rights,
shareholders of record must:
- make written demand for the purchase of their dissenting shares to ISOCOR
or its transfer agent on or before the date of the special meeting;
- vote their dissenting shares against approval of the merger; and
- within 30 days after the mailing to shareholders of notice of approval of
the merger, submit the certificates representing their dissenting shares
to ISOCOR or its transfer agent for endorsement as dissenting shares.
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<PAGE> 50
Failure to follow any of these procedures may result in the loss of
statutory dissenters' rights.
As a condition to the parties' obligations to consummate the merger,
effective demands for payment under Chapter 13 of the California General
Corporation Law must not be made by holders of more than 5% of the outstanding
shares of ISOCOR common stock.
Demand for purchase
A shareholder of ISOCOR electing to exercise dissenters' rights must also
make written demand upon ISOCOR at its principal office: 3420 Ocean Park
Boulevard, Santa Monica, California 90405-3306, Attn: Secretary, or upon
ISOCOR's transfer agent: American Stock Transfer & Trust Company at 40 Wall
Street, New York, New York 10005, to purchase the dissenting shares and to pay
the shareholder their fair market value in cash. A demand will not be effective
unless it is received on or before the date of the special meeting.
The notice must state the number and class of shares held of record, which
the shareholder demands to be purchased, and the amount claimed to be the fair
market value of those shares on October 20, 1999. This statement of fair market
value will constitute an offer by the dissenting shareholder to sell his or her
shares at that price.
Dissenting shareholders may not withdraw their demand for payment without
the consent of ISOCOR's board of directors. The rights of dissenting
shareholders to demand payment terminate:
- if the merger is abandoned, although, in such event, dissenting
shareholders will be entitled upon demand to reimbursement of necessary
expenses incurred in a good faith assertion of their dissenters' rights;
- if the shares are transferred prior to submission for endorsement as
dissenting shares; or
- if ISOCOR and the dissenting shareholders do not agree upon the status of
the shares as dissenting shares or upon the purchase price, and neither
files a complaint or intervenes in a pending action within six months
after the date on which notice of approval of the merger was mailed to
the ISOCOR shareholders.
No ISOCOR shareholder who has a right to demand payment of cash for his or
her shares will have any right to attack the validity of the merger or have the
merger set aside or rescinded, except in an action to determine whether ISOCOR
has received the approval of the number of shares required to approve the
merger.
Vote against approval of the merger
Dissenting shareholders must vote their dissenting shares against adoption
of the reorganization agreement. Record shareholders may vote part of the shares
that they are entitled to vote in favor of the merger or abstain from voting a
part of these shares without jeopardizing their dissenters' rights as to other
shares. Voting against the merger will not of itself, absent compliance with the
provisions of Chapter 13 of the California General Corporation Law summarized
herein, satisfy the requirements for exercise and perfection of dissenters'
rights.
Notice of approval
If shareholders have a right to require ISOCOR to purchase their shares for
cash under the dissenters' rights provision of the California General
Corporation Law, ISOCOR will mail to each of these shareholders a notice of
adoption of the reorganization agreement within ten days after the date of the
shareholder's meeting, stating the price determined by it to represent the fair
market value of the dissenting shares. The statement of price will constitute an
offer by ISOCOR to purchase any dissenting shares at that price.
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Submission of stock certificates
Within 30 days after the mailing of the notice of approval of the merger,
dissenting shareholders must submit to ISOCOR or its transfer agent, at the
address set forth above, the certificates representing the dissenting shares to
be purchased, to be stamped or endorsed with a statement that the shares are
dissenting shares or are to be exchanged for certificates of appropriate
denomination so stamped or endorsed. The notice of approval of the merger will
specify the date by which the submission of certificates for endorsement must be
made and a submission made after that date will not be effective for any
purpose.
Purchase of dissenting shares
If a dissenting shareholder and ISOCOR agree that the shares are dissenting
shares and agree upon the price of the shares, ISOCOR will, upon surrender of
the certificates, make payment of that amount within 30 days after the agreement
on price. ISOCOR will pay interest on the agreed upon amount from the date of
the agreement to the date of payment at the legal rate on judgments. Any
agreement between dissenting shareholders and ISOCOR fixing the fair market
value of any dissenting shares must be filed with the Secretary of ISOCOR. If
ISOCOR denies that the shares are dissenting shares or ISOCOR and a dissenting
shareholder fail to agree upon the fair market value of the shares, the
dissenting shareholder may, within six months after the date on which notice of
approval of the merger was mailed to the shareholder, but not thereafter, file a
complaint or intervene in a pending action, if any, in the Superior Court for
the County of Los Angeles, State of California. Such action shall request that
the Superior Court determine whether the shares are dissenting shares and the
fair market value of the dissenting shares. The Superior Court may determine, or
appoint one or more impartial appraisers to determine, the fair market value per
share of the dissenting shares. The costs of the action, including reasonable
compensation to the appraisers to be fixed by the court, will be assessed or
apportioned as the Superior Court considers equitable. However, if the fair
market value is determined to exceed the price offered to the shareholder by
ISOCOR, then ISOCOR will be required to pay these costs, including, in the
discretion of the Superior Court, attorneys' fees, fees of expert witnesses and
interest at the legal rate on judgments.
SHAREHOLDERS INTENDING TO EXERCISE DISSENTERS' RIGHTS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM, INCLUDING
THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE
MERGER AND SUCH RELATED TRANSACTIONS. PLEASE SEE THE DISCUSSION OF THE MATERIAL
FEDERAL INCOME TAX CONSIDERATIONS OF EXERCISING DISSENTERS' RIGHTS UNDER "THE
MERGER -- MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER."
DELISTING AND DEREGISTRATION OF ISOCOR COMMON STOCK
If the merger is consummated, ISOCOR common stock will be delisted from the
Nasdaq National Market and will be deregistered under the Securities Exchange
Act of 1934.
LISTING OF CRITICAL PATH COMMON STOCK TO BE ISSUED IN THE MERGER
It is a condition to the consummation of the merger that the shares of
Critical Path common stock to be issued in the merger and the shares of Critical
Path common stock to be reserved for issuance be authorized for listing on the
Nasdaq National Market.
RESTRICTION ON RESALES OF CRITICAL PATH COMMON STOCK
The shares of Critical Path common stock to be issued in the merger will be
registered under the Securities Act. These shares will be freely transferable
under the Securities Act, except for shares of Critical Path common stock issued
to or held by any person who is an affiliate of ISOCOR or Critical Path. Persons
who may be deemed to be affiliates include individuals or entities that control,
are controlled by, or are under common control of ISOCOR or Critical Path and
may include some of their officers,
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directors and principal shareholders. Affiliates may not sell their shares of
Critical Path common stock acquired in the merger except pursuant to:
- an effective registration statement under the Securities Act covering the
resale of those shares,
- an exemption under paragraph (d) of Rule 145 under the Securities Act, or
- any other applicable exemption under the Securities Act.
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THE REORGANIZATION AGREEMENT
The following is a brief summary of the material provisions of the
reorganization agreement, a copy of which is attached as Annex A to this proxy
statement/prospectus and incorporated by reference. Shareholders of ISOCOR are
urged to read the reorganization agreement in its entirety for a more complete
description of the merger. In the event of any discrepancy between the terms of
the reorganization agreement and the following summary, the reorganization
agreement will control.
THE MERGER
Following the approval and adoption of the reorganization agreement and the
agreement of merger attached to the reorganization agreement in Annex A as
Exhibit D by the shareholders of ISOCOR and the satisfaction or waiver of the
other conditions to the merger, a wholly-owned subsidiary of Critical Path will
merge into ISOCOR, and ISOCOR will continue as the surviving corporation and as
a wholly-owned subsidiary of Critical Path.
THE EFFECTIVE TIME
As soon as practicable on or after the closing of the merger, the parties
will cause the merger to become effective by filing the agreement of merger with
the California Secretary of State. The parties anticipate that this will occur
promptly after the shareholder meeting.
DIRECTORS AND OFFICERS OF ISOCOR AFTER THE MERGER
At the effective time, the directors of Critical Path's merger subsidiary
will become the new directors of ISOCOR, and the officers of Critical Path's
merger subsidiary will become the new officers of ISOCOR.
CONVERSION OF SHARES IN THE MERGER
At the effective time, each share of ISOCOR common stock will be
automatically canceled and converted into the right to receive 0.4707 shares of
Critical Path common stock, or, in the case of shares subject to dissenters'
rights, the right to receive the amount in cash determined under California law,
except that shares of ISOCOR common stock held immediately prior to the
effective time by ISOCOR, Critical Path or any wholly-owned subsidiary of ISOCOR
or Critical Path will be canceled. In addition, the exchange ratio will be
further adjusted to reflect the effect of any stock split, stock dividend,
reorganization, recapitalization, reclassification or other like change in
either Critical Path common stock or ISOCOR common stock that may occur on or
after the date of this proxy statement/prospectus.
ISOCOR'S STOCK OPTION AND STOCK PURCHASE PLANS
At the effective time, each outstanding option to purchase shares of ISOCOR
common stock under ISOCOR's stock option plans, will be assumed by Critical Path
regardless of whether they are exercisable. Each ISOCOR stock option that is
assumed by Critical Path will continue to have, and be subject to, the same
terms and conditions that were applicable to the option immediately prior to the
effective time, except that:
- each ISOCOR stock option will be exercisable for shares of Critical Path
common stock, and the number of shares of Critical Path common stock
issuable upon exercise of any given option will be determined by
multiplying 0.4707 by the number of shares of ISOCOR common stock
underlying the applicable option, rounded down to the nearest whole
number; and
- the per share exercise price of any given option will be determined by
dividing the exercise price of the option immediately prior to the
effective time by 0.4707, rounded up to the nearest whole cent.
Critical Path has agreed to file a registration statement on Form S-8 for
the shares of Critical Path common stock issuable with respect to the assumed
ISOCOR stock options within 30 days after the
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effective time. Critical Path intends to maintain the effectiveness of the
registration statement for so long as any ISOCOR stock options or other rights
thereunder remain outstanding.
Immediately prior to the effective time, any outstanding purchase rights
under ISOCOR's Employee Stock Purchase Plan will automatically be exercised and
paid for through accumulated payroll deductions. This will allow participants to
purchase shares of ISOCOR common stock under the plan prior to the effective
time. This shortened purchase period will expire immediately following the new
purchase date, and the plan will terminate immediately prior to the effective
time.
THE EXCHANGE AGENT
Promptly after the effective time, Critical Path is required to deposit
with a bank or trust company certificates representing the shares of Critical
Path common stock to be exchanged for shares of ISOCOR common stock, and cash to
pay for fractional shares and any dividends or distributions to which holders of
ISOCOR common stock may be entitled to receive under the reorganization
agreement.
PROCEDURES FOR EXCHANGING STOCK CERTIFICATES
Promptly after the effective time, Critical Path will cause the exchange
agent to mail to the holders of record of ISOCOR stock certificates (1) a letter
of transmittal and (2) instructions on how to surrender ISOCOR stock
certificates in exchange for certificates representing shares of Critical Path
common stock, cash for fractional shares and cash for any dividends or other
distributions that they may be entitled to receive under the reorganization
agreement. HOLDERS OF ISOCOR COMMON STOCK SHOULD NOT SURRENDER THEIR ISOCOR
STOCK CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FROM THE
EXCHANGE AGENT.
Upon surrendering their ISOCOR stock certificates to the exchange agent for
cancellation, together with the letter of transmittal and any other documents
required by the exchange agent, the holders of ISOCOR stock certificates will be
entitled to receive a certificate representing that number of whole shares of
Critical Path common stock which that holder has the right to receive, cash for
fractional shares of Critical Path common stock and cash for any dividends or
other distributions to which the holder is entitled. Until surrendered to the
exchange agent, outstanding ISOCOR stock certificates will be deemed from and
after the effective time to evidence (1) only the right to receive the number of
full shares of Critical Path common stock into which the shares of ISOCOR common
stock have converted and (2) the right to receive an amount in cash for any
fractional shares and any dividends or distributions payable under the
reorganization agreement.
DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES
Until you surrender your ISOCOR stock certificate in exchange for a
Critical Path stock certificate, you will not receive any dividends or other
distributions declared or made by Critical Path after the effective time of the
merger. However, once you surrender your ISOCOR stock certificate to the
exchange agent, you will receive (1) a Critical Path stock certificate, (2) cash
as payment for fractional shares and (3) cash, without interest, as payment for
any dividends or other distributions declared or made by Critical Path after the
effective time of the merger.
NO FRACTIONAL SHARES
No fractional shares of Critical Path common stock will be issued because
of the merger. Instead, each ISOCOR shareholder who would be entitled to a
fractional share of Critical Path common stock will receive cash. The amount of
cash to be received by such ISOCOR shareholder will be determined by multiplying
the fraction of such share that such shareholder would have received by the
average closing sale price of one share of Critical Path common stock over the
ten trading days immediately prior to the effective time of the merger.
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REPRESENTATIONS AND WARRANTIES
Critical Path and ISOCOR each made a number of customary representations
and warranties in the reorganization agreement regarding aspects of their
respective businesses, financial condition, structure and other facts pertinent
to the merger.
The representations given by ISOCOR as they relate to ISOCOR and its
subsidiaries include, among others:
- capitalization;
- financial statements;
- changes in ISOCOR's business since June 30, 1999;
- intellectual property used; and
- fairness opinion received from its financial advisors.
The representations given by Critical Path as they relate to Critical Path
and its subsidiaries include, among others:
- capitalization;
- financial statements;
- changes in business since June 30, 1999; and
- intellectual property used.
The representations and warranties in the reorganization agreement are
complicated and not easily summarized. You are urged to carefully read the
articles of the reorganization agreement entitled "Representations and
Warranties of Company" and "Representations and Warranties of Parent and
Initialize Acquisition Corp."
ISOCOR'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MERGER
ISOCOR agreed that until the earlier of the completion of the merger or the
termination of the reorganization agreement or unless Critical Path consents in
writing, ISOCOR and its subsidiaries will operate their businesses in the usual,
regular and ordinary course consistent with past practice, pay their debts and
taxes when due, and use commercially reasonable efforts to:
- preserve intact their assets and current business organizations;
- keep available the services of their current officers and employees; and
- maintain their material contracts and preserve its relationships with:
- customers,
- suppliers,
- distributors,
- licensors,
- licensees, and
- others having business dealings with ISOCOR and its subsidiaries.
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ISOCOR also agreed that until the earlier of the completion of the merger
or the termination of the reorganization agreement or unless Critical Path
consents in writing, ISOCOR and its subsidiaries would conduct their business in
compliance with specific restrictions relating to the following:
- changes to stock plans;
- severance and termination pay;
- the transfer and license of intellectual property;
- the issuance of dividends or other distributions;
- the purchase and redemption of ISOCOR stock;
- the issuance of securities;
- modification of ISOCOR's articles of incorporation and bylaws;
- the acquisition of any business or entity;
- the disposition of ISOCOR's assets;
- the incurrence of indebtedness;
- employees and employee benefits;
- settlement of litigation and other claims;
- the entrance into, termination or modification of contracts;
- accounting policies and procedures;
- treatment of the merger as a reorganization under Section 368(a) of the
Internal Revenue Code;
- tax elections and liabilities; and
- agreements to do any of the actions listed above.
CRITICAL PATH'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MERGER
Critical Path agreed that until the earlier of the completion of the merger
or termination of the reorganization agreement or unless ISOCOR consents in
writing, Critical Path will:
- carry on its business, in the usual, regular and ordinary course
consistent with past practices, and in compliance with all applicable
laws and regulations;
- pay its debts and taxes when due;
- pay or perform other material obligations when due, and
- use its commercially reasonable efforts consistent with past practices
and policies to:
- preserve substantially intact its present business organization;
- keep available the services of its present officers and employees; and
- preserve its relationships with:
- customers,
- suppliers,
- distributors,
- licensors,
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- licensees, and
- others with which it has significant business dealings.
The agreements related to the conduct of ISOCOR's and Critical Path's
respective businesses in the reorganization agreement are complicated and not
easily summarized. You are urged to carefully read the article of the
reorganization agreement entitled "Conduct Prior to the Effective Time."
NO SOLICITATION
Until the merger is completed or the reorganization agreement is
terminated, ISOCOR has agreed, subject to limited exceptions, that neither it
nor any of its subsidiaries, representatives, affiliates or advisors will,
directly or indirectly:
- solicit, initiate, encourage or induce the making, submission or
announcement of any other acquisition proposal;
- participate in any discussions or negotiations regarding any other
acquisition proposal;
- furnish to any person any nonpublic information with respect to any other
acquisition proposal;
- take any other action to facilitate any inquiries or the making of any
proposal that constitutes or may reasonably be expected to lead to any
other acquisition proposal;
- subject to limited exceptions in the event of a superior offer, approve
or recommend any other acquisition proposal; or
- enter into any letter of intent or similar document or any contract,
agreement or commitment contemplating or otherwise relating to any other
acquisition transaction.
However, prior to the completion of the merger or the termination of the
reorganization agreement, the reorganization agreement allows ISOCOR to furnish
nonpublic information regarding ISOCOR and its subsidiaries to, and to enter
into a confidentiality agreement with, and to enter into discussions with, any
person or group in response to a superior offer submitted by such person or
group, if:
- ISOCOR has not violated any of the restrictions set forth above;
- ISOCOR's board of directors concludes in good faith, after consultation
with its outside legal counsel, based on a written opinion of an
investment bank of nationally recognized reputation, that such action is
required in order for ISOCOR's board of directors to comply with its
fiduciary obligations to ISOCOR's shareholders;
- prior to furnishing any such nonpublic information to, or entering into
discussions or negotiations with, the person or group, ISOCOR:
- gives Critical Path written notice of the identity of such person or
group and of ISOCOR's intention to furnish nonpublic information to, or
enter into discussions or negotiations with, such person or group; and
- ISOCOR receives from such person or group, an executed confidentiality
agreement containing customary limitations on the use and disclosure of
such nonpublic information; and
- contemporaneously with furnishing any nonpublic information to the person
or group, ISOCOR furnishes the same information to Critical Path.
The reorganization agreement defines a "superior offer" as an unsolicited,
bona fide written offer made by a third party to consummate an acquisition of
ISOCOR on terms that ISOCOR's board of directors determines, in its reasonable
judgment, based on a written opinion of an investment bank of nationally
recognized reputation to be more favorable to ISOCOR shareholders from a
financial point of view than the terms of the merger involving Critical Path and
the consideration of which reasonably likely exceeds the value of the
consideration proposed to be issued by Critical Path.
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ISOCOR has agreed to promptly inform Critical Path of the material terms
and conditions of any acquisition proposal or inquiry, the identity of the
person or group making any such acquisition proposal or inquiry, and to keep
Critical Path informed of the status and details, including material amendments
or proposed amendments of any such acquisition proposal or inquiry.
However, an offer will not be considered a superior offer if any financing
required to consummate the transaction contemplated by such offer is not
committed and is not likely in the judgment of ISOCOR's board of directors to be
obtained by such third party on a timely basis.
DIRECTOR AND OFFICER INDEMNIFICATION
From and after the effective time of the merger, Critical Path will cause
ISOCOR to fulfill and honor in all respects the obligations of ISOCOR pursuant
to any indemnification agreements between ISOCOR and its directors and officers
in effect immediately prior to the effective time of the merger and any
indemnification provisions under ISOCOR's articles of incorporation or bylaws in
effect on the date the reorganization agreement was signed.
For a period of 6 years after the merger, the articles of incorporation and
bylaws of ISOCOR will contain provisions with respect to exculpation and
indemnification that are at least as favorable to the current ISOCOR officers
and directors as those contained in ISOCOR, articles of incorporation and bylaws
in effect on the date the reorganization agreement was signed. Critical Path
will cause ISOCOR after the merger to maintain director and officer insurance on
the same terms as ISOCOR's current policies on the current directors and
officers of ISOCOR for three years following the merger.
CONDITIONS TO COMPLETION OF THE MERGER
The obligations of Critical Path and ISOCOR to complete the merger and the
other transactions contemplated by the reorganization agreement are subject to
the satisfaction or waiver of each of the following conditions before completion
of the merger:
- the reorganization agreement and the merger must be approved by the
holders of a majority of outstanding shares of ISOCOR common stock
entitled to vote;
- Critical Path's registration statement must be effective, no stop order
suspending its effectiveness will be in effect and no proceedings for
suspension of its effectiveness will be pending before or threatened by
the Securities and Exchange Commission;
- no law, regulation, injunction or other order must be enacted or issued
which has the effect of making the merger illegal or otherwise
prohibiting completion of the merger substantially on the terms
contemplated by the reorganization agreement;
- all applicable waiting periods under applicable antitrust laws must have
expired or been terminated;
- Critical Path and ISOCOR must each receive from their respective tax
counsel an opinion to the effect that the merger will constitute a
tax-free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code and such opinions must not have been withdrawn.
However, if counsel to either Critical Path or ISOCOR does not render
this opinion, this condition will be satisfied if counsel to the other
party renders the opinion to such party; and
- the shares of Critical Path common stock to be issued in the merger must
be authorized for listing on the Nasdaq National Market, subject to
notice of issuance.
ISOCOR's obligations to complete the merger and the other transactions
contemplated by the reorganization agreement are subject to the satisfaction or
waiver of each of the following additional conditions before completion of the
merger:
- Critical Path's representations and warranties must be true and correct
as of the date of the reorganization agreement and as of the closing date
as if made at and as of the closing date;
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- Critical Path must perform or comply in all material respects with all of
its agreements and covenants required by the reorganization agreement to
be performed or complied with by Critical Path at or before completion of
the merger; and
- no material adverse effect with respect to Critical Path and its
subsidiaries, taken as a whole, shall have occurred since the date of the
reorganization agreement.
Critical Path's obligations to complete the merger and the other
transactions contemplated by the reorganization agreement are subject to the
satisfaction or waiver of each of the following additional conditions before
completion of the merger:
- ISOCOR's representations and warranties must be true and correct as of
the date of the reorganization agreement and at and as of the closing
date as if made at and as of the closing date;
- ISOCOR must perform or comply in all material respects with all of its
agreements and covenants required by the reorganization agreement to be
performed or complied with by ISOCOR at or before completion of the
merger;
- no material adverse effect with respect to ISOCOR and its subsidiaries,
taken as a whole, shall have occurred since the date of the
reorganization agreement;
- Paul Gigg and at least eight other specified employees of ISOCOR shall
not have revoked their acceptance of offers of employment with Critical
Path and each of those individuals will be employed by Critical Path as
of the closing date of the merger and shall have entered into a covenant
not to compete or solicit; and
- holders of no more than five percent of the outstanding shares of ISOCOR
common stock shall have exercised dissenters' rights under California law
with respect to their shares.
TERMINATION OF THE REORGANIZATION AGREEMENT
The reorganization agreement may be terminated at any time prior to
completion of the merger, whether before or after the approval and adoption of
the reorganization agreement and approval of the merger by ISOCOR shareholders:
- by mutual written consent of Critical Path and ISOCOR;
- by Critical Path or ISOCOR, if the merger is not completed before June
30, 2000, except that this right to terminate the reorganization
agreement is not available to any party whose action or failure to act
has been a principal cause of or resulted in the failure of the merger to
occur on or before June 30, 2000, and such action or failure to act
constitutes a breach of the reorganization agreement;
- by Critical Path or ISOCOR, if there is any order, decree or ruling of a
court or governmental authority having the effect of permanently
restraining, enjoining or prohibiting the completion of the merger which
is final and nonappealable;
- by Critical Path or ISOCOR, if the reorganization agreement and the
merger fail to receive the requisite vote for approval by the
shareholders of ISOCOR at the ISOCOR special meeting or at any
adjournment of that meeting;
- by ISOCOR, upon a breach of any representation, warranty, covenant or
agreement on the part of Critical Path in the reorganization agreement,
or if any of Critical Path's representations or warranties are or become
untrue so that the corresponding condition to completion of the merger
would not be met. However, if the breach or inaccuracy is curable by
Critical Path through the exercise of its commercially reasonable
efforts, and Critical Path continues to exercise such commercially
reasonable efforts, ISOCOR may not terminate the reorganization agreement
for 30 days after delivery of written notice from ISOCOR to Critical Path
of the breach. If the breach
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is cured during those 30 days, or if ISOCOR shall otherwise be in
material breach of the reorganization agreement, ISOCOR may not exercise
this termination right;
- by Critical Path, upon a breach of any representation, warranty, covenant
or agreement on the part of ISOCOR set forth in the reorganization
agreement, or if any of ISOCOR's representations or warranties are or
become untrue so that the corresponding condition to completion of the
merger would not be met. However, if the breach or inaccuracy is curable
by ISOCOR through the exercise of its commercially reasonable efforts,
and ISOCOR continues to exercise such commercially reasonable efforts,
Critical Path may not terminate the reorganization agreement for 30 days
after delivery of written notice from Critical Path to ISOCOR of the
breach. If the breach is cured during those 30 days, or if Critical Path
shall otherwise be in material breach of the reorganization agreement,
Critical Path may not exercise this termination right;
- by Critical Path upon ISOCOR's breach of the non-solicitation provisions
of the reorganization agreement; or
- by Critical Path if a triggering event shall have occurred.
A "triggering event" occurs if:
- ISOCOR's board of directors withdraws or amends or modifies in a manner
adverse to Critical Path its recommendation in favor of the approval of
the reorganization agreement or the approval of the merger;
- ISOCOR fails to include in this proxy statement/prospectus the
recommendation of ISOCOR's board of directors in favor of the approval of
the reorganization agreement and the merger;
- ISOCOR's board of directors fails to reaffirm its recommendation in favor
of the approval of the reorganization agreement and the merger within 5
business days after Critical Path requests in writing that such
recommendation be reaffirmed at any time following the announcement of
another acquisition proposal;
- ISOCOR's board of directors approves or recommends any other acquisition
proposal; or
- a tender or exchange offer relating to the securities of ISOCOR is
commenced by a person unaffiliated with Critical Path and ISOCOR does not
send to its security holders, within ten business days after such tender
or exchange offer is first published, sent or given, a statement
disclosing that ISOCOR recommends rejection of such tender or exchange
offer.
PAYMENT OF TERMINATION FEE
ISOCOR must pay a termination fee of $11,484,800 to Critical Path if:
- ISOCOR breaches the nonsolicitation provisions of the reorganization
agreement,
- Critical Path terminates the reorganization agreement because of the
occurrence of a triggering event, except that no fee is payable if the
triggering event is an unsolicited tender offer and no acquisition
transaction is consummated within 12 months of commencement of the tender
offer, or
- the reorganization agreement is terminated by Critical Path or ISOCOR
because the merger is not consummated by June 30, 2000 or because
ISOCOR's shareholders do not approve the reorganization agreement and the
merger, and within 12 months following the termination of the
reorganization agreement ISOCOR is acquired by another entity or enters
into an agreement to be acquired by another entity.
EXTENSION, WAIVER AND AMENDMENT OF THE REORGANIZATION AGREEMENT
Subject to applicable law, Critical Path and ISOCOR may amend the
reorganization agreement before completion of the merger by mutual written
consent.
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Either Critical Path or ISOCOR may extend the other's time for the
performance of any of the obligations or other acts under the reorganization
agreement, waive any inaccuracies in the other's representations and warranties
and waive compliance by the other with any of the agreements or conditions
contained in the reorganization agreement.
THE STOCK OPTION AGREEMENT
The stock option agreement grants Critical Path the option to acquire up to
the number of shares of ISOCOR common stock that represents 19.9% of the issued
and outstanding ISOCOR common stock as of the first date on which the option is
exercisable. The exercise price of the option is $23.54 per share of ISOCOR
common stock, payable in cash.
The option is intended to increase the likelihood that the merger will be
completed. Some of the aspects of the stock option agreement may have the effect
of discouraging persons who might now or at any time be interested in acquiring
all or a significant interest in ISOCOR or its assets before completion of the
merger.
The full text of the stock option agreement is attached as Annex B to this
proxy statement/prospectus and you are urged to read the entire stock option
agreement in its entirety.
EXERCISE EVENTS
The option may be exercised by Critical Path, in whole or in part, at any
time or from time to time if the reorganization agreement is terminated because:
- the merger does not occur by June 30, 2000 and ISOCOR is acquired, or
enters into an agreement to be acquired, by another entity within 12
months of such termination;
- the ISOCOR shareholders do not approve the merger and ISOCOR is acquired,
or enters into an agreement to be acquired, by another entity within 12
months of such termination;
- ISOCOR breaches the restrictions in the reorganization agreement on
soliciting other offers;
- ISOCOR's board of directors changes its recommendation for approval of
the merger and the reorganization agreement, fails to include this
recommendation in this proxy statement/prospectus or fails to reaffirm
this recommendation when requested by Critical Path;
- ISOCOR's board of directors approves or recommends another acquisition
proposal; or
- an unsolicited tender offer or exchange offer shall have been commenced
for ISOCOR common stock and ISOCOR shall not have sent its shareholders
its recommendation that the offer be rejected, unless, in the case of a
tender offer, ISOCOR is not acquired by another entity within 12 months
after its commencement.
TERMINATION
The option will terminate upon the earliest of any of the following:
- completion of the merger;
- 12 months following the date on which the reorganization agreement is
terminated based on the occurrence of a triggering event, except a
triggering event which does not cause a termination fee to be payable, or
a breach of the nonsolicitation provisions of the reorganization
agreement;
- 6 months after payment of the termination fee pursuant to the
reorganization agreement being terminated based on a failure of the
merger to be completed by June 30, 2000 or the failure to obtain the
required approval of ISOCOR shareholders; or
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- if the option becomes exercisable but cannot be exercised by Critical
Path because of a government order or because a waiting period under
antitrust laws has not expired, 10 business days after the prohibition to
exercise shall have been removed or become final and not subject to any
appeal.
REGISTRATION RIGHTS
The stock option agreement grants registration rights to Critical Path with
respect to the shares of ISOCOR common stock represented by the option,
including the right to demand that ISOCOR register all or part of such shares
with the Securities and Exchange Commission, provided that Critical Path is
entitled to make two such demands.
VOTING AGREEMENTS
As a condition to Critical Path's entering into the reorganization
agreement, Critical Path and each of Janine Bushman, Dennis Cagan, Andre De
Fusco, Andrew De Mari, Paul Gigg, Brentwood Associates V, L.P., Karl Klessig,
Alex Lazar, Abe Levine, David Longley, Barry Wyse, and Bill Yundt entered into
voting agreements. By entering into the voting agreements these ISOCOR
shareholders have irrevocably appointed Critical Path as their lawful attorney
and proxy. These proxies give Critical Path the limited right to vote the shares
of ISOCOR common stock beneficially owned by these ISOCOR shareholders,
including shares of ISOCOR common stock acquired after the date of the voting
agreements, in favor of the approval of the reorganization agreement, in favor
of the merger and in favor of each other matter that could reasonably be
expected to facilitate the merger and against any competing acquisition
proposal. These ISOCOR shareholders may vote their shares of ISOCOR common stock
on all other matters.
As of the record date, these individuals and entities collectively
beneficially owned 932,823 shares of ISOCOR common stock which represented
approximately 8.8% of the outstanding ISOCOR common stock. All of the shares of
ISOCOR common stock held by directors and executive officers of ISOCOR and their
affiliates are subject to voting agreements. None of the ISOCOR shareholders who
are parties to the voting agreements were paid additional consideration in
connection with them.
Under these voting agreements, and except as otherwise waived by Critical
Path, these shareholders agreed not to sell the ISOCOR common stock and options
owned, controlled or acquired, either directly or indirectly, by that person
until the earlier of the termination of the reorganization agreement or the
completion of the merger, unless the transfer is in accordance with any
affiliate agreement between the shareholder and Critical Path and each person to
which any shares or any interest in any shares is transferred agrees to be bound
by the terms and provisions of the voting agreement.
These voting agreements will terminate upon the earlier to occur of the
termination of the reorganization agreement and the completion of the merger.
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DESCRIPTION OF ISOCOR CAPITAL STOCK
The authorized capital stock of ISOCOR consists of 50,000,000 shares of
ISOCOR common stock, and 2,000,000 shares of ISOCOR preferred stock. As of
November 30, 1999, 10,542,776 shares of ISOCOR common stock were issued and
outstanding, 225,016 shares of ISOCOR common stock were reserved for future
issuance pursuant to ISOCOR's employee stock purchase plan and 366,596 shares of
ISOCOR common stock were reserved for future issuance pursuant to ISOCOR's stock
option plans. No shares of ISOCOR preferred stock were outstanding as of
November 30, 1999.
The following description describes the capital stock of ISOCOR, as of the
date of this proxy statement/prospectus.
COMMON STOCK
Holders of ISOCOR common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may be
applicable to any outstanding ISOCOR preferred stock, the holders of ISOCOR
common stock are entitled to receive ratably any dividends that may be declared
from time to time by the ISOCOR board of directors out of funds legally
available for dividend distribution. See "Summary -- Market Price and Dividend
Information." In the event of a liquidation, dissolution or winding up of
ISOCOR, the holders of ISOCOR common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior liquidation
rights of ISOCOR preferred stock, if any, then outstanding. The ISOCOR common
stock has no preemptive or conversion rights or other subscription rights. There
are no redemption or sinking fund provisions applicable to the ISOCOR common
stock. All outstanding shares of ISOCOR common stock are fully paid and
non-assessable, and the shares of ISOCOR common stock to be issued upon
consummation of the merger will be fully paid and non-assessable.
PREFERRED STOCK
ISOCOR has 2,000,000 shares of undesignated ISOCOR preferred stock
authorized, none of which are outstanding. The ISOCOR board of directors has the
authority to issue the shares of ISOCOR preferred stock in one or more series
and to fix the rights, preferences, privileges and restrictions granted to or
imposed upon any unissued shares of ISOCOR preferred stock and to fix the number
of shares constituting any series and the designations of such series, without
any further vote or action by the shareholders. The issuance of ISOCOR preferred
stock may have the effect of delaying, deferring or preventing a change in
control of ISOCOR.
DESCRIPTION OF CRITICAL PATH CAPITAL STOCK
The authorized capital stock of Critical Path consists of 150,000,000
shares of Critical Path common stock, and 5,000,000 shares of Critical Path
preferred stock. As of December 1, 1999, 44,038,622 shares of Critical Path
common stock were issued and outstanding, 600,000 shares of Critical Path common
stock were reserved for future issuance pursuant to Critical Path's employee
stock purchase plan, [13,160,676] shares of Critical Path common stock were
reserved for issuance upon the exercise of outstanding options to purchase
Critical Path common stock pursuant to option plans of Critical Path and its
subsidiaries, but no shares of Critical Path common stock were reserved for
issuance upon their exercise. No shares of Critical Path preferred stock were
outstanding as of December 1, 1999.
The following description describes the capital stock of Critical Path as
of the date of this proxy statement/prospectus.
COMMON STOCK
Holders of Critical Path common stock are entitled to one vote per share on
all matters to be voted upon by the shareholders. Subject to preferences that
may be applicable to any outstanding Critical Path preferred stock, the holders
of Critical Path common stock are entitled to receive ratably such dividends, if
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any, as may be declared from time to time by the Critical Path board of
directors out of funds legally available therefor. See "Summary -- Market Price
and Dividend Information." In the event of a liquidation, dissolution or winding
up of Critical Path, the holders of Critical Path common stock are entitled to
share ratably in all assets remaining after payment of liabilities, subject to
prior liquidation rights of Critical Path preferred stock, if any, then
outstanding. The Critical Path common stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the Critical Path common stock. All outstanding shares
of Critical Path common stock are fully paid and non-assessable, and the shares
of Critical Path common stock to be issued upon consummation of the merger will
be fully paid and non-assessable.
PREFERRED STOCK
As of December 1, 1999, Critical Path had 5,000,000 shares of undesignated
Critical Path preferred stock authorized, with no shares outstanding. The
Critical Path board of directors has the authority to issue the shares of
Critical Path preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any unissued
shares of Critical Path preferred stock and to fix the number of shares
constituting any series and the designations of such series, without any further
vote or action by the shareholders. The Critical Path board, without shareholder
approval, can issue Critical Path preferred stock with voting and conversion
rights which could adversely affect the voting power of the holders of Critical
Path common stock. The issuance of Critical Path preferred stock may have the
effect of delaying, deferring or preventing a change in control of Critical
Path. In connection with the acquisition of The docSpace Company, Inc., Critical
Path agreed to issue one share of special voting preferred stock so that holders
of exchangeable shares of a Canadian unlimited liability company with which
docSpace will merge will have the right, through a voting trust, to vote at
meetings of Critical Path shareholders.
WARRANT
As of December 1, 1999, a warrant to purchase 2,442,766 shares of common
stock was held by ICQ, a subsidiary of America Online, as part of a January 1999
email hosting and advertising agreement between Critical Path and ICQ. This
agreement provides that the shares will be exercisable only upon attainment of
each of five milestones. To date, three of these milestones have been achieved
and 1,628,510 shares are issuable upon exercise of the warrant.
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COMPARISON OF RIGHTS OF SHAREHOLDERS OF CRITICAL PATH AND
SHAREHOLDERS OF ISOCOR
This section describes material differences between the rights of
shareholders of Critical Path and shareholders of ISOCOR. While Critical Path
and ISOCOR believe that the following description covers all of the material
differences between the two, this summary may not contain all of the information
that is important to you. You should carefully read this entire document and the
other documents referred to herein for a more complete understanding of the
differences between being a shareholder of ISOCOR and being a shareholder of
Critical Path.
ISOCOR's Amended and Restated Articles of Incorporation and Bylaws, each as
currently in effect, govern your rights as a shareholder of ISOCOR. After
completion of the merger, you will become a shareholder of Critical Path and
Critical Path's Amended and Restated Articles of Incorporation and Bylaws, each
as currently in effect, will govern your rights as a shareholder of Critical
Path. Each of Critical Path and ISOCOR are incorporated under the laws of the
State of California. Accordingly, the California Corporations Code will continue
to govern your rights as a shareholder after completion of the merger.
NUMBER OF DIRECTORS
ISOCOR's Bylaws provide that the number of directors shall not be less than
five nor more than eight, with the exact number currently set at seven. Critical
Path's Bylaws provide that the number of directors shall not be less than four
nor more than seven, with the exact number currently set at seven. Under the
Bylaws of both ISOCOR and Critical Path, the exact number of directors within
the prescribed range may be fixed from time to time by the board of directors.
Under ISOCOR's Bylaws, the exact number of directors may also be fixed from time
to time by a duly adopted amendment to ISOCOR's Articles or its Bylaws approved
by a majority of the outstanding shares entitled to vote. Under Critical Path's
Bylaws, an amendment by shareholders to fix the number of directors must be
approved by 66 2/3% of the shares represented and voting at a duly held meeting
at which a quorum is present, which shares voting affirmatively also constitute
at least 66 2/3% of the required quorum.
FILLING OF VACANCIES ON THE BOARD OF DIRECTORS
ISOCOR's Bylaws provide that a vacancy on the board of directors as a
result of the removal of a director by shareholder vote or by court order may
only be filled by the affirmative vote of a majority of the shares represented
and voting at a duly held meeting at which a quorum is present, which shares
voting affirmatively also constitute a majority of the required quorum.
Critical Path's Bylaws provide that any vacancy on the board of directors,
including a vacancy resulting from the removal of a director, may be filled by a
majority of the directors then in office.
AMENDMENT OF BYLAWS BY SHAREHOLDERS
ISOCOR's Bylaws provide that new bylaws may be adopted or existing bylaws
may be amended or repealed by the vote of holders of a majority of the
outstanding shares entitled to vote.
Critical Path's Bylaws provide that new bylaws may be adopted or existing
bylaws may be amended or repealed by the affirmative vote or written consent of
66 2/3% of the outstanding shares entitled to vote, except as otherwise provided
by law or by Critical Path's Articles or Bylaws.
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BUSINESS OF CRITICAL PATH
COMPANY OVERVIEW
Critical Path is a leading provider of messaging services. Its 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 and messaging systems.
Critical Path's services are designed to facilitate scalability and reliability,
allow access to advanced technologies and provide greater access with high
levels of security. In addition, Critical Path's service is designed to allow
its customers to enhance their brand recognition by maintaining their "look and
feel" while improving the functionality of their email service. Critical Path
intends to build on its expertise in email services to provide additional
Internet messaging services in the future. Currently, Critical Path has over 800
customers and intends to develop new strategic relationships and to further
develop existing strategic relationships to expand its distribution channels and
to undertake joint product development and marketing efforts. Critical Path's
strategic partners to date include ICQ, a subsidiary of America Online, E*TRADE,
Network Solutions, Sprint and US WEST.
RECENT DEVELOPMENTS
Since its initial public offering, Critical Path has announced several
strategic contracts that help it to expand both its customer base and broaden
its global reach. Critical Path has expanded its relationship with America
Online so it now includes ICQ, AOL Latin America and AOL Enterprise, which
provides Critical Path with access to one of the largest concentrated customer
bases of email users on the Internet. Critical Path has signed an agreement with
Qwest to provide hosted messaging services for their customer base.
Furthermore, Critical Path has significantly expanded its international
customer base to include StarMedia, Cable and Wireless, Asiamail, Avantel,
British Telecom and o.tel.o. Critical Path has also extended its messaging
solutions to wireless devices, through partnerships with Arch, VAST and Serried,
and to integrated calendaring and resource scheduling, through the acquisition
of Amplitude Software, Inc.
On May 26, 1999, Critical Path acquired substantially all of the operating
assets of the Connect Service business of Fabrik Communications, Inc. for a
total purchase price of approximately $20.1 million. On July 21, 1999, Critical
Path acquired the dotOne Corporation for cash and stock valued at $52.5 million.
On August 31, 1999, Critical Path acquired Amplitude Software Corporation for a
total purchase price of approximately $214.4 million. Critical Path believes
that the Fabrik and dotOne Corporation acquisitions, together with the Amplitude
acquisition, will position it to offer an advanced suite of messaging solutions
to corporations through its "midsource" strategy. This strategy is intended to
enable enterprise customers to selectively outsource value-added messaging
services without altering their existing infrastructures or groupware solutions.
Many large corporations have invested heavily in email messaging infrastructure.
By offering a suite of hosted Web-based applications such as calendaring based
on open standards, Critical Path intends to provide companies that have chosen
in-source email solutions with the opportunity to take advantage of value-added
services that provide increased functionality, reliability and scalability.
On November 2, 1999, Critical Path entered into an agreement and plan of
reorganization with FaxNet Corporation, a provider of Internet fax and messaging
solutions and a leading outsource supplier of carrier-class enhanced fax and
integrated messaging solutions. The total estimated purchase price is
approximately $199.3 million, consisting of consideration of 2,894,081 shares of
Critical Path common stock and $20 million cash in exchange for all of the
outstanding capital stock of FaxNet, including vested warrants and options to
purchase FaxNet capital stock and assumption of debt. In addition, Critical Path
has agreed to pay to identified FaxNet employees and advisors incentive bonus
payments totaling $7.5 million on behalf of FaxNet, and has also agreed to pay
FaxNet's financial advisory fees in an amount not to exceed $5.25 million plus
out-of-pocket expenses not to exceed $50,000, in connection with the merger.
Pursuant to the reorganization agreement, Critical Path is obligated to
establish a retention bonuses in the aggregate amount of $1.5 million to
incentivize certain employees of FaxNet to remain
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employed with Critical Path for one year following the date of acquisition. The
merger closed December 6, 1999.
FaxNet's customers include Ameritech, Bell Atlantic, BellSouth, US West, Time
Warner's Road Runner, Ariba, Media One Group, Qwest and Telecom Argentina.
On November 3, 1999, Critical Path entered into a merger agreement and plan
of reorganization with The docSpace Company, Inc., a provider of Web-based file
management services located in Toronto, Canada. The total estimated purchase
price is $274.0 million consisting of 4,092,280 shares of Critical Path common
stock and $30 million cash, less any amount outstanding under a promissory note
owed to Critical Path by docSpace, in exchange for all of the outstanding
capital stock of docSpace. In connection with the transaction, docSpace will
merge with an unlimited liability company owned by Critical Path through wholly
owned subsidiaries. Shareholders of docSpace will receive a portion of their
consideration as cash and a portion of their consideration as either (1) shares
of Critical Path common stock or (2) exchangeable shares of the unlimited
liability company. The exchangeable shares will entitle the holders to dividends
and other rights that are, as nearly as practical, economically equivalent to
the ownership of Critical Path common stock. In addition, Critical Path will
issue one share of special voting preferred stock so that holders of the
exchangeable shares will have the right, through a voting trust, to vote at
meetings of Critical Path shareholders. The exchangeable shares are exchangeable
at the option of the holder into shares of Critical Path common stock. The
exchange ratio will be established at the closing based on the number of shares
of Critical Path common stock to be issued directly in the transaction, which
has not yet been determined. However, the total number of shares of Critical
Path common stock to be issued to existing docSpace shareholders directly or
upon the exchange of exchangeable shares will not exceed 4,092,280.
Critical Path has agreed to reimburse Canadian shareholders of docSpace for
aggregate costs of up to $5.0 million that they may incur in the establishment
and maintenance of holding companies as a result of their ownership of
exchangeable shares in an unlimited liability company. Critical Path has also
agreed that prior to closing the merger, and subject to certain conditions,
docSpace may issue additional shares, warrants and options not to exceed 11% of
the existing fully diluted capitalization of docSpace to a strategic partner and
a key management person. If these shares, warrants and options are issued,
Critical Path will assume them on the same terms and for the same price as is
being paid to existing docSpace shareholders, but the consideration paid will be
in addition to the amount being paid to existing shareholders. The merger is
expected to close by January 30, 2000, subject to the approval of all of the
shareholders of docSpace and the satisfaction of closing conditions.
CRITICAL PATH SOLUTION
Critical Path delivers advanced email and messaging services to ISPs, web
hosting companies, web portals and corporations, giving them the ability to
provide a feature-rich email and messaging service to their customers and
employees. Critical Path's services are designed to provide the following key
benefits:
Lower total cost of ownership. Critical Path's 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.
Critical Path's 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 Critical Path's
facilities, not at customers' facilities, and Critical Path employs 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, Critical Path provides
customers a cost savings over in-house messaging solutions through economies of
scale.
Scalability; web-tone reliability. Critical Path's 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]), Critical Path has designed its architecture to
support its 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. Critical
Path's hardware and software infrastructure consists of multiple servers running
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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. Critical Path has created a global network strategy to provide the
type of continuous service that individuals have come to expect from their
telephone service providers. Critical Path provides its customers improved
performance through its 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, Critical Path maintains three data centers in the United
States and two data centers in Europe. Critical Path plans to open additional
data centers in Asia.
Leading-edge technology. Critical Path provides customers with access to
advanced technologies. It eliminates the need for customers and partners to
maintain a core competency in advanced messaging 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. Critical Path's services include POP3, IMAP4 and hosted groupware
systems, which enables customers to choose the option that suits their
end-users' needs. Critical Path also delivers wireless access, integrated
calendars, security and other complex features difficult for in-house
organizations to offer reliably. Customers rely on Critical Path to evaluate,
test and implement the leading features to maintain a leading email solution.
Critical Path's technological capabilities enable it to quickly implement
competitive new technologies for its customers and end-users, reducing their
time to market for leading technologies.
Anytime, anywhere accessibility. Critical Path has designed its services to
allow easy access by customers and end-users. Designed and built on open
Internet-based standards, Critical Path's services are compatible with leading
desktop software such as Microsoft Outlook, Lotus cc:Mail, and Eudora. In
addition, it has developed a web-based email interface that is compatible with
leading web browsers, including Microsoft Internet Explorer and Netscape
Navigator. Critical Path's services are designed to allow administrators and
end-users to access their email system anywhere at any time. Critical Path has
recently entered into partnerships with wireless service providers to deliver
email and messaging access to digital wireless phones and pagers.
Enhanced security. Critical Path has 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, Critical Path reduces the potential for network breaches. Critical
Path has network and data center surveillance 24 hours a day, seven days a week
to identify and curtail potential security breaches.
Branding; customer control. Critical Path's messaging service solution
enables its customers to maintain control over their own brand and desired
functionality. Critical Path's fully customized web-based "brandable" email
interfaces include customer logos and preserve the existing "look and feel" of
the customers' brands. Its web-based Mail Administration Center is designed to
give customers control of their mail accounts via a secure web-based interface.
Critical Path also provides a secure software interface to mailbox account
provisioning that allows customers to integrate their existing functionality
with Critical Path's email system. This enables customers to add and delete
accounts and functionality either at the domain level or at the individual
end-user level.
SERVICES
Critical Path offers multiple messaging services to ISPs, web hosting
companies, web portals and corporations. Its "all-in" service model pricing
includes all enhancements, upgrades and new standard features. Pricing for email
and other hosted messaging services 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. Critical Path's
standard service offering includes its basic services as part of the monthly
mailbox fee. Its add-ons are included in the basic mailbox offering or offered
as an optional premium service. Its premium services are optional add-ons to the
basic mailbox charge and are offered for an additional charge. Critical Path
also derives email hosting revenue by providing users of LAN email
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systems a universal bridge to send messages outside their network. It charges
message fees in addition to monthly service fees for this bridge.
Critical Path's 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.
Current services. Critical Path has introduced to market a variety of
messaging services. Information concerning Critical Path's current services is
summarized in the following table:
<TABLE>
<CAPTION>
CLASS OF TARGET
SERVICE DESCRIPTION BENEFITS SERVICE MARKETS
------- ----------- -------- -------- -------
<S> <C> <C> <C> <C>
Web-Based Email - Hosting service based on a - Requires no software Basic All
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
Double-Byte - Web mail interface in - Allows display of web-based Basic Add-On All
Localization and double-byte Asian languages email interface in
Traffic double-byte languages and
transfer and storage of
messages containing
double-byte message data
POP3 Hosting - Hosting service based on - Allows users to connect to Basic ISPs, web hosting,
Post Office Protocol a shared mail server and (Premium corporate
download email to their add-on
desktop client (Microsoft for portals)
Outlook, Eudora), which
stores the message on the
user's hard drive each time
the inbox is accessed
IMAP4 Hosting - Hosting service that - Email messages and files Premium All
bridges the gap between POP3 hosted on an IMAP server
functionality and web-based can be manipulated from
email accessibility multiple email environments
without the need to
transfer data
Web-Based - Mail Administration Center - Allows email administrators Basic Add-On All
Administration (MAC) has Secure Socket to add, delete and modify
Layer-based brandable web accounts online
interface
Spam Blocking/UBE - Utilizes comprehensive - Protects users from Basic Add-On All
Filtering filtering system unsolicited bulk email,
commonly referred to as
"spam" or "junk mail"
Directory Services - Common directory layer to - Search capabilities Premium All
(LDAP) share information between Add-On
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
collaborative applications
such as certified delivery
and calendaring
</TABLE>
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<TABLE>
<CAPTION>
CLASS OF TARGET
SERVICE DESCRIPTION BENEFITS SERVICE MARKETS
------- ----------- -------- -------- -------
<S> <C> <C> <C> <C>
Additional Data - Additional storage in - Provides expandability of Premium All
Storage increments of 5 megabytes storage space Add-On
Calendar and - On-line personal and group - Integrates scheduling Premium All
Schedule calendars function with the ability to Add-On
Functionality access the user's schedule
and the organization's
events
Unified Messaging - Private-label unified - Allows users to retrieve Premium Portal
messaging service through faxes and voice messages by Add-On
JFAX, a company that logging into their email
provides a unified - Allows users to retrieve
messaging solution faxes and emails via
voicemail and universal
telephone number
Managed Exchange - The service of managing - Provides users the benefits Basic Enterprise
this organizational messaging of Microsoft Exchange without
and collaboration platform the overhead of an internal
IT department
- Rapid time to deployment
- No investment required
Dot Synch - An automatic directory - Automatically keeps address Premium Enterprise
synchronization service books of different email Add-on
systems current with each
other
Dot Fax - Provides faxing - Provides simplicity, Premium Enterprise
capabilities security and speed Add-on
to every user within a LAN-
based email system
Dot Telex - Enables customers to send - Provides simplicity, Premium Enterprise
and receive Telex messages security and speed Add-on
from their current
LAN-based email system
Dot Scan - Provides Virus Scanning - Detects and cleans messages Premium Enterprise
before they are transmitted Add-on
or received
Dot Net - Messaging service that Provides: Premium Enterprise
provides system - Access Control Add-on
administrators tools to - Spam Control
manage a messaging system - Mail Aliasing
- Detailed Reporting
- Web-based admin
- Virus Scanning
Dot X.400 - Enables every user to send - Savings, simplicity, Premium Enterprise
and receive X.400 messages security and speed Add-on
and attachments
SMTP Gateway - Gateway to Internet from - Provides Internet access to Premium Corporate
Services LAN-based mail systems users of proprietary
systems who would otherwise
not be able to mail to
others outside their Local
Area Network
Directory - Synchronizes multiple - Keeps multiple messaging Premium Corporate
Synchronization messaging directories systems up-to-date with new
or deleted users
</TABLE>
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<TABLE>
<CAPTION>
CLASS OF TARGET
SERVICE DESCRIPTION BENEFITS SERVICE MARKETS
------- ----------- -------- -------- -------
<S> <C> <C> <C> <C>
Groupware Hosting - Off-premises hosting of - Delivers full groupware Premium Corporate
Microsoft Exchange capabilities for a
predictable monthly fee
without administrative
headaches
X.400 - Messaging network services - Provides robust message Premium Corporate
tracking capabilities
Resource Management - Schedule shared resources - Increase productivity and Premium Corporate
and manage utilization return on assets through
higher utilization
Digital - Support of SMIME encryption - Provides a greater degree Premium All
Certificates of messages and facilitate of security for messages. CP Add-On
the ordering of digital facilitates the ordering of
certificates to enable the the digital certificates
SMIME encryption. for customers
</TABLE>
Critical Path intends to develop several new Internet messaging services to
complement its existing services.
<TABLE>
<CAPTION>
CLASS OF TARGET
SERVICE DESCRIPTION BENEFITS SERVICE MARKETS
------- ----------- -------- -------- -------
<S> <C> <C> <C> <C>
Permanent Archiving - Archives up to five - Stores and backs up daily Basic All
megabytes of data per mailbox archived documents on its Add-On
included in basic service servers
Mailing List - Supports custom-generated - Allows for user specified Premium All
Management lists, digest formats, list list management Add-on
filters, auto-subscribe and
unsubscribe, and
confirmation of
subscriptions
SSL-Based Email - SSL-based encryption of - Provides enhanced security Premium All
POP3, IMAP4 and web-based of email messages Add-On
email messages
USENET/ Newsgroup - Public and private - Facilitates participating Premium All
newsgroups which give the in newsgroup in a Add-On
enterprise a platform for web-friendly manner
discussion outside the
mailing list functionality
- Allows access to messages
stored on a news server
Certified Delivery - More sophisticated receipt - In addition to verifying Premium Corporate
verification service that the message was Add-On
delivered, users return
encrypted digital
certificates that identify
them as the recipient
</TABLE>
The statements in this proxy statement/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 Critical Path's control. For a discussion of some of
these factors, see "Risk Factors."
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CUSTOMERS
Critical Path currently has the opportunity to offer email services to
millions of mailboxes across its four target markets. The following is a list of
various representative companies with whom Critical Path has messaging services
agreements within their respective categories:
INTERNET SERVICE PROVIDERS
AGIS
America Online
Avantel
British Telecom
Cable & Wireless
DSL Networks
Isp.net
Las Vegas Digital Internet
MCI
NetConX
Satyam Infoway, Ltd.
Sprint
StarNet, Inc.
Surfree.com
US Online Network
WNC Net
WEB PORTALS
Alta Vista
Ancestry.com
AsiaMail
Canada.com
E*TRADE
Gayweb
ifan
LookSmart
Network Solutions
Raging Bull
SINA
Starmedia
The Password
(a division of Password Internet Publishing)
The Zone Network
Third Age Media
US WEST
WEB HOSTING COMPANIES
123 India
CardSecure
Data 2 Info
Navisite
Network Solutions
TABNet
Tonic Domains Corporation
True Media Solutions
Ultima Networks
CORPORATIONS
Bank Law Services
Birkenstock
California Family Health Council
Chateau Communities
Chateau Properties
ChipShot Golf
CompareNet
Continental Airlines
CNA
ICT Financial
Kansas Farm Bureau
Kraft Foods
Partech International Ventures
Photonetics
Promus Hotels
TARGET MARKETS
Critical Path intends to expand its marketing and distribution channels
through strategic relationships to rapidly increase the number of electronic
mailboxes hosted. Critical Path has developed strategic relationships within
four target markets: ISPs, web hosting companies, web portals and corporations.
Internet Service Providers. ISPs 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.
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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, web hosting companies are
increasingly offering web design, domain name registration service and email
services to their customers. Critical Path believes 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 by 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 Critical Path's strategy is to expand its marketing and
distribution channels through strategic relationships with entities that are
both commercial partners and/or equity investors or entities with which it has
contractual reseller relationships. Critical Path believes that these strategic
relationships will enable it to expand its distribution channels and to
undertake joint product development and marketing efforts. The following are
examples of Critical Path's existing strategic relationships that it believes
will position it to increase quickly the number of electronic mailboxes it
hosts.
America Online/ICQ. In January 1999, Critical Path entered into an
agreement with ICQ, a subsidiary of America Online, pursuant to which Critical
Path 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. Critical
Path's agreement with ICQ also provides for Critical Path's integration of
features of the ICQ instant messaging service with Critical Path's standard
email services and Critical Path's offering of these integrated services to its
other customers. In April 1999, Critical Path expanded its relationship with
America Online to include AOL Latin America and AOL Enterprise.
E*TRADE Group. In September 1998, Critical Path 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, 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.
E*TRADE uses Critical Path's 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, Critical
Path is 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, Critical Path entered into an agreement
with Network Solutions, currently the exclusive registrar of Internet domain
names, pursuant to which Critical Path provides email outsourcing services to
users of Network Solutions' website. In exchange for Critical Path's services,
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Network Solutions will provide domain name registration services for Critical
Path's 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, Critical Path entered into an agreement with
Sprint's IP Business Services unit pursuant to which Critical Path provides
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. Critical Path provides a dedicated customer
support number and a sales support center to support Sprint's sales
representatives. It is expected that Sprint will integrate Critical Path's brand
and bill email services under the Sprint name.
US West. In December 1998, Critical Path entered into an agreement with US
WEST pursuant to which Critical Path provides email services to US WEST's
telephone customers. Critical Path believes that US 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 enterprise Internet customers through an email
viewer.
Critical Path's agreements with its 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 Critical Path's
partners without cause, and some of the agreements are terminable by Critical
Path 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 Critical Path's services fail to meet defined minimum performance
standards. These strategic agreements may be terminated upon short notice.
SALES AND MARKETING
Sales Strategy. Critical Path's sales efforts target all market segment
audiences through direct and indirect channels. Critical Path maintains its own
direct sales force to introduce and educate prospective customers and partners
about its service. The direct sales group targets larger ISPs,
telecommunications companies, medium to large corporate customers, large web
hosting companies and high-traffic web portals. As of September 30, 1999,
Critical Path had 42 account executives in the direct sales group, and Critical
Path plans to significantly expand this group in the next 12 months. Critical
Path currently has domestic offices in the San Francisco, Irvine, San Jose,
Seattle, New York, Phoenix, Denver, Chicago, Boston, Atlanta, Houston, San
Diego, Salt Lake City, and Washington D.C. metropolitan areas. Critical Path
currently has international offices in Munich, Germany, London, England and
Paris, France. Within Critical Path's 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 Critical Path's 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 Critical Path initiates to prospective customers. The telesales
group also handles outbound calls to a specific list of contacts provided by
Critical Path's 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 its partners to
offer Critical Path's services to their end-users. Critical Path shares revenue
with its partners to achieve this purpose. To gain market presence and market
share overseas, Critical Path plans to team with leading distributors, resellers
and system integrators that have strong industry backgrounds and market presence
in their respective markets and geographic regions.
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Marketing Strategy. Critical Path's marketing strategy includes a media
relations and public speaking focus to develop a reputation as an industry
leader for email services and messaging. Direct marketing will be used to target
specific corporate, 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 Critical Path's
business-to-business brand presence.
Enhanced Services Development. Critical Path's marketing organizations
focus on marketing and service development. Its application management team
monitors new email and messaging service introductions by Critical Path's
competitors. This in turn assists its marketing group in determining Critical
Path's application pipeline and feature development schedules and provides
direction for its engineering, operations, sales and support teams. Critical
Path's marketing teams are also responsible for driving the requirements and
strategies for each of its four target markets.
Critical Path's 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 Critical Path's
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 Critical Path's change control
board. The change control board, which is comprised of a cross-department
management team, prioritizes and schedules Critical Path's development efforts
and assigns resources to the development project team.
Critical Path's services development process involves coordination among
its application management, marketing and service management teams. To support
its service development and marketing functions, Critical Path conducts an
ongoing analysis of competitive intelligence, product forecasting, financial
analysis and pricing strategies.
TECHNOLOGY
In offering email services, Critical Path employs advanced software and
hardware, combining internal expertise with industry standard technology to
create a proprietary infrastructure.
Mail Center Technology. Critical Path has created a proprietary email
system, Mail Center Technology, or 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 by 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. Critical Path has 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. Critical
Path's MCT hardware and software consists of Sun Microsystems, Inc. Ultra
Enterprise servers, Cisco Systems, Inc. routers, EMC redundant storage arrays,
Veritas software and rackmounted Intel processor-based servers running Solaris
and FreeBSD, a free operating language.
All aspects of MCT are deployed in a redundant configuration 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, IMAP4 and web-based email services and will
also host 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.
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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 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 Hyper Text Markup Language
or HTML, email, allows users to access their email 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. Critical Path has created a proprietary Account
Provisioning Protocol or APP for account creation and maintenance. APP enables
accounts transitioning from other services or legacy systems to be bulk-loaded,
tested, replicated and deployed on Critical Path's 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, 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. Critical Path maintains data centers in
San Francisco and Palo Alto, California, Sterling, Virginia, London, England and
Munich, Germany. Critical Path also plans to maintain data centers in Asia. 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, Critical Path has reduced the likelihood that its
customers will suffer downtime as a result of network outages. Critical Path's
backbone architecture and interconnection strategy consists of clear channel
DS-3 connections and direct 100 MB/sec Ethernet connections. Critical Path has
entered into an agreement with Qwest to transition some of its customers to
Qwest's facility in Sunnyvale, California.
Critical Path currently has bilateral peering arrangements in place with
the following organizations: aussie.net, Excite@Home, AboveNet Communications,
Compaq/Digital Equipment Corporation, Concentric Networks, Dacom, DataResearch
Associates, DIGEX, Direct Network Access, Electric Lightwave, Exodus
Communications, Frontier GlobalCenter, GTE Internetworking/Genuity, Globix,
Hanaro Telecom, Hurricane Electric, Inet, MAXIM, Paradox Digital, Pilot Network
Services, Route Server Next Generation, Singapore Telecom, Telestra Corporation,
Tycho Internet, Verio, ViaNet Communications, Web Professionals, WebTV Networks,
XMISSION, and Zocalo.
In addition to its peering connections, Critical Path currently purchases
additional Internet access from MCI WorldCom and Sprint, through their
relationships with AboveNet Communications Inc.
Critical Path's 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. Critical Path intends to
open data centers in Asia. These data centers will create a local connectivity
in those markets.
Network Security. Critical Path has created a custom firewall solution to
reduce the incidence of network security breaches, utilizing Cisco Systems, Inc.
routers for firewall hardware. To enhance security
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for the network, Critical Path's staff members monitor the network and hardware
24 hours a day, seven days a week. Any suspicious activity is reported and
investigated immediately.
Critical Path's 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 Critical Path's security efforts are to prevent intruders from
gaining access to its customers' email messages, passwords or financial
information, to protect its server software and design information from being
accessed by intruders, and to prevent malicious individuals from causing service
failure or slowdown. Critical Path accomplishes these goals by ensuring that its
server clusters are entirely isolated from the Internet at large except for the
specific services Critical Path provides, 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. Critical Path's 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 its service
partners and customers.
Critical Path's engineers have written proprietary "learning" software that
automatically screens incoming messages for telltale items in message headers
and subject lines. Critical Path has also developed a comprehensive database of
commonly forged addresses and frequently abused domain names. Most additions to
the "black list" have been reported by Critical Path's end-users, who are
encouraged to notify it 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, Critical Path's
personnel monitor incoming messages 24 hours a day, seven days a week. Critical
Path is part of a group of key network operators and ISPs working to develop
technologies and other measures aimed at protecting users from junk email.
Critical Path has representatives serving on the Coalition Against Unsolicited
Commercial Email, the leading national organization lobbying for anti-spam
legislation. Critical Path's Acceptable Use Policy explicitly states that
partners and customers may not use its service to send unsolicited bulk email.
Customer Support. Critical Path provides customer support 24 hours a day,
seven days a week by contractual agreement. Critical Path's customer support
service consists of two tiers. Tier 1 includes technical support in response to
end-user inquiries. Although its customers typically provide Tier 1 support
directly to their end-users, they can outsource this function to it and Critical
Path can provide Tier 1 support to their end-users via email or web-based
support. Critical Path also provides support information on its website.
Tier 2 support includes technical support, provided to Critical Path's ISP,
web hosting, web portal and corporate customers, via toll-free access and email
correspondence managed by Critical Path's team of trained technical support
representatives. Critical Path's 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, Critical Path has
deployed customer relationship management 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 Critical Path's
ability to track recurring customer issues that will identify opportunities for
service improvements. Critical Path's staff of trained technical
representatives, coupled with leading edge monitoring and tracking tools allows
it to successfully serve the needs of its clients.
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COMPETITION
The market for Internet-based email services is characterized by companies
that elect to develop and maintain in-house solutions and companies that seek
outsourcing arrangements for their email services. For customers seeking
outsourcing arrangements, Critical Path competes 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 Critical Path expands its service offerings, Critical
Path expects to encounter increased competition in the development and delivery
of these services. Many of Critical Path's current and potential competitors
have longer operating histories, larger customer bases, greater brand
recognition and significantly greater financial, marketing and other resources
than Critical Path does and may enter into strategic or commercial relationships
with larger, more established and well-financed companies. Certain of Critical
Path's competitors may be able to enter into such strategic or commercial
relationships on more favorable terms. Further, certain of Critical Path's
competitors may offer services at or below cost. In addition, new technologies
and the expansion of existing technologies may increase competitive pressures on
it. Increased competition may result in reduced operating margins and loss of
market share. Critical Path believes that its 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;
- 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 Critical Path's competitive positioning, it may not be
able to compete successfully against current and future competitors, and
competitive pressures could have a material adverse effect on Critical Path's
business, operating results and financial condition.
INTELLECTUAL PROPERTY
Critical Path regards its copyrights, service marks, trademarks, trade
secrets and similar intellectual property as critical to its success, and it
relies on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect Critical Path's proprietary rights.
It may be possible for unauthorized third parties to copy certain portions
of Critical Path's products or reverse engineer or obtain and use information
that Critical Path regards 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.
Critical Path has two patents pending in the United States. It does not
know whether these patents will be granted or, if granted, that the patents 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 its means of protecting
Critical Path's proprietary rights in the
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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. Critical Path may also be subject to legal proceedings and
claims from time to time in the ordinary course of its business, including
claims of alleged infringement of the trademarks and other intellectual property
rights of third parties by it and its licensees. For example, Critical Path
recently received a letter alleging that its 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.
Critical Path also intends to continue to strategically license certain
technology from third parties, including its web server and SSL encryption
technology. In the future, if Critical Path adds certificate technology to its
systems, it may license additional technology from third-party vendors. Critical
Path cannot be certain that these third-party content licenses will be available
to it on commercially reasonable terms or that it will be able to successfully
integrate the technology into its products and services. These third-party
in-licenses may expose it to increased risks, including risks associated with
the assimilation of new technology, the diversion of resources from the
development of Critical Path's own proprietary technology and its 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 Critical Path's business, financial condition and operating
results to suffer. See "Risk Factors -- The success of the combined company will
depend significantly on the protection of its intellectual property."
EMPLOYEES
As of September 30, 1999, Critical Path had 369 full-time employees. None
of its employees is covered by collective bargaining agreements. Critical Path
believes that its relations with its employees are good.
FACILITIES
Critical Path's 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.
Critical Path believes that its facilities will be adequate for the next 12
months. However, Critical Path may not be able to lease additional space on
commercially reasonable terms or at all.
LEGAL PROCEEDINGS
Critical Path is party to various legal proceedings in the ordinary course
of business. Critical Path believes that the ultimate outcome of these matters
will not have a material adverse impact on its financial position, results of
operations or operating cash flows.
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CRITICAL PATH'S MANAGEMENT
The current executive officers, directors and key employees of Critical
Path and their ages as of October 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Douglas T. Hickey.......................... 44 President, Chief Executive Officer and
Director
David C. Hayden............................ 44 Chairman of the Board of Directors
David A. Thatcher.......................... 44 Executive Vice President and Chief
Financial Officer
Joseph Duncan.............................. 51 Vice President and Chief Information
Officer
Judie A. Hayes............................. 52 Vice President of Corporate Communications
William H. Rinehart........................ 35 Vice President of Worldwide Internet Sales
Marcy Swenson.............................. 35 Vice President of Architecture
Mari E. Tangredi........................... 35 Vice President of Business Development
Cynthia D. Whitehead....................... 52 Vice President of Operations and Customer
Service
Brett M. Robertson......................... 39 Vice President of Strategic Development and
General Counsel
Sharon Wienbar............................. 37 Vice President Marketing
R. Scott Newth............................. 35 President, Enterprise Messaging
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 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
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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.
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.
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
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.
Rinehart 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 Architecture of Critical
Path since October 1999. From June 1997 to October 1999, Ms. Swenson served as
the Vice President of Software Engineering for Critical Path. 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.
Brett M. Robertson has served as Vice President of Strategic Development
and General Counsel since June 1999. From July 1998 to December 1998, Ms.
Robertson served as General Counsel of Broderbund Software. From August 1994 to
July 1998 Ms. Robertson served as Associate General Counsel of
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Broderbund Software. From 1986 to August 1994, Ms. Robertson practiced corporate
law at various law firms including Wilson Sonsini Goodrich and Rosati, O'Melveny
and Myers, and Cooley Godward LLP. Ms. Robertson received her B.A. from the
University of California at Berkeley and her J.D. from the University of
Virginia.
Sharon Wienbar has served as Vice President Marketing of Critical Path
since August 1999. From March 1999 to August 1999, Ms. Wienbar served as Vice
President Marketing at Amplitude Software. From 1991 to 1998, Ms. Wienbar was
most recently Vice President at Adobe Systems. Ms. Wienbar received her M.S. and
B.A. from Harvard University and her M.B.A. from Stanford.
R. Scott Newth has served as President, Enterprise Messaging since July
1999. From February 1998 to July 1999, Mr. Newth was President and Chief
Executive Officer of DotOne Corporation. From March 1997 to February 1998, Mr.
Newth served as Chief Financial Officer of DotOne. Prior to joining DotOne, Mr.
Newth spent eleven years in investment and merchant banking in large
international companies. Mr. Newth received his B.S. in Finance and M.B.A. from
Florida State 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 to January 1995, he served as General
Manager for Lotus Development Corporation. In August 1990, Mr. Harvey founded
Approach Software Corporation, 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 Ashford.com, Broadbase Software
and Red Hot Software, as well as several privately held companies. Mr. Harvey
received a B.S.E.E. degree from Rice University.
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
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Massachusetts Institute of Technology and Massachusetts Institute of Technology
Sloan School of Management.
Critical Path has authorized seven directors. All directors are elected to
hold office until Critical Path's 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 Critical Path's 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 Critical Path's 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 Critical
Path's Compensation Committee.
DIRECTOR COMPENSATION
Critical Path reimburses each member of its board of directors for
out-of-pocket expenses incurred in connection with attending board meetings. No
member of Critical Path's 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.
EXECUTIVE COMPENSATION
The following table summarizes all compensation earned by or paid to
Critical Path's Chief Executive Officer and to each of its 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
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION(1) 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(5)
David Hayden(3)
Chairman of the Board of Directors..................... 170,833 135,000 1,363,636(6)
Wayne Correia(4)
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(7)
</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 year 1998.
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(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) Mr. Correia ceased to be employed by Critical Path on September 30, 1999.
(5) 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).
(6) 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.
(7) 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 $2.20 per share, respectively.
All options vest as to 25% of the shares on the first anniversary of Ms.
Tangredi's employment with Critical Path and 1/48th each full month
thereafter.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENTAGE OF POTENTIAL REALIZABLE AT ASSUMED
TOTAL OPTIONS ANNUAL RATES OF STOCK PRICE
GRANTED TO EXERCISE OR APPRECIATION FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -------------------------------
GRANTED FISCAL YEAR(1) ($/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) 19.55 0.84 10/18/08 79,219,343 127,173,963
David Hayden.............. 1,363,636(6) 12.87 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 year 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.
(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.
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(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.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR-END AT FISCAL YEAR-END(3)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Douglas Hickey(1)................... 1,274,687(2) $ -- 1,274,687/-- $ 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
Critical Path's 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 its initial public offering. Critical Path's 1998
Stock Plan provides for awards or sales of shares and options (including
incentive stock options or ISOs, and nonstatutory stock options or 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 have been reserved for issuance under Critical
Path's 1998 Stock Plan and this amount is increased by 5% each January 1,
commencing January 1, 2000.
Critical Path's 1998 Stock Plan is administered by its compensation
committee and its non-insider option committee. Critical Path's compensation
committee consists of at least two directors who are "non-employee directors,"
as defined in Rule 16b-3. Its non-insider option committee consists of Critical
Path's chief executive officer, and is authorized to grant options to persons
who are not executive officers. The board of directors may amend Critical Path's
1998 Stock Plan as desired without further action by Critical Path's
shareholders except as required by applicable law. Critical Path's 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 Critical Path's 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.
Critical Path's 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.
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<PAGE> 86
As of October 31, 1999, 13,634,418 awards had been granted under Critical
Path's 1998 Stock Plan. Such options have exercise prices ranging from $0.022 to
$87.00 per share and a weighted average per share exercise price of $5.2720.
Options to purchase 2,719,652 shares have been exercised, and 1,412,964 have
been cancelled.
EMPLOYEE STOCK PURCHASE PLAN
The board of directors adopted Critical Path's Employee Stock Purchase Plan
effective upon completion of its initial public offering. A total of 600,000
shares of common stock have been reserved for issuance under Critical Path's
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. Critical Path's 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. Critical Path's Employee Stock Purchase Plan
permits eligible employees to purchase common stock through payroll deductions,
which may not exceed 15% of an employee's compensation.
Critical Path's Employee Stock Purchase Plan is implemented in a series of
overlapping 24 month participation periods. The initial participation period
commenced on the effectiveness of Critical Path's 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 Critical Path's 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 a
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 its 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 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
it when made.
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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.
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CRITICAL PATH MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Critical Path was founded in February 1997 to deliver email hosting
solutions to Internet service providers, web hosting companies, web portals and
corporations. From its inception to October 1997, Critical Path's operating
activities related primarily to the planning and development of its proprietary
technological solution, recruitment of personnel, raising of capital and
purchase of operating assets. Critical Path initiated its email hosting service
in October 1997. It continued to make investments to improve the quality of its
service. In December 1997, it enhanced its initial service offering, a hosting
service based on Post Office Protocol 3, with the addition of a web mail
interface. Post Office Protocol 3 is a standard protocol for receiving email
commonly referred to as "POP3". In January 1999, Critical Path further enhanced
its service with the addition of an offering based on the Lightweight Directory
Access Protocol, or "LDAP," a directory software protocol.
In May 1999, Critical Path acquired substantially all the operating assets
of the Connect Service business of Fabrik Communications, Inc. Critical Path
purchased the ongoing business operations as well as nearly 500 customer
relationships of Fabrik. The acquisition has been accounted for using the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the net assets acquired on the basis of their respective fair
values on the date of acquisition. The total purchase price of approximately
$20.1 million consisted of $12.0 million cash, common stock valued at $8.0
million, and other acquisition costs of approximately $100,000. Of the total
purchase price, approximately $500,000 was allocated to property and equipment,
and the remainder was allocated to intangible assets, including customer list
($2.1 million), assembled workforce ($400,000), and goodwill ($17.1 million).
The acquired intangible assets will be amortized over their estimated useful
lives of two to three years. Goodwill will be amortized using the straight-line
method over three years, resulting in a quarterly charge of $1.4 million during
the amortization period. At September 30, 1999, cumulative amortization of
intangibles totaled $2.2 million.
In July 1999, Critical Path acquired all outstanding shares of dotOne
Corporation, a leading provider of corporate email and messaging services. The
acquisition has been accounted for using the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible net
liabilities and intangible net assets acquired on the basis of their respective
fair values on the date of the acquisition. The total purchase price of $57.0
million consisted of $17.5 million cash, common stock valued at $35.0 million,
assumed stock options with an estimated fair market value of $3.2 million, and
other acquisition costs of approximately $1.3 million. Of the total purchase
price, approximately $1.7 million was allocated to net tangible liabilities, and
the remainder was allocated to intangible assets, including customer list ($4.6
million), assembled workforce ($1.5 million), existing technology ($600,000),
and goodwill ($52.0 million). The acquired intangible assets will be amortized
over their estimated useful lives of three to five years. Goodwill will be
amortized using the straight-line method over three years, resulting in a
quarterly charge of $4.3 million during the amortization period. At September
30, 1999, cumulative amortization of intangibles totaled $3.2 million.
In August 1999, Critical Path acquired all outstanding shares of Amplitude
Software Corporation, a leading provider of Internet calendaring and resource
scheduling solutions. The acquisition has been accounted for using the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the tangible and intangible net assets acquired on the basis of their respective
fair values on the date of the acquisition. The total purchase price of $214.4
million consisted of $45.0 million cash, common stock valued at $141.3 million,
assumed stock options with an estimated fair market value of $22.0 million, and
other acquisition costs of approximately $6.1 million. Of the total purchase
price, approximately $4.4 million was allocated to net tangible assets and the
remainder was allocated to intangible assets, including customer list
($600,000), assembled workforce ($3.8 million), existing technology ($4.1
million), and goodwill ($201.5 million). The acquired intangible assets will be
amortized over their estimated useful lives of three to five years. Goodwill
will be amortized using the straight-line
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method over four years, resulting in a quarterly charge of $12.6 million during
the amortization period. At September 30, 1999, cumulative amortization of
intangibles totaled $4.4 million.
In December 1999, Critical Path acquired all outstanding shares of FaxNet
Corporation, a provider of Internet fax and messaging solutions and a leading
supplier of carrier-class enhanced fax and integrated messaging solutions. The
estimated purchase price for FaxNet is approximately $199.3 million, comprised
of approximately $20.0 million in cash, $154.8 million in stock and $24.5
million in assumed unvested options and assumed debt and expenses. Critical Path
anticipates that it will amortize the intangibles acquired in this transaction
over their useful lives.
In early November 1999, entered into an agreement to acquire the docSpace
Company, Inc., a provider of Web-based file management services. The estimated
purchase price for docSpace is $274.0 million, comprised of approximately $30.0
million in cash, $234.0 million in stock and $10.0 million in expenses, and that
transaction is expected to close in late January 2000, subject to conditions.
Critical Path anticipates that it will amortize the intangibles acquired in this
transaction over their useful lives.
Critical Path continues to derive most of its revenues through its email
hosting services. Critical Path's service revenues are derived primarily from
contractual relationships which provide for revenues on a per mailbox and per
message basis. These contracts are typically one to three years in length.
Revenues based upon a percentage of the email advertising revenues generated by
customers are recognized when those revenues are earned and reported by the
customer. Critical Path also derives email hosting revenue by providing users of
LAN email systems a universal bridge to send messages outside their network.
Critical Path charges message fees in addition to monthly service fees for this
bridge, and recognizes revenue in the period such services are provided. Other
set-up fees are comprised of customized installation of email services. Payments
are based on a contractual fee for the customization, and revenue is recognized
upon completion of the work. Consulting revenues are billed and recognized on a
monthly basis as the service is performed. Revenues for software licenses for
which collection of the resulting receivable is deemed probable are recognized
upon delivery of the licensed software. Revenues from software maintenance are
recognized ratably over the maintenance term. Agreements with some of Critical
Path's customers require minimum performance standards regarding the
availability and response time of its email services. If it fails to meet these
standards Critical Path's customers could terminate their relationships with it
and it could be subject to contractual monetary penalties.
Critical Path expects to expand its operations and employee base, including
its sales, marketing, technical, operational and customer support resources. In
particular, Critical Path intends to expand its sales force to deliver its email
outsourcing services to customers in its four target markets: ISPs, web hosting
companies, web portals and corporations. Critical Path also intends to further
develop new and existing strategic relationships to expand its distribution
channels and to undertake joint product development and marketing efforts.
Critical Path intends to develop worldwide sales offices and data centers.
It currently has sales offices in the United States, Germany, Great Britain, and
France, and data centers in the United States, Germany, and Great Britain. It
expects to open additional data centers within the next 12 months.
Future investments in technology may involve the development, acquisition
or licensing of technologies that complement or augment Critical Path's existing
services and technologies.
During 1998, Critical Path recorded aggregate unearned compensation
totaling approximately $19.9 million in connection with certain sales of stock
and the grant of certain options to employees, directors and consultants. This
amount is being amortized over the four-year vesting period of the related
options. These options were issued to create incentives for continued
performance. Of the total unearned compensation, approximately $448,000,
$217,000, $269,000 and $1.7 million were amortized in the quarters ended March
31, June 30, September 30, and December 31, 1998, respectively. In January and
March 1999, it granted options resulting in an additional $18.1 million of
unearned compensation. Amortization of unearned compensation was approximately
$3.7 million during the three months ended March 31, 1999, approximately $4.9
million during the three months ended June 30, 1999, and approximately $4.8
million
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during the three months ended September 30, 1999. Critical Path expects
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, Critical Path entered into an agreement with ICQ, a
subsidiary of America Online, Inc., pursuant to which it will provide email
hosting services that will be integrated with ICQ's instant messaging service
provided to ICQ's customers. The ICQ instant messaging service is designed to
allow users to communicate in real time over the Internet. As part of the
agreement, ICQ agreed to provide sub-branded advertising for Critical Path in
exchange for a warrant to purchase 2,442,766 shares of common stock, issuable
upon attainment of each of five milestones. Critical Path believes that this
agreement will have a significant current and potential future impact on its
results of operations. The following table summarizes the shares underlying each
milestone and the related exercise price:
<TABLE>
<CAPTION>
SHARES
UNDERLYING EXERCISE
WARRANT PRICE
------------------- --------
<S> <C> <C>
Milestone 1....................................... 814,254 $ 4.26
Milestone 2....................................... 407,128 $ 5.50
Milestone 3....................................... 407,128 $ 6.60
Milestone 4....................................... 407,128 $ 8.80
Milestone 5....................................... 407,128 $11.00
---------
Totals.......................................... 2,442,766
</TABLE>
In the quarter ended June 30, 1999, Critical Path amended the vesting terms
of its agreement with ICQ. The revised vesting terms did not impact the shares
underlying the first milestone, which vested immediately upon the execution of
the agreement. The shares underlying the remaining milestones vest on the date
in a quarter in which ICQ completes a minimum registration of 100,000
sub-branded ICQ mailboxes, compared to 250,000 sub-branded ICQ mailboxes as
provided in the terms of the original agreement. The amended agreement also
provides that only one milestone may be achieved on a quarterly basis.
Using the Black-Scholes option pricing model and assuming a term of seven
years and expected volatility of 90%, the initial fair value of the warrant on
the effective date of the agreement approximated $16.5 million, which is being
amortized to advertising expense using the straight-line method over four years.
The shares underlying the second through fifth milestones are remeasured at each
subsequent reporting date until each sub-branded ICQ mailbox registration
threshold is achieved and the related warrant shares vest, at which time the
fair value attributable to that tranche of the warrants fixed. In the event such
remeasurement results in increases or decreases from the initial fair value,
which could be substantial, these increases or decreases will be recognized
immediately, if the fair value of the shares underlying the milestone has been
previously recognized, or over the remaining term, if not.
At March 31, 1999, none of the registration milestones specified within the
ICQ warrant had been achieved. Therefore, the shares underlying the second
through the fifth milestones of the ICQ warrant were remeasured using the
closing price of Critical Path common stock on March 31, 1999 of $77 per share.
This remeasurement resulted in an increase to the fair value of the warrant of
$109.4 million, bringing the total fair value of the warrant to $125.9 million
as of March 31, 1999.
At June 30, 1999, none of the registration milestones specified within the
ICQ warrant agreement had been achieved. Therefore, the shares underlying the
second through the fifth milestones of the ICQ warrant were remeasured using the
closing price of Critical Path common stock on June 30, 1999 of $55.3125 per
share. This remeasurement resulted in a decrease to the fair value of the
warrant of $35.0 million compared to the fair value of the warrant on March 31,
1999, bringing the total fair value of the warrant to $90.9 million as of June
30, 1999.
At September 30, 1999, one of the registration milestones specified within
the ICQ warrant agreement had been achieved. The shares underlying this
milestone were remeasured using the closing
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price of Critical Path common stock on August 19, 1999, the date on which the
milestone was achieved. The closing price of Critical Path common stock on
August 19, 1999 was $36.6875. The shares underlying the third through the fifth
milestones of the ICQ warrant were remeasured using the closing price of
Critical Path common stock on September 30, 1999 of $40.34375. Together, these
remeasurement calculations resulted in a decrease to the fair value of the
warrant of $26.0 million compared to the fair value of the warrant on June 30,
1999, bringing the total fair value of the warrant to $64.9 million as of
September 30, 1999.
The revised fair value will be amortized ratably over the remainder of the
four-year term of the agreement, resulting in a quarterly amortization charge to
advertising expense in the amount of $4.1 million. Based on the revised fair
value of the warrant, the resulting cumulative amortization charge totaled $12.2
million for the nine months ended September 30, 1999. As an amortization charge
of $11.4 million had been recognized during the six months ended June 30, 1999,
the difference of approximately $800,000 was recognized as advertising expense
in the quarter ended September 30, 1999.
As of September 30, 1999, only two of the five milestones had been
attained. On October 16, 1999, the Company attained the third registration
milestone. Critical Path expects that future changes in the trading price of its
common stock at the end of each quarter, and at the time certain milestones are
achieved, will cause additional substantial changes in the ultimate amount of
the related stock-based compensation.
Critical Path has incurred significant losses since its inception, and as
of September 30, 1999 had an accumulated deficit of approximately $70.8 million.
It intends to invest heavily in sales and marketing, continued development of
its network infrastructure, and continued technology enhancements. Critical Path
expects to continue to incur substantial operating losses for the foreseeable
future.
In view of the rapidly evolving nature of its business, its recent
acquisitions, and its limited operating history, Critical Path believes that
period-to-period comparisons of its revenues and operating results, including
its gross profit margin and operating expenses as a percentage of total net
revenues, are not meaningful and should not be relied upon as indications of
future performance. At September 30, 1999, Critical Path had 369 employees, in
comparison with 58 employees at September 30, 1998. Critical Path does not
believe that its historical growth rates for revenue, expenses, or personnel are
indicative of future results.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
The following table sets forth the historical results of our operations,
expressed in absolute dollars and as a percentage of revenues, for the nine
months ended September 30, 1999 and 1998, respectively.
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<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-----------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues(1).............................. $ 7,968 $ 292 100.0% 100.0%
Cost of net revenues(2)...................... (13,860) (1,253) 173.9 429.1
-------- ------- ----- -------
Gross profit (loss)..................... (5,892) (961) 73.9 329.1
-------- ------- ----- -------
Operating expenses:
Sales and marketing........................ 8,760 836 109.9 286.3
Research and development................... 4,705 1,237 59.0 423.6
General and administrative................. 7,919 2,088 99.4 715.1
Acquisition-related bonus compensation..... 570 -- 7.2 --
Amortization of intangibles................ 9,813 -- 123.2 --
Stock-based expenses....................... 25,244 868 316.8 297.3
-------- ------- ----- -------
Total operating expenses................ 57,011 5,029 715.5 1,722.3
-------- ------- ----- -------
Loss from operations......................... (62,903) (5,990) 789.4 2,051.4
Other income (expense):
Interest and other income.................. 5,074 120 63.7 41.1
Interest expense(3)........................ (411) (262) 5.2 89.7
-------- ------- ----- -------
Net loss..................................... $(58,240) $(6,132) 730.9% 2,100.0%
======== ======= ===== =======
Net loss per share (basic and diluted)....... $ (2.26) $ (1.78)
======== =======
Weighted average shares (basic and
diluted)................................... 25,715 3,445
======== =======
Acquisition-related bonus charges included
in:
(2) Cost of net revenues................... $ 130 $ --
Stock-based charges included in:
(1) Net revenues........................... $ 106 $ 102
(2) Cost of net revenues................... $ 3,901 $ 66
(3) Interest expense....................... $ (48) $ (145)
</TABLE>
Net revenues. Critical Path continues to derive most of its revenues
through its email hosting services. Its service revenues are derived primarily
from contractual relationships which provide for revenues on a per mailbox and
per message basis. These contracts are typically one to three years in length.
Revenues based upon a percentage of the email advertising revenues generated by
customers are recognized when those revenues are earned and reported by the
customer. Critical Path also derives email hosting revenue by providing users of
LAN email systems a universal bridge to send messages outside their network. It
charges message fees in addition to monthly service fees for this bridge, and
recognizes revenue in the period such services are provided. Other set-up fees
are comprised of customized installation of email services. Payments are based
on a contractual fee for the customization, and revenue is recognized upon
completion of the work. Consulting revenues are billed and recognized on a
monthly basis as the service is performed. Revenues for software licenses for
which collection of the resulting receivable is deemed probable are recognized
upon delivery of the licensed software. Revenues from software maintenance are
recognized ratably over the maintenance term. Agreements with some of Critical
Path's customers require minimum performance standards regarding the
availability and response time of its email services. If Critical Path fails to
meet these standards its customers could terminate their relationships with it
and it could be subject to contractual monetary penalties.
For the nine months ended September 30, 1999, Critical Path's revenue
increased to $7,968,000 from $292,000 in the corresponding period of the
previous fiscal year. This increase in revenue resulted primarily from a
substantial increase in the number of mailboxes Critical Path hosted during the
current fiscal year
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in comparison with the corresponding periods of the previous fiscal year, as
well as from the contribution to current revenue of acquired companies' revenue
streams. At September 30, 1999, it hosted 6.7 million active mailboxes. At
September 30, 1998, by comparison, it hosted approximately 255,000 mailboxes.
In connection with certain customer contracts executed in 1998, Critical
Path granted warrants or options to purchase Series B Convertible Preferred
Stock. The fair value of these warrants or options, determined using the
Black-Scholes option pricing model, has been recognized ratably as a sales
discount over the terms of the respective agreements. Amortization of this
discount amounted to $106,000 and $102,000 for the nine months ended September
30, 1999 and 1998, respectively.
In early 1998, Critical Path executed agreements with E*TRADE, an on-line
brokerage services company, and Verio, a web hosting organization, pursuant to
which it derives revenue for providing email services. During the nine months
ended September 30, 1999, E*TRADE and Verio accounted for approximately 23% and
7%, respectively, of Critical Path's net revenues, excluding the value of stock
purchase rights received by customers. For the entirety of 1998, E*TRADE and
Verio accounted for approximately 62% and 30%, respectively, of Critical Path's
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 Critical Path's email services,
including depreciation of capital equipment used in its network infrastructure
and personnel costs in its operations and customer support functions. For the
nine months ended September 30, 1999, cost of net revenues was $13,860,000, or
174% of net revenues, in comparison with costs of $1,253,000, or 429% of net
revenues, for the corresponding period of 1998. Critical Path has made
significant acquisitions of equipment for its data centers over the past 12
months, and as a result its depreciation expense of networking equipment during
1999 has increased substantially in comparison with the corresponding periods of
the previous fiscal year. Additionally, Critical Path incurred $1,308,000 of
consulting and outside contractor charges during the nine months ended September
30, 1999 as it continued its efforts to enhance its network and migrate to a new
storage platform. Critical Path has also increased its staffing significantly in
operations and customer support over the past year, and consequently
compensation and other personnel costs have been higher in the current fiscal
year. From January 1, 1999 to September 30, 1999, its operations and customer
support staff increased from 25 employees to 102 employees. At September 30,
1998, Critical Path had 19 employees on staff in operations and customer support
functions.
During the nine months ended September 30, 1999, Critical Path also
incurred a one-time stock-based charge of approximately $2 million in connection
with a severance agreement for a terminated employee. This expense was charged
to cost of net revenues based on the functions and duties previously performed
by the terminated employee.
Sales and Marketing. Critical Path's sales and marketing expenses consist
principally of compensation for its sales and marketing personnel, advertising,
public relations, other promotional costs, and, to a lesser extent, related
overhead. For the nine months ended September 30, 1999, sales and marketing
expenses came to $8,760,000, or 110% of net revenues, in comparison with
$836,000, or 286% of net revenues, for the corresponding period of the previous
fiscal year. Increases in marketing and promotional expenses, incentive
compensation payments to sales personnel, and increases in compensation
associated with additional headcount accounted for the increase in sales and
marketing expenses during 1999. From January 1, 1999 to September 30, 1999,
Critical Path's sales and marketing staff increased from 30 employees to 120
employees. At September 30, 1998, it had 12 employees on staff in sales and
marketing functions.
Research and Development. Critical Path's research and development expenses
consist principally of compensation for its technical staff, payments to outside
contractors, and, to a lesser extent, related overhead. It expenses research and
development expenses as they are incurred. For the nine months ended September
30, 1999, research and development expenses were $4,705,000, or 59% of net
revenues, in comparison with $1,237,000, or 424% of net revenues, for the
corresponding period of the previous fiscal year. These significant dollar
increases resulted primarily from increases in personnel and use of outside
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contractors. From January 1, 1999 to September 30, 1999, Critical Path's
research and development staff increased from 27 employees to 109 employees. At
September 30, 1998, Critical Path had 20 employees on staff in research and
development functions.
General and Administrative. Critical Path's general and administrative
expenses consist principally of compensation for personnel, fees for outside
professional services, occupancy costs and, to a lesser extent, related
overhead. For the nine months ended September 30, 1999, general and
administrative expenses came to $7,919,000 or 99% of net revenues, in comparison
with $2,088,000, or 715% of net revenues, for the corresponding period of the
previous fiscal year. These increases were attributable primarily to increases
in compensation associated with additional headcount, increased fees for outside
professional services, and higher occupancy costs. From January 1, 1999 to
September 30, 1999, Critical Path's general and administrative staff increased
from 11 employees to 38 employees. At September 30, 1998, it had seven employees
on staff in general and administrative functions.
Acquisition-related bonus program. In connection with its acquisition of
Amplitude, Critical Path established a bonus program in the aggregate amount of
$10 million to provide incentive for former Amplitude employees to continue
their employment with Critical Path. Payment of bonuses to the listed employees
will occur one year following the date of acquisition, unless the listed
employees voluntarily terminate their employment with Critical Path prior to
August 31, 2000. The aggregate amount of the eligible bonus is adjusted downward
at each point that a former Amplitude employee chooses to terminate his or her
employment with Critical Path. The amount of any such downward adjustment
corresponds to the amount that the terminating employee would have received had
he or she elected to continue employment with Critical Path. A ratable share of
the adjusted eligible bonus amount will be accrued and charged to compensation
expense over the 12 months ending August 31, 2000. As of September 30, 1999, the
adjusted eligible bonus amount was $8.4 million, and the ratable charge to
compensation expense was $700,000. Based on the functions of the employees
scheduled to receive acquisition bonuses, $130,000 of the compensation charge
was allocated to cost of net revenues and $570,000 was allocated to operating
expenses.
Stock-based expenses. During 1998, Critical Path 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, it
recorded an additional $18.1 million of unearned compensation related to the
grant of stock options in the months of January 1999 and March 1999.
Amortization of such unearned compensation amounted to approximately $13.3
million for the nine months ended September 30, 1999, in comparison with
$852,000 for the nine months ended September 30, 1998. During the nine months
ended September 30, 1999, Critical Path also incurred a one-time stock-based
charge of approximately $2 million in connection with a severance agreement for
a terminated employee. This expense was charged to cost of net revenues. For the
nine months ended September 30, 1999 and 1998, Critical Path amortized total of
$29.1 million and $934,000 of unearned compensation, respectively, relating to
the grant of stock options and stock warrants. Of this amortized unearned
compensation, approximately $3.9 million and $66,000 was allocated to cost of
net revenues and approximately $25.2 million and $868,000 was allocated to
operating expenses for the nine months ended September 30, 1999 and 1998,
respectively.
Critical Path incurred stock-based expenses for warrants it granted to ICQ,
a subsidiary of AOL, and to one other strategic partner. Amortization of the
fair value of these warrants resulted in stock-based expenses of approximately
$13.9 million for the nine months ended September 30, 1999. Quarterly
amortization associated with the ICQ warrant is subject to substantial increase
or decrease in future quarters based upon changes in the trading price of its
common stock.
Interest and other income and interest expense. Interest and other income
consists primarily of interest earnings on Critical Path's cash and cash
equivalents. Interest and other income amounted to $5,074,000 for the nine
months ended September 30, 1999. Critical Path completed private placements of
equity securities in April 1998, September 1998, and January 1999, and closed
public offerings of common stock in April 1999 and June 1999. As a result,
interest income increased significantly during 1999 in comparison with
corresponding periods in 1998 due to higher cash balances available for
investing. During
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the nine months ended September 30, 1999, Critical Path incurred interest
expense on capital lease obligations and stock-based charges in the amount of
$411,000, of which $48,000 related to the amortization of stock-based charges
and the remainder to interest payments on capital lease obligations. In the
corresponding period of 1998, Critical Path incurred interest expense of
$262,000, of which $145,000 related to the amortization of stock-based charges
and the remainder to interest payments on notes payable and capital lease
obligations.
Income taxes. No provision for federal or state income taxes has been
recorded as Critical Path has incurred net operating losses from inception
through September 30, 1999. As of December 31, 1998, it had approximately $8.8
million of federal and state net operating loss carryforwards, which expire in
varying amounts beginning in 2012, available to offset future taxable income.
Under the Tax Reform Act of 1986, the amounts of and benefits from net operating
loss carryforwards may be impaired or limited in certain circumstances. For
example, the amount of net operating losses that Critical Path 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 it will realize any benefit from this deferred tax asset, it has
established a full valuation allowance as of December 31, 1998.
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, Critical
Path began to recognize revenues from the sale of its email hosting services.
Net revenues for 1998 were $897,000. In early 1998, Critical Path executed
agreements with E*TRADE and TABNet pursuant to which it began to derive revenue
for providing email services. For 1998, E*TRADE accounted for approximately 62%
and TABNet accounted for approximately 30% of Critical Path's 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.
Cost of net revenues. During 1998, Critical Path's costs of net revenues
were approximately $2.3 million, or 261.5% of net revenues. Critical Path made
significant acquisitions of equipment for its data centers at the beginning of
the quarter ended September 30, 1998, and, as a result, Critical Path's
depreciation expense increased significantly in the final two quarters of 1998.
Additionally, Critical Path significantly increased its 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 Critical Path
increased personnel and its use of outside contractors. From January 1, 1998 to
December 31, 1998, Critical Path's 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 Critical Path expanded its sales force and
significantly increased the promotion of its 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, Critical Path's 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.
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Stock-based expenses. During 1998, Critical Path 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 Note 8 to Critical Path Consolidated Financial
Statements.
Interest and other income and interest expense. Interest and other income
amounted to $375,000 during 1998. Critical Path 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, Critical Path has
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 Critical Path incurred net operating losses from inception through December
31, 1998. As of December 31, 1998, Critical Path 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 Critical Path 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 Critical Path will realize any benefit from this deferred tax asset, it
has established a full valuation allowance as of December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Critical Path's cash and cash equivalents increased by approximately $132.0
million during the nine months ended September 30, 1999. This net change
occurred as it raised approximately $269.9 million in proceeds from the sale of
equity securities, net of issuance costs, used $15.8 million in cash to fund
operating activities, paid $78.2 million (net of cash acquired) to consummate
acquisitions, advanced $15.0 million to third parties pursuant to promissory
notes, invested $4.5 million to obtain equity positions in strategic partners,
disbursed $21.8 million to purchase property and equipment, and paid $2.4
million to retire principal on capital lease obligations and acquire treasury
shares. Cash and cash equivalents increased by approximately $14.8 million
during the year ended December 31, 1998. This net change occurred as the Company
raised $23.4 million in proceeds from the sale of equity securities, net of
issuance costs, and used $6.9 million to fund operating activities. Installation
of network infrastructure equipment in its data centers, license of new software
platforms, purchases of furniture and equipment for new employees, and leasehold
improvements related to expansion of Critical Path's facilities accounted for
the significant increase in capital expenditures. Critical Path expects that its
investment in property and equipment will continue to grow as it seeks to
increase its capacity to provide email hosting and additional services.
Critical Path has 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 September 30, 1999. Outstanding
borrowings accrue interest at a rate equal to the bank's prime rate plus 2.0%.
Capital lease obligations, including both short-term and long-term portions,
increased approximately $4.4 million, net of principal repayments, during the
nine months ended September 30, 1999, as it secured financing for a substantial
share of its additions to property and equipment. Critical Path's line of credit
and capital lease obligations contain no provisions that would limit its future
borrowing ability. Deferred revenue, excluding balances acquired through
acquisitions, decreased $438,000 during the nine months ended September 30,
1999, as it recognized into revenue a payment it had previously received from a
customer as an advance for future services.
In January 1999, Critical Path completed the second round of the Series B
Convertible Preferred Stock financing through the issuance of approximately 3.2
million shares, including 454,544 shares issued pursuant to outstanding stock
purchase rights, for net proceeds of $12.5 million. Also in January 1999, it
sold 1,090,909 shares of common stock for net proceeds of $2.4 million. In April
1999, Critical Path received approximately $114.1 million in net proceeds upon
the closing of its initial public offering of
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common stock. In June 1999, Critical Path received approximately $140.7 million
in net proceeds upon the closing of its secondary public offering of common
stock.
In May 1999, Critical Path made a minority investment of $3 million in the
common stock of Starmedia Network, Inc. Based on the closing price of Starmedia
stock at September 30, 1999, the fair value of Critical Path's investment was
$10.0 million and is recorded as an investment in the assets section of Critical
Path's balance sheet. The excess of the investment's carrying value over its
cost is recorded as an unrealized gain on investments and included in the equity
section of Critical Path's balance sheet.
In July 1999, Critical Path advanced $10 million to a privately-held
company pursuant to a promissory note. The note bears interest at the prime rate
of interest as stipulated in the Wall Street Journal. The amount was advanced in
connection with the Company's evaluation of the obligor for potential
acquisition. Under the terms of the note, all principal and accrued interest is
repayable within 90 days of written demand by the holder. Upon the decision by
Critical Path not to proceed with an acquisition of the obligor, Critical Path
presented a demand notice for repayment on August 18, 1999. All amounts owed to
Critical Path pursuant to this note were due to be paid not later than November
16, 1999, however, Critical Path has granted the obligor an extension until
December 31, 1999.
In August 1999, Critical Path advanced $5 million to docSpace pursuant to a
promissory note. The note bears interest at a rate equal to 8% per annum simple
interest and is due and payable on demand by Critical Path at any time after
August 2, 2000. The amount was advanced in connection with Critical Path's
evaluation of docSpace for potential acquisition. Under the terms of the note,
any principal and interest outstanding on the note may be converted into
docSpace common stock at the election of docSpace and the note automatically
converts into docSpace common stock upon the earlier of the consummation of the
acquisition of docSpace by Critical Path or the consummation by docSpace of a
financing in an amount greater than $5 million. On November 4, 1999, Critical
Path announced a definitive agreement to acquire all outstanding common stock of
docSpace.
Critical Path believes that its current cash balances are sufficient to
meet its working capital and capital expenditure requirements for at least the
next 12 months. It anticipates that further expansion of its operations will
cause Critical Path to incur negative cash flows on a short-term basis, and
therefore require it to consume its cash and other liquid resources to support
its growth in operations.
Critical Path believes that its current cash balances will be sufficient to
meet its working capital and capital requirements beyond the next 12 months.
However, its operating and investing activities on a long-term basis may require
it to obtain additional equity or debt financing. In addition, Critical Path
may, from time to time, evaluate potential acquisitions of other businesses,
products, and technologies. In May 1999, Critical Path acquired substantially
all the operating assets of Fabrik Connect Service, and in July 1999, Critical
Path completed the acquisition of dotOne Corporation. In connection with these
transactions, Critical Path disbursed $17.0 million in cash of June 30, 1999,
and an additional $12.5 million in July 1999. In August 1999, Critical Path
completed the acquisition of Amplitude Software Corporation and disbursed $45.0
million in cash consideration. An additional $7.5 million in transaction fees
was disbursed during 1999 to consummate these acquisitions. Critical Path
expects that future acquisitions of businesses and other strategic assets,
including its pending acquisitions of ISOCOR, docSpace, and FaxNet, will require
considerable outlays of capital. In order to consummate potential acquisitions,
Critical Path may need additional equity or debt financings in the future.
YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer programs
or hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations causing disruptions of operations for any
company using these computer programs or hardware, including, among other
things, a temporary inability to process transactions, send invoices or engage
in normal business activities. As a result, many companies' computer systems may
need to be upgraded or replaced in order to avoid "Year 2000" issues.
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We are a comparatively new enterprise, and, accordingly, the software and
hardware we use to manage our business has all been purchased or developed
internally within the past 30 months. While this fact pattern does not uniformly
protect us against Year 2000 exposure, we believe we gain some mitigation from
the fact that the information technology, or IT, we use to manage our business
is not based upon "legacy" hardware and software systems. "Legacy system" is a
term often used to describe hardware and software systems which were developed
in previous decades when there was less awareness of Year 2000 issues.
Generally, hardware and software design within the current decade and the past
several years in particular has given greater consideration to Year 2000 issues.
All of the software code we have internally developed to manage our network
traffic, for example, is written with four digits to define the applicable year.
We are in the process of testing our internal IT and non-IT systems,
including the systems of those companies we have recently acquired. Prior to
September 1999, all of the testing we had completed was performed by our own
personnel. In September 1999, we engaged an outside consultant to document our
compliance procedures and prepare a Statement of Readiness addressing the Year
2000 compliance of our IT software and hardware. Under the present schedule, the
consultant's review and delivery of the Statement of Readiness should be
completed by December 1999. Based on the internal testing we have performed to
date and the interim results from our consultant's review, we believe that any
modifications necessary to make our IT systems Year 2000 compliant will be
minor.
In addition to our internally developed software, we use software and
hardware developed by third parties both for our network and internal
information systems. We have begun to test such third-party software and
hardware in an effort to assess Year 2000 compliance. We have also obtained
documentation from key suppliers of hardware and networking equipment for our
data centers which indicates that this hardware and networking equipment is Year
2000 compliant. Based upon an evaluation of our broader list of software and
hardware providers, we are aware that all of these providers are in the process
of reviewing and implementing their own Year 2000 compliance programs. We will
work with these providers to address any Year 2000 issues and obtain the
necessary enhancements and documentation from them to ensure that their products
are Year 2000 compliant.
In addition, we rely on third party network infrastructure providers to
gain access to the Internet. If these providers experience business
interruptions as a result of their failure to achieve Year 2000 compliance, our
ability to provide Internet connectivity could be impaired, which could have a
material adverse effect on our business, results of operations and financial
condition.
Our customers' success in maintaining Year 2000 compliance is also
significant to our ability to generate revenues. We currently derive revenue by
managing customers' email and messaging activities across our network. In all
cases, interruptions in our customers' services and on-line activities caused by
Year 2000 problems could have a material adverse effect on our revenues to the
extent that these interruptions may limit or delay our customers' ability to
expand their base of email users.
We have incurred expenses to date for our outside consultants and Year 2000
assessment software. Additional costs for consultants and remediation efforts
will vary dependent upon the requirements we identify, but we do not anticipate
that any future costs associated with our Year 2000 remediation efforts will be
material. However, if we, our customers, our providers of hardware and software,
or our third party network providers fail to remedy any Year 2000 issues, our
service could be interrupted and we could experience a material loss of revenues
that could have a material adverse effect on our business, results of
operations, and financial condition. We would consider such an interruption to
be the most reasonably likely unfavorable result of any failure by us, or
failure by the third parties upon whom we rely, to achieve Year 2000 compliance.
Presently, we believe we are unable to reasonably estimate the duration and
extent of any possible interruption, or quantify the effect it may have on our
future revenues. We are currently in the process of developing a comprehensive
contingency plan to address the issues which could result from this type of
event.
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CRITICAL PATH SHARE OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Critical Path common stock as of November 30, 1999 by:
- each person or entity known to Critical Path to own beneficially more
than 5% of its common stock;
- each of Critical Path's directors;
- each of Critical Path's Named Executive Officers; and
- all executive officers and directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(2)
------------------------------------------
PERCENT PRIOR PERCENT AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER TO MERGER MERGER
--------------------------------------- ---------- ------------- -------------
<S> <C> <C> <C>
Benchmark Capital Partners II, L.P.(3)
2480 Sand Hill Road
Menlo Park, CA 94025.................................... 2,820,969 6.4% 7.8%
Mohr, Davidow Ventures V, L.P.(4)
2775 Sand Hill Road,
Suite 240
Menlo Park, CA 94025.................................... 2,620,969 6.0 6.2
E*TRADE Group, Inc.
Four Embarcadero
2400 Geng Road
Palo Alto, CA 94306..................................... 3,669,462 8.3 6.6
US WEST Internet Ventures, Inc.
1999 Broadway, Suite 500
Denver, CO 80202........................................ 2,276,131 5.2 4.1
Douglas T. Hickey(5)...................................... 1,406,743 3.2 2.4
David Hayden(6)........................................... 3,447,510 7.7 6.1
Wayne Correia(7).......................................... 2,450,000 5.6 4.5
Marcy Swenson(8).......................................... 1,084,236 2.5 2.0
Mari Tangredi(9).......................................... 147,970 * *
Christos M. Cotsakos(10).................................. 3,825,808 8.7 6.9
Lisa Gansky(11)........................................... 219,273 * *
Kevin R. Harvey(12)....................................... 2,888,722 6.6 7.8
James A. Smith(13)........................................ 2,276,131 5.2 4.1
George Zachary(14)........................................ 2,620,969 6.0 6.2
All directors and executive officers as a group (15
persons)(15).............................................. 20,975,794 46.0 40.8
</TABLE>
- -------------------------
* Less than 1%.
(1) Unless otherwise indicated, the address for the following shareholders is
c/o Critical Path, Inc., 320 1st Street, San Francisco, California 94105.
(2) Applicable percentage ownership prior to the merger is based on 44,038,622
shares outstanding as of November 30, 1999. Applicable percentage ownership
after the merger is based on 55,445,998 shares outstanding, comprised of
the shares outstanding as of October 31, 1999 and, assuming the
consummation of the ISOCOR merger and the acquisitions of FaxNet and
docSpace, an estimated 12,016,325 shares issued pursuant to those three
transactions. Beneficial ownership is determined in
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accordance with the rules and regulations of the SEC. 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
November 30, 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 2,418,501 shares held by Mohr, Davidow Ventures V, L.P. and
202,468 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 713,817 shares subject to Critical Path's right of repurchase as
of November 30, 1999. Also includes 18,181 shares held in the name of Mr.
Hickey's minor children's name and 149,521 shares subject to options
exercisable within 60 days after November 30, 1999.
(6) Includes 1,022,727 shares subject to options exercisable within 60 days
after November 30, 1999.
(7) Includes 833,340 shares subject to Critical Path's right of repurchase as
of November 30, 1999.
(8) Includes 426,137 shares subject to Critical Path's right of repurchase as
of November 30, 1999.
(9) Includes 55,644 shares subject to options exercisable within 60 days after
November 30, 1999.
(10) Includes 156,346 shares held by The Cotsakos Revocable Trust, UAD 9/3/87 of
which Mr. Cotsakos is the trustee, including 34,091 shares of common stock
subject to Critical Path's right of repurchase as of November 30, 1999.
Also includes 3,669,462 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.
(11) Includes 34,091 shares subject to Critical Path's right of repurchase as of
November 30, 1999.
(12) Includes 2,820,969 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.
(13) Consists of shares held by US WEST Internet Ventures, a subsidiary of US
WEST. Mr. Smith is the President and Chief Executive Officer of US WEST
Dex, also a subsidiary of USWEST. Mr. Smith disclaims beneficial ownership
of all shares held by USWEST Internet Ventures, except to the extent of his
pecuniary interest therein.
(14) Consists of shares held by Mohr, Davidow Ventures V, L.P., of which Mr.
Zachary is a partner. Mr. Zachary disclaims beneficial ownership of all
such shares except to the extent of his pecuniary interest therein.
(15) Includes 1,549,450 shares subject to options exercisable within 60 days
after November 30, 1999. Of the total shares, 816,090 shares are subject to
Critical Path's right of repurchase as of November 30, 1999.
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BUSINESS OF ISOCOR
GENERAL
ISOCOR was founded and incorporated in California in February 1991. ISOCOR
develops, markets and supports electronic messaging and directory infrastructure
software products and services that enable businesses to engage in electronic
communications over corporate networks and the Internet. ISOCOR's products are
available either as a complete, integrated package or as individual components.
ISOCOR's products and services are designed to support electronic information
exchange globally in an accurate, cost-effective and secure way, while operating
seamlessly across different environments.
ISOCOR's business strategy is to provide a focused range of products,
targeted at large corporations and Internet service providers, offering features
and performance to meet the wide range of customers' needs; to support open
architectures and legacy systems by providing solutions that are hardware and
software platform-independent and are based on open Internet standards.
PRODUCTS
At present, the majority of ISOCOR's products are based upon internally
developed technology. ISOCOR believes that this decreases the amount of time
required to respond to market demand, differentiates its products from those of
its competitors in terms of features and quality, and decreases its dependence
on third-party suppliers.
ISOCOR has designed its software to conform to international standards,
allowing ISOCOR's products to interoperate with many existing products and
services. Conformance with international standards has been achieved through
application of the experience of ISOCOR employees in standards development to
the design and testing of ISOCOR's products.
The ISOCOR solution is implemented through two major product groups:
message servers and directories. Message servers handle the interchange of any
size or type of electronic document or information across and outside of a
customer's computer network and include products that allow leading proprietary
e-mail systems to interoperate. Directory products support enterprise-wide
directory listing, access and navigation, as well as connections to databases,
third-party directories, enterprise software environments and the Web.
MESSAGE SERVER PRODUCTS
ISOCOR's server software has been designed to provide high performance
while reducing hardware requirements. This has been achieved through a design
methodology that eliminates the overhead of protocol layering and reduces the
number of computer instructions required to perform common operations. The
design also reduces the risk that messages will be lost or will not be
duplicated in the event of external system breakdowns, such as loss of power or
hardware failures. This promotes high reliability of the electronic information
exchange and allows Internet service providers to utilize the software to offer
e-mail services to their customers.
N-PLEX, ISOCOR's Internet server product, provides robust message
management, administrative control and secure message transfer to the SMTP, POP3
and IMAP4 standards. In addition, N-PLEX has been ported to the Sun Solaris UNIX
operating system and is optimized for high levels of performance. Security holes
are eliminated by the proprietary ISOCOR design, and authentication login
facilities have been added using encryption technology to prevent unauthorized
access to the mail systems.
The N-PLEX Management Center manages ISOCOR's message servers, providing
the high level of service necessary for implementing mission-critical electronic
information exchange. The N-PLEX Management Center runs on the Windows NT
platform, performing remote management of components over TCP/IP, thereby
allowing the administrator to manage multiple sites simultaneously from a
central management station. The management facilities provided by the Management
Center include remote
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configuration, routing configuration, fault notification, performance
monitoring, system management and message tracking.
ISOPLEX message servers store and relay messages via the X.400 standard,
allowing them to be implemented over prevailing network protocols including
TCP/IP and X.25. In addition, ISOCOR's ISOPLEX servers run on a variety of
hardware platforms and operating systems. The management system can be used on a
remote basis over a networked set of servers, reducing the personnel required to
manage the ISOPLEX servers.
DIRECTORY PRODUCTS
As systems increase in size and complexity, organizations increasingly need
to implement a central repository for the information required to communicate
across systems. The Global Directory Server, or GDS, ISOCOR's directory product,
is designed to store and disseminate such information on both a wide area and
local area basis. This information may include e-mail addresses and
cryptographic material for digital signatures and message confidentiality that
are used invisibly by client software, as well as information that users may
access directly, such as telephone numbers, fax numbers, physical mail addresses
and pictures. The directory allows efficient and rapid updating of this
information for use at diverse locations, reducing errors and saving the time
and personnel resources required to maintain and distribute this data. This
distributed application architecture allows system managers to optimize the
location of information so that information required locally is on the local
server, while users continue to have transparent access to information on any
other server in the network.
GDS is standards-based and can synchronize stored information, such as
e-mail addresses, among proprietary systems communicating across different
e-mail systems. A number of client applications are compatible with GDS,
including Web browsers, and Internet clients through the use of LDAP
(Lightweight Directory Access Protocol) which can access GDS over the wide
variety of network connections including dial-up and Internet TCP/IP. GDS can
serve as an easy-to-access information source, storing data from other sources
such as corporate databases, Web servers and other content sources.
As with other ISOCOR applications, GDS is supplemented by an integrated set
of directory tools, called the Global Directory Navigator, that allows an
administrator to exchange information with other databases, collect accounting
information and administer the system either remotely or locally.
In March 1996, ISOCOR entered into an agreement with International
Computers Limited, or ICL, to license a portion of ICL's i500 directory server
product for incorporation with ISOCOR's own communication software technology to
create ISOCOR's Global Directory Server product. This bi-lateral crosslicensing
agreement provides for the payment of royalties by ISOCOR based on sales of
products incorporating the licensed i500 directory server product. The ICL i500
business was purchased by PeerLogic in April 1999.
MetaConnect, ISOCOR's meta-directory product, is designed to unify data for
effective intranet and Internet use, enabling an organization to provide
employees, customers and trading partners accurate, updated information from
existing data sources. This product manages the connections to disparate
directories and applications databases and joins the information together in one
meta-directory, which can be centrally managed as a unified resource across the
enterprise. The product is designed to use most existing LDAP v3 directory
servers, including Microsoft Active Directory, Netscape Directory Server,
Novell's NDS and ISOCOR Global Directory Server.
MARKETING, SALES AND DISTRIBUTION
ISOCOR sells its products both directly to end users and indirectly through
resellers, systems integrators and original equipment manufacturers, or OEMs. In
North America, ISOCOR sells its products primarily through a direct sales
organization focused on Fortune 1000 companies and service providers.
Internationally, ISOCOR sells its products primarily through a worldwide network
of resellers.
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ISOCOR's international resellers consist primarily of systems integrators
and value added resellers, or VARs. These resellers typically range in size from
several hundred staff down to half a dozen specialists in some smaller
countries. ISOCOR selects resellers based on general experience in electronic
information exchange, data communications and systems integration, and then
trains them on ISOCOR's software products and technologies at ISOCOR's training
centers in the U.S. and Ireland. In addition, ISOCOR sells to some major
accounts worldwide, including Internet service providers and large
telecommunications carriers which prefer to deal directly with ISOCOR for
support.
ISOCOR's reseller agreements generally grant resellers non-exclusive rights
to distribute ISOCOR's products in each reseller's defined geographic market.
Each reseller is generally responsible for supporting its end-user customers,
while ISOCOR provides technical support to the reseller. ISOCOR provides price
protection to its resellers such that, if ISOCOR reduces the price of its
products, resellers are entitled to a credit for the difference between the
reduced price and the price they previously paid for products that are held in
the reseller's inventory at the time of the price reduction and that were
purchased within the preceding 30 days. ISOCOR's resellers typically stock
little inventory, but instead obtain products from ISOCOR on an as-needed basis.
To support its sales efforts, ISOCOR conducts marketing programs which
include direct mail, public relations, advertising (including a Web site on the
global Internet (www.isocor.com)), worldwide trade shows and selected joint
marketing programs. ISOCOR also sponsors meetings for its resellers to provide
them additional information and skills to market ISOCOR's products effectively.
The sales, support and service functions for ISOCOR's products sold in North and
South America are provided principally through ISOCOR's Santa Monica
headquarters. European, Middle East and Asian markets are serviced through
ISOCOR sales and support offices in Berlin, Bern, Dublin, London, Paris and
Turin.
During 1998, international revenues accounted for 77% of ISOCOR's total
revenues. Of these international revenues, 86% resulted from sales to resellers
or customers located primarily in Europe, with the remainder resulting from
sales to resellers or customers located in the rest of the world. International
sales may be subject to government controls and other risks, including export
licenses, federal restrictions on the export of critical technology, changes in
demand resulting from currency exchange fluctuations, political instability,
trade restrictions and changes in tariffs. To date, ISOCOR has experienced no
material difficulties due to these factors.
CUSTOMERS
ISOCOR's products are used in a variety of industries. ISOCOR markets its
products primarily to large and medium-sized corporate customers and Internet
service providers. During 1998, no single customer accounted for more than 10%
of ISOCOR's revenues. During 1998, the following categories of revenue accounted
for more than 10% of total revenue: customer and reseller services accounted for
40% of total revenues, Internet messaging products accounted for 29% of total
revenues and X.400 products accounted for 15% of total revenues.
CUSTOMER AND RESELLER SUPPORT AND SERVICES
ISOCOR offers its resellers and end-user customers standard support and
upgrade services. The agreements that provide for these services vary among end
users, resellers and OEMs, but generally provide that for an annual fee ISOCOR
will provide customer support services by e-mail, fax or telephone. These
agreements also generally provide for software upgrades to the licensed products
as they are generally released by ISOCOR. ISOCOR also offers training, custom
engineering and pre- and post-sale services to end users and resellers.
Professional services include network design consulting, product installation,
administrator training, custom application integration and turnkey systems
implementation. ISOCOR has major customer support centers in Santa Monica and
Dublin. Additionally, local technical support is available at ISOCOR's regional
offices in Berlin, Bern, London, Paris and Turin.
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PRODUCT DEVELOPMENT
ISOCOR has invested significant resources into the development of new
products and expects to continue to make these investments in the future. ISOCOR
also plans to continue to enhance its products with new releases that provide
additional features and to make its products available on additional hardware
and operating system platforms.
Much computer hardware and software experiences problems handling dates
beyond the year 1999. Therefore, some computer hardware and software will need
to be modified prior to the year 2000 in order to remain functional. ISOCOR has
substantially completed its assessment of both the readiness of its internal
computer systems and software, and the compliance of its software licensed to
customers, for handling the year 2000. ISOCOR in the final stages of
implementing successfully the systems and programming changes necessary to
address year 2000 issues and does not currently believe that the cost of such
actions will have a material effect on ISOCOR's results of operations or
financial condition in future periods. However, if ISOCOR, its customers or
vendors are unable to resolve such processing issues in a timely manner, it
could result in a material financial risk and the possibility that third parties
might assert claims against ISOCOR with respect to such issues. Accordingly,
there can be no assurance that there will not be a delay in, or increased costs
associated with, the implementation of such changes, which could have an adverse
effect on future results of operations.
ISOCOR has development centers located in Berlin, Copenhagen, Dublin and
Santa Monica. The largest such facility is located in Dublin in order to take
advantage of lower costs in Ireland, Irish Development Authority tax incentives
and grants and the strong Irish educational structure. The presence of
development facilities in the U.S. and Europe enhances access to both American
and European markets and technology. ISOCOR invests substantial management time
and resources in quality assurance testing for all of its products. Quality
assurance testing takes place at the Berlin, Dublin and Santa Monica facilities.
As of December 31, 1998 and September 30, 1999, ISOCOR employed 69 and 59
persons, respectively, in the product development function. The product
development organization consists of separate product units, each with expertise
in specific areas. Engineering expenses were $5.9 million and $4.2 million in
1998 and for the nine months ended September 30, 1999, respectively.
COMPETITION
The market for ISOCOR's products is intensely competitive and subject to
rapid technological change and evolving standards. ISOCOR believes its long-term
success will depend in part on its ability to be a leader in developing and
offering products that meet emerging industry or market opportunities, to offer
a broad range of high-performance, multi-platform, messaging and directory
infrastructure products, to maintain strong customer support and sufficient
distribution channels and to offer competitively priced products. Both the
messaging and directory infrastructure markets are fragmented and a number of
companies are participating in them with a variety of product offerings
featuring varying profiles and business models.
For directory infrastructure products, ISOCOR's competition includes
software companies with specialized product offerings such as Innosoft
International and Siemens. ISOCOR's messaging products face direct competition
from solution vendors and systems integrators such as Netscape Communications
Corporation, Sun Microsystems, Inc. and Software.com.
In addition some major software providers such as Microsoft and Lotus
Development Corporation, a subsidiary of International Business Machines
Corporation, have incorporated functionality into their product offerings
similar to that provided by ISOCOR's products and therefore compete with ISOCOR
indirectly by eliminating the need for their customers to identify and purchase
separate messaging solutions. ISOCOR's Global Directory Server contains elements
that compete directly and indirectly with components and complete products
offered by Novell Inc. and other developers of directory server-based
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software products. To the extent such companies provide such functionality or
products, ISOCOR's business, financial condition and results of operations could
be materially adversely affected.
A variety of potential actions by any of ISOCOR's competitors, including
reduction of product prices, increased promotion, announcement or accelerated
introduction of new or enhanced products, product giveaways or product bundling
could have a material adverse effect on ISOCOR's business, financial condition
and results of operations. Large companies that compete with ISOCOR or that may
compete with it in the future have substantial technical and financial resources
that allow them to develop, enhance or acquire competitive products, and
substantial marketing resources and presence to promote these products
aggressively. Moreover, ISOCOR's current and potential competitors may respond
more quickly than ISOCOR to new or emerging technologies or changes in customer
requirements. Accordingly, it is possible that current or potential competitors
could rapidly gain significant market share.
PROPRIETARY RIGHTS
ISOCOR regards its software products as proprietary and relies primarily on
a combination of statutory and common law copyright, trademark and trade secret
laws, customer licensing agreements, employee and third party nondisclosure
agreements and other methods to protect its proprietary rights. ISOCOR generally
enters into confidentiality and invention assignment agreements with its
employees and consultants. Additionally, ISOCOR enters into confidentiality
agreements with its customers and potential customers and limits access to, and
distribution of, its proprietary information. In its N-PLEX product lines,
ISOCOR has implemented a key license mechanism which disables use of the various
modules of the product unless proper number keys are provided by the customer
during the installation process. Otherwise, ISOCOR does not include in its
software any mechanisms to prevent or inhibit unauthorized use, but generally
either requires the execution of an agreement that restricts copying and use of
ISOCOR's products or provides for the same in a shrinkwrap license agreement.
There can be no assurance that ISOCOR's means of protecting its proprietary
rights will be adequate or that ISOCOR's competitors will not independently
develop similar technology.
While ISOCOR has not received claims alleging infringement of the
proprietary rights of third parties which ISOCOR believes would have a material
adverse effect on ISOCOR's business, financial condition and results of
operations, nor is it aware of any similar threatened claims, there can be no
assurance that third parties will not claim that ISOCOR's current or future
products infringe the proprietary rights of others. Any such claim, with or
without merit, could result in costly litigation or might require ISOCOR to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to ISOCOR, or
at all.
MANUFACTURING
ISOCOR contracts with third parties to manufacture the media containing its
software, which consists of diskette and tape duplication and printing of
manuals and boxes. Assembly is performed by ISOCOR at its Dublin and Berlin
facilities. The raw materials and services associated with manufacturing the
media are generally available through a number of sources. Finished products are
generally shipped from Ireland to customers in Europe, the Middle East and Asia,
and to ISOCOR's United States facility. ISOCOR's United States facility
generally distributes products to customers in North and South America. The
Connectivity products are generally shipped directly from Berlin to customers in
Germany, and otherwise to ISOCOR's Irish and United States facilities for
further distribution.
EMPLOYEES
As of September 30, 1999, ISOCOR employed 246 persons, including 59 in
product development and engineering (including 11 in Berlin, three in
Copenhagen, 37 in Dublin and 8 in Santa Monica), 84 in professional services and
pre- and post-sales customer support, 11 in North American sales, 26 in
international sales, 17 in marketing, eight in assembly, and 41 in
administration. ISOCOR also retains consultants from time to time, primarily in
the area of engineering, to assist with particular areas of
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software development for limited periods of time. None of ISOCOR's employees are
currently represented by a labor union, and ISOCOR considers its relations with
its employees to be good.
PROPERTIES
ISOCOR's corporate offices are located in Santa Monica, California, where
ISOCOR currently leases approximately 19,000 square feet under a sublease
expiring in 2001. ISOCOR's Santa Monica facility houses its corporate offices
and engineering, sales and marketing departments. Additionally, ISOCOR leases
approximately 2,900 square feet in Pennsauken, New Jersey for a presales and
services office under a lease which expires in 2001, and approximately 9,000
square feet of total space in Berlin for engineering and sales offices under a
lease expiring in 2002. ISOCOR leases approximately 6,000 square feet in Turin
for sales, pre-sales and services under a lease expiring in 2000. ISOCOR also
leases 550 square feet in Turin and 1,100 square feet in Milan for staff and
consultants under leases which expire in 2000. ISOCOR also leases office space
for its major engineering facility in Dublin, consisting of approximately 24,000
square feet under a sublease expiring in 2014. In addition, ISOCOR leases
approximately 1,000 square feet each of office facilities in London, Paris,
Copenhagen, Bern, and Zurich. The Bern and Zurich facilities are sales offices,
while the offices in London and Paris perform pre-sales marketing and support.
The London and Paris leases expire in 2002 and 2000, respectively. The leases
for the facilities in Copenhagen, Bern and Zurich are month to month leases.
ISOCOR believes that these facilities are adequate for ISOCOR's current needs
and that suitable additional space, if needed, should be available on
commercially reasonable terms to accommodate expansion of ISOCOR's operations.
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ISOCOR'S MANAGEMENT
The current executive officers and directors of ISOCOR and their ages as of
October 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Andrew De Mari............................. 60 Chairman of the Board of Directors
Paul Gigg.................................. 46 President, Chief Executive Officer and
Director
Janine M. Bushman.......................... 45 Vice President, Finance and Administration,
Chief Financial Officer and Director
Karl Klessig............................... 57 Vice President, Marketing and Strategic
Alliances
David Longley.............................. 54 Vice President, International Sales and
Marketing
Alex Lazar................................. 42 Vice President, North American Sales
Abraham Levine............................. 51 Vice President, Professional Services
Barry Wyse................................. 37 Vice President, Engineering
Andre De Fusco(2).......................... 41 Director
Dennis Cagan............................... 54 Director
G. Bradford Jones(1)(2).................... 44 Director
Bill Yundt(1).............................. 59 Director
</TABLE>
- -------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Andrew De Mari is a founder of ISOCOR, was elected Chairman of the Board of
Directors in November 1997 and has been a member of the Board of Directors since
ISOCOR's inception in 1991. Prior to becoming Chairman, Dr. De Mari served as
ISOCOR's President and Chief Executive Officer since its founding in 1991. Prior
to founding ISOCOR, Dr. De Mari was a founder of Retix a networking equipment
company, and a Vice President of Compucorp, an office automation product
manufacturer, Dr. De Mari holds M.S.E.E. and Ph.D. degrees in Electrical
Engineering from the California Institute of Technology and Dott. Inc.
Electrical Engineering from the Politecnico di Torino, Italy.
Paul R. Gigg joined ISOCOR in January 1993. He became General Manager,
Europe in October 1995, was elected Vice President, European Marketing and Sales
in October 1996, was elected Chief Operating Officer in April 1997 and was
elected to the Board of Directors and as President and Chief Executive Officer
in November 1997. Prior to joining ISOCOR, Mr. Gigg was Director of Marketing
and Engineering at Dowty Communications (formerly Case Communications), a
developer and supplier of networking products. Mr. Gigg holds a B.S.E.E. degree
from the University of Wales, United Kingdom.
Janine M. Bushman joined ISOCOR in April 1993. She became the Vice
President of Operations of ISOCOR in October 1994, was elected to the Board of
Directors in July 1995 and was elected Chief Financial Officer and Vice
President, Finance and Administration in November 1995. For almost six years
prior to joining ISOCOR, Ms. Bushman was Controller and Corporate Secretary for
Interactive Systems Corporation, a developer and supplier of UNIX operating
systems software. Ms. Bushman holds an M.B.A. from Loyola Marymount University
and a B.S. in Accounting from the California State University at Northridge.
Karl Klessig joined ISOCOR in May 1998, and was elected Vice President,
Marketing and Strategic Alliances in October 1998. Prior to joining ISOCOR, Mr.
Klessig was the founder of Enterprise Solutions Limited (ESL), where he served
as a Director from its inception in 1991, and as President and CEO until 1997.
ESL develops, manufactures and distributes electronic messaging and directory
solutions. Prior to that he was the founder, President and CEO of Quadratron
Systems Limited, an Office Automation Software company, from 1983 until 1991.
Mr. Klessig holds a B.S. degree in Physics from Illinois Institute
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<PAGE> 108
of Technology, where he serves on the Board of Overseers, and a Masters of
International Business Administration from West Coast University.
David Longley joined ISOCOR in January 1997 as General Manager of European
Sales and Marketing. Mr. Longley was appointed Vice President of International
Sales and Marketing in May 1999. Prior to joining ISOCOR, Mr. Longley held
positions at ICL from 1992 to 1997, where he was most recently General Manager
of the ICL i500 Directory Business. Mr. Longley holds a BSc in Mathematics from
London University.
Alex Lazar joined ISOCOR in November 1993 and was elected to the position
of Vice President, North American Sales in July 1997. Prior to joining ISOCOR,
Mr. Lazar was Vice President, Sales and Support and a founder of Isicad, a
network management software company, which position he held from 1987 to 1993.
Mr. Lazar holds a B.S. from DePaul University.
Abraham Levine joined ISOCOR in January 1999 as Vice President,
Professional Services. Prior to joining ISOCOR, Mr. Levine was Vice President of
Professional Services at Software.com, an Internet messaging company, from May
1997 to December 1998. Prior to this, Mr. Levine was Vice President and General
Manager of Business Intranet Solutions at Sprint from February 1996 to February
1997. Previously, Mr. Levine held several positions, including Sprint Global
Executive, at Control Data Systems a messaging product and integration company
from February 1989 to February 1996 and March 1997 to May 1997. Mr. Levine holds
a B.S. degree in Business Administration from California State University at
Northridge.
Barry Wyse joined ISOCOR B.V. in May 1995 and became Vice President,
Engineering of ISOCOR in December 1997. Prior to joining ISOCOR, Mr. Wyse served
as Software Manager for Microsoft B.V., a subsidiary of Microsoft Corporation, a
commercial software provider, from April 1994 to May 1995 and as Principal
Engineer for Lotus B.V., a subsidiary of Lotus Development Corporation, which
was subsequently acquired by IBM, from December 1992 to February 1994. Mr. Wyse
holds an M.S. degree in Computer Science from University College, Dublin
Ireland.
Andre De Fusco was elected to the Board of Directors of ISOCOR in March
1999. Mr. de Fusco has been President and Chief Executive Officer of ACT
Networks, Inc. since July 1998. Previously Mr. de Fusco held several positions
with ACT Networks, including the position of Vice President and General Manager
of the Broadband Network Services subsidiary from July 1997 to June 1998, Vice
President, Strategic Planning and Business Development from December 1995 to
July 1997 and Vice President of Marketing from December 1994 to December 1995.
Mr. de Fusco was employed as Director of International Accounts and Director of
Business Development for Northern Telecom from 1990 to 1994 and as Vice
president of Marketing and President of Maxcom, a developer of electronic mail
systems, from 1984 to 1990.
Dennis Cagan was elected to the Board of Directors of ISOCOR in August 1997
and has also served as a consultant to ISOCOR since that time. Until November
1999 he served as Chief Strategy Officer of MessageMedia, Inc., a services
company providing customer relationship management and direct marketing via
Internet e-mail. From January 1999 to April 1999 he was interim CEO of
MessageMedia, Inc. Mr. Cagan has been President of Cagan Co., Inc., a management
consulting firm, since 1981 and also serves as Chairman of the Board of Acorn
Technologies, Inc. He also currently serves on the Board of Directors of
SupplySolution, Inc. and MessageMedia, Inc.
G. Bradford Jones became a member of ISOCOR's Board of Directors in July
1991. He is a general partner in the venture capital firm of Brentwood
Associates, which he joined in 1981. Mr. Jones also serves on the Board of
Directors of Onyx Acceptance Corp., Interpore International and Aastrom
Biosciences.
Bill Yundt joined ISOCOR's Board of Directors in May 1998. He is Vice
President, Networking at WebTV Networks, Inc., a subsidiary of Microsoft
Corporation where he has been employed since June 1996. Prior to joining WebTV
Mr. Yundt served as Vice President of BBn Planet Corporation, a computer
hardware hosting service provider, from September 1994 to May 1996. Mr. Yundt
was founder and CEO
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<PAGE> 109
of BARRNet (Bay Area Regional Network), an Internet service provider, in 1993
where he was active through 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of ISOCOR's Board of Directors
are currently Mr. Yundt and G. Bradford Jones. Neither Mr. Jones nor Mr. Yundt
has at any time been an officer or employee of ISOCOR.
SUMMARY COMPENSATION TABLE
The following table shows the compensation received by ISOCOR's Chief
Executive Officer during 1998 and the four other most highly compensated
executive officers of ISOCOR on an annualized basis whose total annual salary
and bonus exceeded $100,000 for 1998 (the "Named Officers"), and the
compensation received by each such individual for the fiscal years ended
December 31, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
-------------------------------------- SECURITIES
BONUS AND OTHER ANNUAL UNDERLYING ALL OTHER
SALARY COMMISSION COMPENSATION OPTIONS COMPENSATION
-------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Paul Gigg............................... 1998 $227,631 $33,280 $42,000
President and Chief 1997 153,640 46,057 24,000 $125,000 $31,862
Executive Officer 1996 79,698 76,913 -- 25,000 7,949
Alex Lazar.............................. 1998 105,316 55,382 8,500
Vice President, 1997 98,254 62,113 -- 20,000
North American Sales 1996 79,250 65,535
Raomal Perera(1)........................ 1998 102,278 11,720 36,000 13,709
Senior Vice President, 1997 110,957 12,680 32,400 9,235
Engineering 1996 87,295 -- 32,400 28,000 11,904
Janine Bushman.......................... 1998 146,135 23,123 2,009
Vice President, Finance 1997 130,000 32,109
& Administration, CFO 1996 110,000 25,000
Robert Lewin(2)......................... 1998 193,480 11,754 30,500
Vice President, Marketing 1997 9,170 6,100 50,000
</TABLE>
- -------------------------
(1) Raomal Perera resigned as an officer of ISOCOR effective July 1, 1999.
(2) Robert Lewin resigned as an officer of ISOCOR effective December 9, 1998.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information with respect to the stock option
grants made during the year ended December 31, 1998 under ISOCOR's 1992 Stock
Option to the Named Officers. No stock appreciation rights were granted to these
individuals during such fiscal year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
% OF TOTAL OF STOCK PRICE
OPTIONS APPRECIATION
OPTIONS GRANTED TO EXERCISE OR FOR OPTION TERMS($)(1)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME (SHARES) FISCAL YEAR (PER SHARE)(4) DATE 5% 10%
---- -------- ------------ -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Paul Gigg............... 6,000 0.8 $1.8125 11-30-2005 $ 6,839 $ 17,332
25,000 3.2..... 1.8125 8-14-2006 28,497 72,216
75,000 9.6 1.8125 5-15-2007 85,490 216,649
50,000 6.4 1.8125 11-5-2007 56,994 144,433
170,000 22.0 1.8125 5-13-2008 193,778 491,072
Alex Lazar.............. 20,000 2.5 1.8125 8-14-2006 22,797 57,773
65,000 8.4 1.8125 5-13-2008 74,092 187,763
Raomal Perera(2)........ 8,000 1.0 1.8125 1-18-2006 9,119 23,109
20,000 2.5 1.8125 8-14-2006 22,797 57,773
20,000 2.5 1.8125 5-13-2008 22,797 57,773
Janine Bushman.......... 10,000 1.3 1.8125 1-18-2006 11,399 28,887
15,000 1.9 1.8125 8-14-2006 17,098 43,330
30,000 3.9 1.8125 5-13-2008 34,196 86,660
Robert Lewin(3)......... 37,500 4.9 1.8125 12-8-2007 42,745 108,325
</TABLE>
- -------------------------
(1) Potential realizable values are reported net of the option exercise price
but before taxes associated with exercise. These amounts represent certain
assumed rates of appreciation only. Actual realized gains, if any, on stock
option exercises are dependent on future performance of ISOCOR common stock,
as well as the optionee's continued employment through the vesting period.
(2) Raomal Perera resigned as an officer of ISOCOR effective July 1, 1999.
(3) Robert Lewin resigned as an officer of ISOCOR effective December 9, 1998.
(4) Reflects options granted in prior fiscal years for which the exercise price
was adjusted.
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<PAGE> 111
AGGREGATED OPTION EXERCISES IN FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUE TABLE
The following table provides certain summary information concerning shares
of ISOCOR common stock acquired upon exercise of stock options and represented
by outstanding stock options, for each of the Named Officers as of December 31,
1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)(2)
ACQUIRED --------------------------- ---------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul Gigg................. -- -- 7,850 28,150 $32,876 $117,892
7,083 2,917 27,893 11,487
4,625 1,375 12,721 3,782
14,583 10,417 40,111 28,652
43,181 31,819 118,769 87,518
26,924 23,076 74,054 63,471
-- 170,000 -- 467,585
Raomal Perera(3).......... -- -- 5,833 2,167 11,304 4,200
11,666 8,334 22,609 16,151
-- 20,000 -- 38,760
Alex Lazar................ -- -- 979 21 3,855 83
9,750 2,250 32,302 7,454
11,666 8,334 32,087 22,923
-- 65,000 -- 178,783
Janine Bushman............ -- -- 16,000 -- 67,008 --
4,000 -- 15,752 --
4,000 -- 15,752 --
3,916 84 15,421 331
13,000 3,000 43,069 9,939
7,291 2,709 20,054 7,451
8,750 6,250 24,067 17,191
-- 30,000 -- 82,515
Robert Lewin(4)........... -- -- 12,500 37,500 28,125 84,375
</TABLE>
- -------------------------
(1) Determined based on the closing price of ISOCOR common stock as reported on
the Nasdaq Stock Market on December 31, 1998 ($4.56 per share).
(2) Excludes options with exercise prices in excess of the fair market value of
the underlying shares as of the date of this table.
(3) Raomal Perera resigned as an officer of ISOCOR effective July 1, 1999.
(4) Robert Lewin resigned as an officer of ISOCOR effective December 9, 1998.
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<PAGE> 112
TEN-YEAR OPTION REPRICINGS
The following table sets forth certain information as of December 31, 1998
with respect to the repricing of certain stock options held by the named
officers during the previous ten years. No stock appreciation rights were
granted to any Named Officer during such period.
<TABLE>
<CAPTION>
NUMBER OF MARKET LENGTH OF
SECURITIES PRICE OF EXERCISE ORIGINAL OPTION
UNDERLYING STOCK AT PRICE AT TERM REMAINING
OPTION/SARS TIME OF TIME OF NEW AT DATE OF
REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME DATE AMENDED AMENDMENT AMENDMENT PRICE AMENDMENT
---- -------- ----------- ------------ ------------ -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Paul Gigg............ 12-11-98 6,000 $ 1.8125 $ 2.625 $ 1.8125 6 yrs. 11 mos.
12-11-98 25,000 1.8125 2.625 1.8125 7 yrs. 8 mos.
12-11-98 75,000 1.8125 2.625 1.8125 8 yrs. 5 mos.
12-11-98 50,000 1.8125 2.625 1.8125 8 yrs. 11 mos.
4-1-97 6,000 2.625 7.50 2.625 8 yrs. 8 mos.
4-1-97 25,000 2.625 6.75 2.625 9 yrs. 4 mos.
Raomal Perera(1)..... 12-11-98 8,000 1.8125 2.625 1.8125 7 yrs. 1 mos.
12-11-98 20,000 1.8125 2.625 1.8125 7 yrs. 8 mos.
4-1-97 8,000 2.625 8.00 2.625 8 yrs. 10 mos.
4-1-97 20,000 2.625 6.75 2.625 9 yrs. 4 mos.
Alex Lazar........... 12-11-98 20,000 1.8125 2.625 1.8125 7 yrs. 8 mos.
4-1-97 20,000 2.625 6.75 2.625 9 yrs. 4 mos.
Janine Bushman....... 12-11-98 10,000 1.8125 2.625 1.8125 7 yrs. 1 mos.
12-11-98 15,000 1.8125 2.625 1.8125 7 yrs. 8 mos.
4-1-97 10,000 2.625 8.00 2.625 8 yrs. 10 mos.
4-1-97 15,000 2.625 6.75 2.625 9 yrs. 4 mos.
Robert Lewin(2)...... 12-11-98 37,500 1.8125 2.625 1.8125 7 yrs. 8 mos.
</TABLE>
- -------------------------
(1) Raomal Perera resigned as an officer of ISOCOR effective July 1, 1999.
(2) Robert Lewin resigned as an officer of ISOCOR effective December 9, 1998.
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<PAGE> 113
ISOCOR MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues. Total revenues were $24,272,000 and $16,358,000 for the nine
months ended September 30, 1999 and 1998, respectively, representing an increase
in 1999 of 48% over the same period one year ago. Revenues from domestic sources
accounted for approximately 32% and 27% of total revenues in the nine months
ended September 30, 1999 and 1998, respectively, while ISOCOR's European
marketplace revenues accounted for 59% and 60%, respectively, of ISOCOR's total
revenues in the same periods. The remaining 9% and 13% of revenues in the nine
months ended September 30, 1999 and 1998, respectively, were generated from
sources outside North America and Europe, primarily from Asia and South America.
Product revenues were $14,456,000 and $10,019,000 for the nine months ended
September 30, 1999 and 1998, respectively. ISOCOR's Internet Messaging product
line consists primarily of the N-PLEX products, which accounted for $7,381,000
or 51% of total product revenues in the nine months ended September 30, 1999, up
from the nine months ended September 30, 1998 level of $4,938,000 or 49% of
total product revenues. Directory revenues accounted for $3,747,000 or 26% of
total product revenues in the nine months ended September 30, 1999, up from the
nine months ended September 30, 1998 level of $1,484,000, or 15% of product
revenues. ISOCOR's worldwide Internet Messaging and Directory business includes
customers who are implementing large-scale/complex software systems. These
systems take time to design, configure and implement. This has a delaying impact
on the speed at which ISOCOR recognizes its revenues, such that large projects
will be recognized as revenue over several quarters.
In the nine months ended September 30, 1999 and 1998 product revenues
driven by the demand for non-Internet related solutions were $3,329,000 and
$3,597,000 of product revenues, respectively. This slight decrease was primarily
due to decreased volumes of ISOCOR's products relating to a continuing shift in
market demand away from ISOCOR's older non-Internet related product lines,
partially offset by increased prices. ISOCOR believes that this marketplace and
the related revenues will continue to decline slowly through the remainder of
1999 and beyond.
Service revenues were $9,816,000 and $6,339,000 for the nine months ended
September 30, 1999 and 1998, respectively. The 55% increase from 1998 to 1999
resulted primarily from increased volumes of software support and update
services; increased levels of custom services revenues largely driven by the
increased customer demand for ISOCOR's solutions incorporating both products and
services; and to a lesser extent due to the increased capabilities provided by
ISOCOR's acquisition of a 60% interest in an Italy-based services company in the
third quarter of 1998.
Cost of Revenues. Cost of product revenues consists primarily of costs of
media duplication, manuals and packaging materials, hardware purchased from
third party vendors and third party royalties relating to licensed technology.
The increase in cost of product revenues to $2,340,000 from $1,746,000 in the
nine months ended September 30, 1999 to September 30, 1998, respectively,
resulted primarily from increased hardware purchased from third party vendors.
Cost of service revenues consists primarily of personnel-related costs of
providing custom services and software support and update services. The increase
in cost of service revenues from $3,372,000 for the nine months ended September
30, 1998 to $6,549,000 for the nine months ended September 30, 1999 resulted
from increased personnel and related costs associated with supporting a higher
level of service revenues and includes the services cost of sales attributable
to ISOCOR's acquisition of a 60% interest in System Wizards, S.p.A. in the third
quarter of 1998.
Gross Profit. Gross profit was $15,383,000 and $11,240,000 for the nine
months ended September 30, 1999 and 1998, respectively, representing 63% and 69%
of revenues for those same periods, respectively. The decrease in gross margin
percentage between the periods was driven primarily by decreased services gross
margins.
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<PAGE> 114
Gross profit from product sales was $12,116,000 and $8,273,000 for the nine
months ended September 30, 1999 and 1998, respectively, representing 84% and 83%
of product sales for the nine months ended September 30, 1999 and 1998,
respectively. The slight increase in gross profit percentage is due to the fixed
cost component of cost of sales spread over a higher product revenue base for
the nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998.
Gross profit from services was $3,267,000 and $2,967,000 for the nine
months ended September 30, 1999 and 1998, respectively, representing 33% and 47%
of services revenues for those same periods, respectively. The decrease in gross
profit percentage between the periods was primarily driven by increased levels
of personnel required to provide these services, partially attributable to
ISOCOR's acquisition of a 60% interest in System Wizards, S.p.A. in the third
quarter of 1998.
Engineering. Engineering expenses were $4,227,000 and $4,238,000 for the
nine months ended September 30, 1999 and 1998, respectively, representing 17%
and 26% of revenues for those same periods, respectively. The percentage decline
in engineering expenses is affected by the higher revenue in the nine months
ended September 30, 1999.
Sales and Marketing. Sales and marketing expenses were $10,466,000 and
$9,960,000 for the nine months ended September 30, 1999 and 1998, respectively,
representing 43% and 61% of revenues for those same periods, respectively. The
absolute increase in sales and marketing expenses resulted principally from
operating expenses associated with higher commissions on higher revenues for the
nine months ended September 30, 1999 versus 1998 and partially from ISOCOR's
acquisition of a 60% interest in an Italy based services company in the third
quarter of 1998. The decrease in sales and marketing expenses as a percentage of
revenues is affected by the higher revenue in the nine months ended September
30, 1999.
Administration. Administration expenses were $3,456,000 and $2,472,000 for
the nine months ended September 30, 1999 and 1998, respectively, representing
14% and 15% of revenues for those same periods, respectively. The absolute
increase in administration expenses resulted principally from the increased
operating expenses associated with increased consulting and professional service
fees and partially attributable to the increased operating expenses associated
with ISOCOR's acquisition of a 60% interest in System Wizards, S.p.A. in the
third quarter of 1998.
(Income)loss from currency fluctuations. (Income) loss from currency
fluctuations was $631,000 and $(301,000) for the nine months ended September 30,
1999 and 1998, respectively. The fluctuation during these periods resulted
principally from Ireland due to the strength of the U.S. dollar against the
local currency.
Interest income. Interest income was $623,000 for the nine months ended
September 30, 1999 as compared with $784,000 in the same period in 1998. The
decrease is primarily related to decreased levels of marketable securities
during the first six months of 1999 as compared to the same period in 1998.
Provision for Income Taxes. The income tax provision was $114,000 for both
the nine months ended September 30, 1999 and 1998, on pre-tax losses of
$2,774,000 and $4,345,000, respectively, which resulted from taxes on ISOCOR's
foreign operations.
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
The consolidated financial statements of ISOCOR contained in this proxy
statement/prospectus have been retroactively restated for all periods presented
to include the financial position, results of operations and cash flows of NetCS
Informationstechnik GmbH, which was acquired on August 29, 1996, in accordance
with the pooling-of-interests method of accounting. In 1997, NetCS
Informationstechnik GmbH's legal name was changed to ISOCOR GmbH.
Revenues. Total revenues were $26.4 million, $22.0 million and $23.3
million in 1996, 1997 and 1998, respectively, representing a decrease of 17% in
1997 and an increase of 6% in 1998.
On a geographic basis, revenues from North American sources accounted for
22%, 33% and 23% of total revenues during 1996, 1997 and 1998, respectively,
while revenues in ISOCOR's European
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<PAGE> 115
marketplace accounted for 71%, 58% and 66% of total revenues in 1996, 1997 and
1998, respectively. The remaining percentages of revenue of 7%, 9% and 11% in
1996, 1997 and 1998, respectively, were generated from sources outside North
America and Europe, primarily from Australasia and South America.
Product revenues were $21.3 million, $15.6 million and $14.0 million in
1996, 1997 and 1998, respectively, representing a decrease of 27% in 1997 and a
decrease of 10% in 1998.
The 27% decrease in product revenues from 1996 to 1997 was mainly due to
decreased volumes of, and declining prices for, ISOCOR's older non-Internet
related products and Connectivity products, partially offset by increased
volumes in ISOCOR's products driven by the increased demand for software
solutions as a result of the increased business usage of the Internet. ISOCOR
believes that the major driver for the decline in demand for non-Internet
related software solutions was the rapid emergence and explosion of business use
of the Internet. In 1996, product revenues driven by the demand for non-Internet
related solutions were $12.4 million, or 58% of product revenues, while in 1997
these revenues fell to $4.9 million, or 31% of product revenues. Connectivity
product revenues were $3.9 million and $719,000 in 1996 and 1997, respectively.
The 10% decrease in product revenues from 1997 to 1998 was mainly due to
decreased volumes of ISOCOR's products related to a continuing shift in market
demand away from ISOCOR's older non-Internet related products lines, partially
offset by increased average prices of ISOCOR's Internet products driven by the
increased demand for software solutions as a result of the increased business
usage of the Internet. While ISOCOR continues to sell non-Internet related
projects in certain parts of the world, or in certain specific application
areas, ISOCOR believes that this marketplace will continue to decline slowly
throughout 2000 and beyond. In 1998, product revenues driven by the demand for
non-Internet related solutions were 25% of product revenues. ISOCOR's Internet
related product lines are primarily Internet Messaging and Directory. The
Internet Messaging product line consists primarily of the N-PLEX products and
accounted for 49% and 43% of total product revenues in 1998 and 1997,
respectively. ISOCOR's Directory products accounted for 16% and 15% of total
product revenues in 1998 and 1997, respectively. ISOCOR's worldwide Internet
Messaging and Directory business is evolving to include more customers who are
implementing larger-scale/more complex software systems. These systems take
increased time to design, configure and implement. This evolution has a delaying
impact on the speed at which ISOCOR recognizes its revenues, such that larger
projects will be recognized as revenue over several quarters. This trend is
currently more pronounced in ISOCOR's U.S. customers than elsewhere in the
world. As of December 31, 1998, ISOCOR had approximately $5.5 million of orders
in backlog, which compares to the December 31, 1997 and 1996 levels of less than
$500,000.
Service revenues were $5.1 million, $6.4 million and $9.3 million in 1996,
1997 and 1998, respectively, representing increases of 25% and 45% in 1997 and
1998, respectively. Service revenues include software support and update fees,
custom engineering, installation and training. The increase in 1997 from 1996
was primarily due to increased volumes of software support and update service
fees. The increase in 1998 from 1997 was primarily due to increased volumes of
custom engineering largely driven by the increased capabilities provided by
ISOCOR's acquisition of a 60% interest in an Italy-based services company in the
third quarter of 1998, and to a lesser extent due to increased volumes of
software support and update service fees. ISOCOR believes that services revenues
are becoming an increasingly important component of its offerings to the market
because more customers are implementing larger-scale/more complex software
systems.
Cost of revenues. Cost of revenues of $5.1 million, $5.7 million and $7.9
million in 1996, 1997 and 1998, respectively, includes both cost of product
revenues and cost of service revenues. Cost of product revenues consists
primarily of product media duplication, manuals and packaging materials,
personnel and facility costs associated with the assembly operation, and
third-party royalties relating to licensed technology costs of hardware
purchased from third-party vendors. Cost of service revenues consists primarily
of personnel-related costs of providing software support and update, custom
engineering, installation and training services.
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Cost of product revenues were $2.7 million, $2.9 million and $2.8 million
in 1996, 1997 and 1998, respectively. Cost of product revenues increased from
1996 to 1997 primarily as a result of increased third-party royalties on one of
ISOCOR's product lines associated with the growth in demand driven by the
Internet and a $310,000 write-down of third-party prepaid royalties relating to
a specific product technology which ISOCOR believed was non-strategic, which was
partially offset by a reduction in costs relating to hardware purchased from
third-party vendors as a result of decreased sales of these components. Cost of
product revenues decreased from 1997 to 1998 primarily as a result of decreased
third-party royalties on one of ISOCOR's product lines and the 1997 write-down
of third-party royalties relating to a specific product technology which ISOCOR
believed was non-strategic, both of which were partially offset by increased
costs relating to hardware purchased from third-party vendors as a result of
increased sales of these components.
Cost of services revenues were $2.4 million, $2.8 million and $5.1 million
in 1996, 1997 and 1998, respectively. Cost of services revenues increased due to
increased costs associated with supporting higher levels of service revenues
during these periods.
Gross profit. Gross profit was $21.3 million, $16.4 million and $15.4
million representing 81%, 74% and 66% of total revenues in 1996, 1997 and 1998,
respectively. The decline in the gross profit percentage from 1996 to 1997 is
primarily attributable to a decrease in the product gross margin percentage. The
decline in the gross profit percentage from 1997 to 1998 is primarily
attributable to a decline in services gross margin percentage combined with the
impact of an increasing percentage of services revenues to total revenues and,
to a lesser extent, by a decline in the product gross profit percentage.
Gross profit from product sales was $18.6 million, $12.8 million and $11.2
million in 1996, 1997 and 1998, respectively, representing 87%, 82% and 80% of
product revenues in 1996, 1997 and 1998, respectively. The absolute decrease in
gross profit from 1996 to 1997 was primarily a result of decreased product
revenues as discussed above, coupled with increased third-party royalties on one
of ISOCOR's product lines associated with the growth in demand driven by the
Internet and a 1997 $310,000 write-down of third-party prepaid royalties
relating to a specific product technology which ISOCOR believed was
non-strategic. The absolute decrease in gross profit from 1997 to 1998 was
primarily a result of decreased product revenues as discussed above and
increased costs of hardware purchased from third-party vendors as a result of
increased sales of these components, both of which were partially offset by
decreased third-party royalties on one of ISOCOR's product lines and the 1997
write-down of third-party royalties relating to a specific product technology
which ISOCOR believed was non-strategic.
Gross profit from services was $2.7 million, $3.6 million and $4.2 million
in 1996, 1997 and 1998, respectively, representing 53%, 56% and 46% of services
revenues in 1996, 1997 and 1998, respectively. The increase in the gross profit
from services percentage from 1996 to 1997 is primarily due to increased
services revenues without a corresponding increase in personnel costs associated
with providing these services. The decrease in the gross profit from services
percentage from 1997 to 1998 is primarily due to increased levels of personnel
required to provide those services and is partially attributable to ISOCOR's mid
1998 acquisition of a 60% interest in System Wizards, S.p.A.
Engineering. Engineering expenses were $9.0 million, $7.9 million and $5.9
million in 1996, 1997 and 1998, respectively, representing 34%, 36% and 25% of
revenues in 1996, 1997 and 1998, respectively. Engineering expenditures consist
primarily of personnel costs, facilities costs, equipment costs and related
costs required to conduct ISOCOR's development efforts, which include costs
related to engineering, product management, technical writing and quality
assurance. The dollar decrease in engineering expenses in 1997 resulted
principally from decreased levels of personnel involved in these activities, and
relate primarily to the continued reduction in and stabilization of development
of ISOCOR's older non-Internet based products. The dollar decrease in
engineering expenses in 1998 resulted principally from decreased levels of
personnel involved in these activities, including the continued reduction in
development of ISOCOR's older non-Internet based products. During 1996, 1997 and
1998, there were approximately 136, 106 and 74 people on average, respectively,
involved in engineering activities. To date, all software development costs have
been expensed as incurred, as the impact of software development costs that
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qualify for capitalization under Financial Accounting Standard No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," have been immaterial to the financial statements. ISOCOR believes
that significant investments in research and development are required for ISOCOR
to remain competitive. While ISOCOR intends to continue to place emphasis on its
research and development efforts in the future to remain competitive, ISOCOR
anticipates it will continue to moderate these expenses during 1999, relative to
prior periods, and that these expenses may not vary directly with the level of
revenues for that same period.
Sales and marketing. Sales and marketing expenses were $10.1 million, $14.0
million and $13.1 million in 1996, 1997 and 1998, respectively, representing
38%, 63% and 56% of revenues in 1996, 1997 and 1998, respectively. Sales and
marketing expenses include personnel and associated costs relating to selling,
sales support and marketing activities, including marketing programs such as
trade shows and other promotional costs. In 1997, the increase over 1996 in
total dollars in sales expenses resulted primarily from expansion of ISOCOR's
sales and support organizations and marketing is due to costs associated with
increased levels of personnel being involved with marketing activities on a
worldwide basis, as well as an increase in marketing program costs. In 1998, the
decrease in sales and marketing expenses was due to ISOCOR's refocusing of its
sales and marketing efforts and a decrease in the level of personnel involved
and expenses associated with those efforts. During 1996, 1997 and 1998, there
were approximately 77, 95 and 88 people on average, respectively, primarily
involved in sales activities. ISOCOR intends to increase its sales and marketing
spending in 1999.
Administration. Administration expenses were $2.7 million, $3.0 million and
$3.6 million in 1996, 1997 and 1998, respectively, representing 10%, 13% and 15%
of revenues in 1996, 1997 and 1998, respectively. From 1996 to 1997 the dollar
increases were primarily due to higher levels of staffing. From 1997 to 1998 the
dollar increase were primarily due to increased levels of professional services
fees. During 1996, 1997 and 1998, there were approximately 29, 38 and 39 people
on average, respectively, primarily involved in administrative activities.
ISOCOR expects to increase the dollar amount of its administration expenditures
in the future to support potential growth and to continue to meet the reporting
and investor relations requirements imposed on a public company.
Agency grants. In 1992, 1994 and 1996 ISOCOR secured grant aid in the
amounts of $750,000, $850,000 and $793,000, respectively, from the IDA under an
incentive program designed to induce organizations to locate and conduct
business in Ireland. These grants are for six years each and are primarily
dependent upon the creation and fulfillment of new jobs within ISOCOR in
Ireland. ISOCOR reflected as reductions of operating expenses $413,000, $69,000
and $0 relating to these grants in 1996, 1997 and 1998, respectively. ISOCOR has
decreased its level of employment in Ireland in 1997 and 1998. However ISOCOR is
committed to retaining a significant and continuing presence in Ireland. The
Company also received grant aid from the Technological Finance
Authority -- Berlin under an incentive program to promote research and
development in small and medium-sized German-owned companies located in Berlin.
ISOCOR reflected as reductions of operating expenses $87,000, $0 and $0 relating
to these grants in 1996, 1997 and 1998, respectively. As of August 31, 1996,
ISOCOR is no longer eligible to receive grants from the Technological Finance
Authority -- Berlin. ISOCOR expects the level of grant aid it receives from
differing sources to vary from year to year, primarily dependent upon its
employment level in Ireland.
Severance costs. Severance costs of $681,000 in 1997 represent the costs
accrued with respect to 35 terminated employees due to the restructuring
activities completed in 1997. The total severance costs incurred were $364,000
for engineering, $190,000 for sales and marketing, and $127,000 for
administration.
Acquisition costs. Acquisition costs of $227,000 in 1996 represent the
direct costs, primarily legal and accounting, of the business combination of
NetCS Informationstechnik GmbH and ISOCOR.
Income (loss) from currency fluctuations. Income (loss) from currency
fluctuations was $(82,000), $39,000 and $241,000 in 1996, 1997 and 1998,
respectively. The differences result from changes in foreign currency rates.
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Interest income. Interest income was $1.0 million, $1.2 million and $1.0
million in 1996, 1997 and 1998, respectively. The increase in 1997 resulted
primarily from interest earned for the full twelve months of 1997 on the cash
equivalents and marketable securities related to ISOCOR's initial public
offering in March 1996, partially offset by declining cash equivalents and
marketable securities balances in 1997. The decrease in 1998 is primarily
related to decreased levels of cash, cash equivalents and marketable securities.
Provision for income taxes. During 1997 and 1998, ISOCOR did not generate
taxable income in the United States. In 1996, ISOCOR utilized $390,000 of tax
loss carryforwards to offset income otherwise taxable in the United States,
which resulted in a significant reduction in income tax expense for that year.
ISOCOR has significant operations and generates a substantial portion of its
taxable income in Ireland. Under a tax holiday due to terminate in 2010, ISOCOR
is taxed in Ireland on its "manufacturing income" at a 10% rate. For Irish tax
purposes, most of ISOCOR's operating income earned in Ireland is considered
"manufacturing income." To qualify for this 10% rate, ISOCOR must carry out
"software development services" or "technical or consultancy services", as
defined in the Irish Finance Act 1980, in Ireland and qualify for an employment
grant from the IDA. If ISOCOR ceases to comply with these qualifications, all or
a part of its taxable profits may be subject to a 32% tax rate on its post
disqualification date taxable profits. Should this occur, or should Irish tax
laws be rescinded or changed, ISOCOR's net income could be materially adversely
affected.
LIQUIDITY AND CAPITAL RESOURCES
Prior to ISOCOR's initial public offering in March 1996, ISOCOR financed
its operations primarily through private sales of equity securities. ISOCOR
received net proceeds of approximately $1.8 million in 1996 from the private
sale of equity securities. In March 1996, ISOCOR completed a public offering and
sale of 2,300,000 shares of its common stock resulting in net proceeds to ISOCOR
of approximately $18.3 million. Funds from ISOCOR's equity financings continue
to be used to fund the expansion of ISOCOR's infrastructure and internal
operations, including purchases of capital equipment and the hiring of
additional personnel.
ISOCOR generated (used) cash from operating activities of $446,000,
$(4,718,000) million and $266,000 in 1996, 1997 and 1998, respectively, and
$(467,000) for the nine months ended September 30, 1999. Operating cash flows in
1998 relative to 1997 were positively affected by a decreased operating loss
(net of adjustments due to depreciation and amortization and the provision for
doubtful accounts, returns and price protection) and increased cash flow
relative to a decreased level of other current assets and an increased level of
other accrued expenses and deferred revenues. Operating cash flows in 1997
relative to 1996 were negatively affected by a significantly increased operating
loss (net of adjustments due to depreciation and amortization and the provision
for doubtful accounts, returns and price protection), partially offset by a
decreased level of revenues. Cash flow from operations can vary significantly
from quarter to quarter depending upon the timing of operating cash receipts and
payments, especially accounts receivable and accounts payable. In addition,
ISOCOR typically generates a large percentage of its quarterly revenues during
the last few weeks of the quarter, which when coupled with payment terms in
excess of 90 days on some of the larger sales tends to give rise to increases in
accounts receivable.
ISOCOR currently anticipates that its available cash, cash equivalents and
marketable securities resources ($19.3 million as of September 30, 1999), will
be sufficient to meet its working capital and capital expenditure requirements
through at least the end of 2000.
YEAR 2000 ISSUES
ISOCOR is working to resolve the potential impact of the year 2000 on the
ability of ISOCOR's computerized information systems and ISOCOR's software
products to process information accurately that may be date-sensitive. Any of
ISOCOR's programs or products that recognize a date using "00" as the year 1900
rather than the year 2000 could result in errors or system failures. ISOCOR
utilizes a number of computer programs across its entire operation. ISOCOR is
assessing both the readiness of its internal
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computer systems and software, and the compliance of its software licensed to
customers, for handling the year 2000.
ISOCOR relies on a variety of internal computer systems, as well as
services provided by third parties, in the operation of its business. ISOCOR has
substantially completed its assessment of the impact of the year 2000 problem
upon such systems and does not believe that any of such systems are mission-
critical to ISOCOR's business operations such that a failure in such systems
would have an immediate adverse effect on ISOCOR's business, financial condition
or results of operations. At this time, ISOCOR believes that its systems are
year 2000 compliant and is in the final stages of completing the process of
taking steps or monitoring the actions of its suppliers with respect to those
systems. ISOCOR's internal systems run on personal computers and
microprocessor-based computer servers set up in a workstation environment and
should not be susceptible to universal failures. Were system failures to occur
as a result of the year 2000 issue, ISOCOR believes that its on-site engineers
and technical personnel would be able to address and resolve such issues prior
to the occurrence of any material adverse effect on ISOCOR's business
operations. The failure of certain of the systems upon which ISOCOR relies, such
as payroll and banking services, could, however, be disruptive to ISOCOR's
business operations if such systems were unavailable for an extended period of
time. ISOCOR is in the final stages of completing its process of making
inquiries with the providers of such types of services to determine their year
2000 readiness. However, ISOCOR believes that its business operations would not
be materially adversely affected by short disruptions in such services and that
the providers of such services (who also typically service many other business
customers) will take steps to rectify any failures as soon as possible. More
generally, ISOCOR does not believe that its risks with regard to failures in the
power grid or general communications, building security and similar systems
place ISOCOR in a unique position relative to year 2000 issues as compared to
other businesses.
ISOCOR is in the final stages of testing and upgrading, where necessary,
the current versions of its currently-offered software products to address the
year 2000 issue and year 2000 compliant versions of its currently available
products. ISOCOR believes that a number of its older or obsolete products and/or
versions are not year 2000 compliant, and ISOCOR currently does not intend to
update such products or versions. ISOCOR has taken and plans to continue to take
appropriate steps to notify its customers and distribution channels about the
year 2000 issues associated with ISOCOR's older and discontinued products.
ISOCOR maintains on its website a list of ISOCOR's current year 2000 compliant
products (by product and version number). Customers under current support and
maintenance agreements with ISOCOR will be entitled to upgrade to a year 2000
compliant replacement product. ISOCOR has completed a mailing to its customers
under support and maintenance agreements and has conducted a general customer
mailing, including ISOCOR's distribution channels and customers not under
maintenance and support agreements. ISOCOR has given certain of its customers
warranties with respect to year 2000 compliance and may have to offer updates,
workarounds or replacement products to those customers. Through its website,
ISOCOR is encouraging customers not under support and maintenance agreements to
contact ISOCOR regarding possible upgrades or migration paths to address year
2000 issues. In addition to the information contained on ISOCOR's website,
ISOCOR's regular newsletter contains similar information regarding year 2000
issues. In certain cases, however, customers may need to make hardware and/or
operating system changes in order to implement a year 2000 solution. In other
cases, ISOCOR will not be able to offer a solution. In the event that any of the
products that ISOCOR has made or intends to make year 2000 compliant suffer
unanticipated failures as a result of year 2000 problems, ISOCOR would deploy
its engineering and technical support resources to implement a solution.
ISOCOR believes that its customers are currently undergoing evaluations of
their needs to achieve year 2000 compliance and are in various states of
readiness. ISOCOR believes that for some customers, this may slow down their
software purchases as they devote more time to preparing and testing their
systems for year 2000 readiness, versus evaluating and implementing new systems.
Therefore, such customers may choose to defer system investments during 1999,
negatively impacting ISOCOR's revenues. Because year 2000 related impacts on
customer purchasing decisions are unprecedented, ISOCOR has a limited ability to
forecast accurately the impact of the year 2000 issue on its revenues.
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Some of ISOCOR's products incorporate software code supplied by third
parties. ISOCOR relies upon such vendors to ensure that such code is updated to
address year 2000 issues where appropriate. Because such third parties license
their code to others in addition to ISOCOR, ISOCOR believes that such third
parties will take measures to address any year 2000 issues with respect to such
code. However, in the event that such third parties do not take actions to make
the code year 2000 compliant or their actions prove insufficient, and where
ISOCOR has the right to make code modifications, ISOCOR believes that its
technical personnel, who are familiar with the code used in ISOCOR's products,
could make necessary modifications to correct problems that arise.
ISOCOR has not incurred substantial costs to date to address the year 2000
issue and does not expect the total costs of such project to be material to
ISOCOR's financial position. To date, ISOCOR has spent approximately $325,000 in
connection with actions taken by ISOCOR to address year 2000 problems and
estimates remaining costs to be immaterial. Such costs are being expensed as
they are incurred and are being funded through operating cash flow. Cost
estimates are based on currently available information. Factors that could
affect these estimates include, but are not limited to, the availability and
cost of trained personnel to evaluate and implement necessary changes, the
ability to locate and correct noncompliant systems and the ability of ISOCOR's
customers and service providers to successfully implement year 2000 compliant
systems or fixes. Any failure by ISOCOR to make its products year 2000 compliant
could result in a decrease in sales of ISOCOR's products and/or possible claims
against ISOCOR by customers as a result of year 2000 problems caused by ISOCOR's
products. Despite ISOCOR's efforts to address the year 2000 impact on its
internal systems, products and business operations, the year 2000 issue may
result in a material disruption of its business or have a material adverse
effect on ISOCOR's business, financial condition or results of operations.
EURO IMPACT
In January 1999, eleven European countries, including Ireland, Germany and
Italy, where ISOCOR maintains significant operations, initiated the process to
replace their individual national currencies with a single, shared new currency,
the "Euro", as part of the program of European Economic and Monetary Union. It
is expected that this process will be completed at the latest by end of June in
the year 2002. Although transactions during this transitional period may still
be consummated in the individual currencies of the member countries, ISOCOR will
be required to, and is currently in the process of, implementing modifications
to its accounting systems as well as its contracts and other obligations in
order to accommodate the Euro. The Company does not currently believe that it
will incur a material financial expense in connection with such modifications.
The introduction of the Euro, presents certain risks for ISOCOR including, risks
associated with its reduced ability to adjust pricing of its products based on
local currencies, fluctuations in the Euro based on economic turmoil in
countries other than those in which ISOCOR does business and other risks
normally associated with doing business in international currencies, any of
which could have an adverse effect on ISOCOR's business, financial condition and
results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative information about market risk. ISOCOR's exposure to market
risk for changes in interest rates relates primarily to ISOCOR's investment
portfolio. ISOCOR maintains an investment policy designed to ensure the safety
and preservation of its invested funds by limiting default risk, market risk and
investment risk. As of September 30, 1999, ISOCOR had $10.3 million and $9.0
million of cash and cash equivalents and marketable securities, respectively,
with a weighted average variable rate of 3.43% and 5.14%, respectively.
ISOCOR attempts to mitigate default risk by attempting to invest in high
credit quality securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor and by placing its portfolio under the management of
professional money managers who invest within specified parameters established
by the board of directors. The
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portfolio includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity and maintains a prudent amount of
diversification.
Qualitative information about market risk. While ISOCOR's consolidated
financial statements are prepared in United States dollars, a substantial
portion of ISOCOR's worldwide operations have a functional currency other than
the United States dollar. In particular, ISOCOR maintains substantial
development operations in Ireland, where the functional currency is the Irish
Pound, Germany where the functional currency is the German Mark and Italy, where
the functional currency is the Italian Lira. In addition, a significant portion
of ISOCOR's revenues are also denominated in currencies other than the United
States dollar. Fluctuations in exchange rates may have a material adverse effect
on ISOCOR's results of operations and could also result in exchange losses. The
impact of future exchange rate fluctuations cannot be predicted adequately. To
date, ISOCOR has not sought to hedge the risks associated with fluctuations in
exchange rates, but may undertake such transactions in the future. ISOCOR does
not have a policy relating to hedging. There can be no assurance that any
hedging techniques implemented by ISOCOR would be successful or that ISOCOR's
results of operations will not be materially adversely affected by exchange rate
fluctuations.
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ISOCOR SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain ownership information with respect
to the beneficial ownership of ISOCOR common stock as of October 20, 1999 by:
- each person who is known by ISOCOR to own beneficially more than 5% of
its common stock;
- each director of ISOCOR;
- each named executive officer listed in the ISOCOR Summary Compensation
Table who is currently employed by ISOCOR; and
- all directors and executive officers of ISOCOR as a group.
Unless otherwise indicated, and subject to community property laws where
applicable, each of the shareholders named in the following table has sole
voting and investment power with respect to the shares shown as beneficially
owned by it. A person is deemed to be the beneficial owner of securities which
can be acquired by such person within 60 days from October 20, 1999 upon the
exercise of options and warrants. Each beneficial owner's percentage ownership
is determined by assuming that options which are held by such person and which
are exercisable within 60 days from October 20, 1999 have been exercised;
options which held by any other person and which are exercisable within 60 days
from October 20, 1999 are not assumed to have been exercised.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF SHARES BENEFICIALLY OWNED
BENEFICIALLY OWNED AS A RESULT OF PERCENTAGE
(INCLUDING THE NUMBER OPTIONS EXERCISABLE OF SHARES
OF SHARES SHOWN IN WITHIN 60 DAYS OF OUTSTANDING AS OF
NAME OF BENEFICIAL OWNER THE SECOND COLUMN) OCTOBER 20, 1999 OCTOBER 20, 1999
------------------------ --------------------- ------------------- -----------------
<S> <C> <C> <C>
Janine Bushman............................... 78,166 78,166 0.74%
Dennis Cagan................................. 5,000 0 *
Andre De Fusco............................... 0 0 --
Andrew De Mari(1)............................ 336,307 51,666 3.21
Paul Gigg.................................... 230,014 212,656 2.16
G. Bradford Jones(2)......................... 607,618 0 5.83
Karl Klessig................................. 31,118 29,687 *
Alex Lazar................................... 62,155 55,395 *
Abraham Levine............................... 1,000 0 *
David Longley................................ 21,562 21,562 *
Barry Wyse................................... 45,243 44,728 *
Bill Yundt................................... 9,437 937 *
All executive officers and directors as a
group (12 persons)......................... 1,427,620 494,799 13.08
</TABLE>
- -------------------------
* Less than 1%.
(1) Excludes 6,471 shares owned by Antonella De Mari, 471 shares owned by Luigi
De Mari, 6,471 shares owned by Alessandra De Mari and 6,471 shares owned by
Susanna De Mari, all of whom are members of Dr. De Mari's immediate family.
Dr. De Mari disclaims beneficial ownership of such shares.
(2) Includes 607,618 shares held by Brentwood Associates V, L.P. Mr. Jones, a
director of ISOCOR is a general partner of Brentwood V Ventures, L.P., the
General Partner of Brentwood Associates V, L.P. Because of his position with
Brentwood V Ventures, L.P., Mr. Jones may be deemed to be a beneficial owner
of such shares, but disclaims beneficial ownership of such shares except to
the extent of his individual interest in the partnership.
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FUTURE SHAREHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, ISOCOR shareholders may
present proper proposals for inclusion in ISOCOR's proxy statement and for
consideration at its 2000 annual meeting of shareholders, in the event the
merger has not been consummated prior thereto, by submitting such proposals to
ISOCOR in a timely manner. In order to be so included for the 2000 annual
meeting shareholder proposals must be received by ISOCOR within a reasonable
time before the meeting, and must otherwise comply with the requirements of Rule
14a-8.
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) to
December 31, 1997 and the year ended December 31, 1998, the consolidated
financial statements of ISOCOR as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998, the financial statements
of dotOne Corporation as of September 30, 1997 and 1998 and for the period from
January 1, 1997 (Inception) to September 30, 1997 and for the year ended
September 30, 1998, and the consolidated financial statements of FaxNet
Corporation as of December 31, 1997 and 1998 and for each of the years then
ended included in this Prospectus have been so included in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of FABRIK Communications, Inc. at
September 30, 1997 and 1998 and for each of the two years ended September 30,
1998, appearing in this proxy statement/ prospectus have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The financial statements of THE DOCSPACE COMPANY INC. as at July 31, 1999
and 1998 and for the periods then ended included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of Amplitude Software Corporation, Inc. as of
December 31, 1998 and 1997 and for each of the years in the two-year period
ended December 31, 1998, have been included herein in reliance upon the report
of KPMG LLP, independent auditors appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
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, Professional Corporation.
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WHERE YOU CAN FIND MORE INFORMATION
<TABLE>
<S> <C>
Reports, proxy statements and other information Reports, proxy statements and other information
regarding Critical Path may be inspected at: concerning ISOCOR may be inspected at:
The National Association of Securities Dealers The National Association of Securities Dealers
1735 K Street, N.W. 1735 K Street, N.W.
Washington, D.C. 20006 Washington, D.C. 20006
Requests for documents relating to Critical Path Requests for documents relating to ISOCOR should be
should be directed to: directed to:
Critical Path, Inc. ISOCOR
320 First Street 3420 Ocean Park Blvd.
San Francisco, CA 94105 Santa Monica, CA 90405-3306
(415) 808-8800 (310) 581-8100
</TABLE>
Each of Critical Path and ISOCOR file reports, proxy statements and other
information with the Securities and Exchange Commission. Copies of ISOCOR's and
Critical Path's reports, proxy statements and other information may be inspected
and copied at the public reference facilities maintained by the Securities and
Exchange Commission.
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, New York 10048
Washington, D.C. 20549 Chicago, Illinois 60661
</TABLE>
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549 or by calling the Securities and
Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission
maintains a website that contains reports, proxy statements and other
information regarding each of us. The address of the Securities and Exchange
Commission website is http://www.sec.gov.
Critical Path has filed a registration statement under the Securities Act
with the Securities and Exchange Commission with respect to Critical Path common
stock to be issued to ISOCOR shareholders in the merger. This proxy
statement/prospectus constitutes the prospectus of Critical Path filed as part
of the registration statement. This proxy statement/prospectus does not contain
all of the information set forth in the registration statement because certain
parts of the registration statement are omitted as provided by the rules and
regulations of the Securities and Exchange Commission. You may inspect and copy
the registration statement at any of the addresses listed above.
THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO PURCHASE, THE CRITICAL PATH COMMON STOCK OR THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS
UNLAWFUL TO MAKE THE OFFER, SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN
THAT JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF SECURITIES MEANS, UNDER ANY CIRCUMSTANCES, THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION SET FORTH OR IN CRITICAL PATH'S AFFAIRS SINCE
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS. THE INFORMATION CONTAINED IN THIS
DOCUMENT WITH RESPECT TO CRITICAL PATH WAS PROVIDED BY CRITICAL PATH, AND THE
INFORMATION CONTAINED IN THIS DOCUMENT WITH RESPECT TO ISOCOR AND ITS
SUBSIDIARIES WAS PROVIDED BY ISOCOR.
118
<PAGE> 125
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PRO FORMA CONDENSED COMBINED FINANCIAL DATA
Overview.................................................... F-3
Pro Forma Condensed Combined Balance Sheet.................. F-7
Pro Forma Condensed Combined Statement of Operations........ F-8
Notes to Pro Forma Condensed Combined Financial
Information............................................... F-9
ISOCOR CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999
Report of Independent Accountants........................... F-11
Consolidated Balance Sheets................................. F-12
Consolidated Statements of Operations....................... F-13
Consolidated Statements of Shareholders' Equity............. F-14
Consolidated Statements of Cash Flows....................... F-15
Consolidated Statements of Comprehensive Income............. F-16
Notes to Consolidated Financial Statements.................. F-17
CRITICAL PATH, INC. CONSOLIDATED FINANCIAL STATEMENTS
For the Period from February 19, 1997 (Inception) to
December 31, 1997, for the year ended December 31, 1998, and
for the nine months ended September 30, 1998 and 1999
Report of Independent Accountants........................... F-32
Consolidated Balance Sheet.................................. F-33
Consolidated Statement of Operations........................ F-34
Consolidated Statement of Shareholders' Equity (Deficit).... F-35
Consolidated Statement of Cash Flows........................ F-36
Notes to Consolidated Financial Statements.................. F-37
FABRIK COMMUNICATIONS, INC. CONSOLIDATED FINANCIAL
STATEMENTS
For the years ended September 30, 1997 and 1998, and for the
six months ended March 31, 1998 and 1999
Report of Ernst & Young LLP Independent Auditors............ F-53
Consolidated Balance Sheets................................. F-54
Consolidated Statements of Operations....................... F-55
Consolidated Statements of Redeemable Convertible Preferred
Stock and Shareholders' Deficit........................... F-56
Consolidated Statements of Cash Flows....................... F-57
Notes to Consolidated Financial Statements.................. F-58
DOTONE CORPORATION FINANCIAL STATEMENTS
For the Period from January 1, 1997 to September 30, 1997,
for the year ended September 30, 1998, and for the nine
months ended June 30, 1998 and 1999
Report of Independent Accountants........................... F-68
Balance Sheet............................................... F-69
Statement of Operations..................................... F-70
Statement of Stockholders' Deficit.......................... F-71
Statement of Cash Flows..................................... F-72
Notes to Financial Statements............................... F-73
AMPLITUDE SOFTWARE CORPORATION, INC. FINANCIAL STATEMENTS
For the years ended December 31, 1997, 1998 and for the six
months ended June 30, 1998 and 1999
Independent Auditors' Report................................ F-80
Balance Sheets.............................................. F-81
Statements of Operations.................................... F-82
</TABLE>
F-1
<PAGE> 126
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Statements of Shareholders' Deficit......................... F-83
Statements of Cash Flows.................................... F-84
Notes to Financial Statements............................... F-85
FAXNET CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1997, 1998 and nine months
ended September 30, 1998 and 1999
Report of Independent Accountants........................... F-95
Consolidated Balance Sheet.................................. F-96
Consolidated Statement of Operations........................ F-97
Consolidated Statement of Changes in Redeemable Preferred
Stock and Stockholders' Deficit........................... F-98
Consolidated Statement of Cash Flows Increase (Decrease) in
Cash and Cash Equivalents................................. F-99
Notes to Consolidated Financial Statements.................. F-100
DOCSPACE FINANCIAL STATEMENTS
For the year ended July 31, 1999 and the period from
incorporation (November 10, 1997) to July 31 1998
Auditors' Report............................................ F-110
Balance Sheets.............................................. F-111
Statements of Loss.......................................... F-112
Statements of Shareholders' Equity (Deficit)................ F-113
Statements of Cash Flows.................................... F-114
Notes to Financial Statements............................... F-115
</TABLE>
F-2
<PAGE> 127
CRITICAL PATH, INC.
PRO FORMA CONDENSED COMBINED FINANCIAL DATA
OVERVIEW
Effective May 26, 1999, Critical Path, Inc. ("Company") acquired
substantially all of the operating assets of the Connect Service business of
Fabrik Communications, Inc. ("Fabrik"), 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 net assets acquired on the basis of their respective fair values on
the acquisition date. The fair value of intangible net assets was determined
based upon a valuation using a combination of methods, including an income
approach for the acquired customer list and a 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 $8.0 million of the Company's Common Stock (109,091 shares) 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 base
($2.1 million), assembled workforce ($400,000) and goodwill ($17.1 million). The
acquired intangible assets, excluding goodwill, will be amortized over their
estimated useful lives of two to three years. Goodwill is being amortized over
its estimated useful life of three years.
On July 21, 1999, the Company acquired dotOne Corporation ("dotOne"), a
leading corporate email 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 a fair value of $3.2 million, and other estimated
acquisition related expenses of approximately $1.3 million, consisting primarily
of payments for finders fees, legal 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, excluding goodwill, are being amortized over their estimated
useful lives of three to five years. Goodwill is being amortized over its
estimated useful life of three years.
On August 31, 1999, the Company acquired Amplitude Software Corporation
("Amplitude"), a leading provider of business-to-business Internet calendaring
and resource scheduling solutions. 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 assembled
workforce.
The total purchase price of approximately $214.4 million consisted of $45.0
million of cash, $141.3 million of the Company's Common Stock (4,107,250
shares), assumed stock options with a fair value of $22.0 million, and other
acquisition related expenses of $6.1 million, consisting primarily of payments
for finders fees, legal and other professional fees. Of the total purchase
price, $4.4 million was
F-3
<PAGE> 128
allocated to net tangible assets, and the remainder was allocated to intangible
assets, including existing technology ($4.1 million), customer base ($600,000),
assembled workforce ($3.8 million) and goodwill ($201.5 million). The acquired
intangible assets, excluding goodwill, will be amortized over their estimated
useful lives of two to four years. Goodwill will be amortized over its estimated
useful life of four years.
On October 20, 1999, the Company signed a definitive agreement to acquire
ISOCOR ("ISOCOR"), a leading supplier of Internet messaging, directory and
directory software solutions. The acquisition, which is subject to the approval
of ISOCOR's shareholders as well as certain regulatory approvals, will be
accounted for using the purchase method of accounting and accordingly, the
purchase price will be 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 preliminary
valuation using a combination of methods, including an income approach for the
acquired existing and in-process technologies, an income approach for the
customer/partner base and replacement cost approach for the value of the
assembled workforce.
The total estimated purchase price of approximately $274.0 million will
consist of approximately $225.7 million of the Company's Common Stock based upon
the number of shares to be determined at closing (estimated to be 5,029,964
shares based upon the merger agreement, accelerated vesting of options, and
assuming no dissenting shares), an average of the closing market price of the
Company's Common Stock over a period of two days prior and two days after the
proposed transaction was announced ($44.87), and an exchange ratio of 0.4707,
assumed stock options with an estimated fair value of $37.2 million, and other
estimated acquisition related expenses of approximately $11.1 million,
consisting primarily of payments for financial advisor and other professional
fees. Of the total estimated purchase price, approximately $5.65 million will be
allocated to net tangible assets, and the remainder will be allocated to
intangible assets, including in-process technology ($200,000), existing
technology ($18.3 million), customer/partner base ($9.8 million), assembled
workforce ($3.4 million) and goodwill ($236.65 million). The acquired in-process
technology will be expensed in the period the transaction is consummated. The
other acquired intangible assets, excluding goodwill, will be amortized over
their estimated useful lives of three years. Goodwill will be amortized over its
estimated useful life of three years.
On December 6, 1999, the Company acquired FaxNet Corporation ("FaxNet"), a
leading outsource supplier of carrier-class enhanced fax and integrated
messaging solutions. The acquisition has been accounted for using the purchase
method of accounting and accordingly, the purchase price has been allocated to
the tangible and intangible 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 preliminary valuation using a combination of methods,
including an income approach for the acquired existing technology, an income
approach for the customer/partner base and replacement cost approach for the
value of the assembled workforce.
The total purchase price of approximately $199.3 million consisted of $20.0
million of cash, approximately $154.8 million of the Company's Common Stock
based upon the number of shares determined at closing (estimated to be 2,894,081
shares based upon the merger agreement and assuming no dissenting shares), and
an average of the closing market price of the Company's Common Stock over a
period of two days prior and two days after the proposed transaction was
announced ($53.48), assumed unvested stock options with an estimated fair value
of $7.3 million, assumed subordinated notes of 4.2 million and other estimated
acquisition related expenses of approximately $13.0 million, consisting of bonus
payments to certain members of management of FaxNet totaling $7.5 million, and
financial advisor and other professional fees. Of the total purchase price,
approximately $15.7 million was allocated to net tangible liabilities, and the
remainder was allocated to intangible assets, including existing technology
($20.3 million), customer base ($14.3 million), assembled workforce ($900,000)
and goodwill ($179.5 million). The acquired intangible assets, excluding
goodwill, will be amortized over their estimated useful lives of three to eight
years. Goodwill will be amortized over its estimated useful life of eight years.
F-4
<PAGE> 129
On November 3, 1999, the Company signed a definitive agreement to acquire
The docSpace Company ("docSpace"), a leading provider of Web-based services for
secure file delivery, storage and collaboration. The acquisition, which is
subject to the approval of docSpace's shareholders, will be accounted for using
the purchase method of accounting and accordingly, the purchase price will be
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 preliminary valuation using a
combination of methods, including a cost approach for the acquired
patented/proprietary technology, and replacement cost approach for the value of
the assembled workforce.
The total estimated purchase price of approximately $274.0 million will
consist of $30.0 million of cash, approximately $234.0 million of the Company's
Common Stock based upon the number of shares to be determined at closing
(estimated to be 4,092,280 shares based upon the merger agreement and assuming
no dissenting shares), and an average of the closing market price of the
Company's Common Stock over a period of two days prior and two days after the
proposed transaction was announced ($57.21), and other estimated acquisition
related expenses of approximately $10.0 million, consisting primarily of
payments for professional fees. Of the total estimated purchase price,
approximately $12.55 million will be allocated to net tangible liabilities, and
the remainder will be allocated to intangible assets, including
patented/proprietary technology ($21.5 million), assembled workforce ($500,000)
and goodwill ($264.55 million). The acquired intangible assets, excluding
goodwill, will be amortized over their estimated useful lives of three years.
Goodwill will be amortized over its estimated useful life of three years.
Management of Critical Path believes that the pending acquisition of
docSpace is a probable acquisition.
The accompanying unaudited pro forma condensed combined balance sheet gives
effect to these consummated and pending acquisitions as if they had occurred on
September 30, 1999, by combining the balance sheet of ISOCOR, FaxNet and
docSpace with the balance sheet of the Company at September 30, 1999. The
acquisitions of Fabrik, dotOne and Amplitude were consummated prior to September
30, 1999. Therefore, the historical Critical Path balance sheet at September 30,
1999 includes the allocated purchase price for these acquisitions.
The accompanying unaudited pro forma condensed combined statements of
operations give effect to these consummated or pending acquisitions as if they
had occurred on January 1, 1998, by the results of operations of:
- Fabrik for the year ended September 30, 1998 and the period from January
1, 1999 to May 26, 1999 with the results of operations of the Company for
the year ended December 31, 1998 and nine months ended September 30,
1999, respectively.
- dotOne for the year ended September 30, 1998 and the period from January
1, 1999 to July 21, 1999 with the results of operations of the Company
for the year ended December 31, 1998 and the nine months ended September
30, 1999, respectively.
- Amplitude for the year ended December 31, 1998 and the period from
January 1, 1999 to August 31, 1999 with the results of operations of the
Company for the year ended December 31, 1998 and the nine months ended
September 30, 1999, respectively.
- ISOCOR for the year ended December 31, 1998 and the nine months ended
September 30, 1999 with the results of operations of the Company for the
year ended December 31, 1998 and the nine months ended September 30,
1999, respectively.
- FaxNet for the year ended December 31, 1998 and the nine months ended
September 30, 1999 with the results of operations of the Company for the
year ended December 31, 1998 and the nine months ended September 30,
1999, respectively.
- docSpace for the twelve months ended December 31, 1998 and the nine
months ended September 30, 1999 with the results of operations of Company
for the year ended December 31, 1998 and the nine months ended September
30, 1999, respectively.
F-5
<PAGE> 130
The unaudited pro forma condensed combined statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of beginning of the periods presented and
should not be construed as being representative of future operating results.
Note that the purchase price for ISOCOR, FaxNet and docSpace are estimates
and could change (primarily as a result of the actual number of Critical Path
Common Stock that is ultimately issued).
Also, note that the purchase price allocations of ISOCOR, FaxNet, and
docSpace are based upon preliminary valuations. These valuations could change
when finalized upon closing of these transactions, based upon the facts and
circumstances at that time. A change in the purchase price or the allocation of
the purchase price could have a material effect on actual future results of the
Company.
F-6
<PAGE> 131
CRITICAL PATH, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
---------------------------------------------------------------------------------
HISTORICAL ADJUSTMENTS
---------------------------------------------- -------------------
CRITICAL PATH ISOCOR FAXNET DOCSPACE (A) (B) PRO FORMA
------------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents...... $146,833 $ 10,258 $ 1,020 $ 5,016 $ -- $(84,100) $ 79,027
Restricted cash.............. 325 -- -- -- -- -- 325
Marketable securities........ -- 9,009 -- -- -- -- 9,009
Accounts receivable, net..... 4,952 7,431 2,111 95 -- -- 14,589
Prepaid expenses and other
current assets............... 19,168 2,682 593 87 (5,000) -- 17,530
-------- -------- -------- ------- -------- -------- ----------
Total Current
Assets.............. 171,278 29,380 3,724 5,198 (5,000) (84,100) 120,480
Notes receivable from
officers................... 1,053 -- -- -- -- -- 1,053
Intangibles, net............. 278,487 -- 1,379 -- (1,379) 769,700 1,048,187
Furniture and equipment,
net........................ 30,862 2,262 6,108 467 -- -- 39,699
Investments.................. 11,514 -- -- -- -- -- 11,514
Other assets................. -- 2,302 1,562 217 -- -- 4,081
-------- -------- -------- ------- -------- -------- ----------
$493,194 $ 33,944 $ 12,773 $ 5,882 (6,379) $685,600 $1,225,014
======== ======== ======== ======= ======== ======== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Liabilities:
Accounts payable and accrued
liabilities.................. $ 8,332 $ 1,033 $ 5,135 $ 4,544 $ -- $ -- $ 19,044
Accrued compensation and
benefits..................... 2,693 6,882 -- -- -- -- 9,575
Other accrued liabilities.... -- 1,519 -- 5,067 (5,000) 1,586
Deferred revenue............. 971 6,109 -- 22 -- 7,102
Capital lease obligations,
current.................... 3,686 -- 2,554 -- -- -- 6,240
Subordinated notes........... -- -- -- -- -- 4,200 4,200
Total Current
Liabilities......... 15,682 15,543 7,689 9,633 (5,000) 4,200 47,747
Deferred revenue............. 202 -- -- -- -- -- 202
Capital lease obligations,
long term.................... 4,664 -- 2,677 -- -- -- 7,341
Other long-term
liabilities................ -- 151 2,397 -- -- -- 2,548
Put warrants................. -- -- 131 -- -- -- 131
Deferred taxes............... -- -- -- -- 35,599 35,599
-------- -------- -------- ------- -------- -------- ----------
20,548 15,694 12,894 9,633 (5,000) 39,799 93,568
-------- -------- -------- ------- -------- -------- ----------
SHAREHOLDERS' EQUITY/(DEFICIT):
Preferred Stock.............. -- -- 24,043 -- (24,043) -- --
Common stock................. 43 40,518 28 1,755 (42,301) 12 55
Share subscriptions.......... -- -- -- 3,762 (3,762) -- --
Additional paid-in capital... 612,898 -- 155 -- (155) 658,988 1,271,886
Notes receivable from
shareholders................. (1,107) -- -- -- -- -- (1,107)
Unearned compensation........ (75,427) -- -- (1,558) 1,558 -- (75,427)
Unrealized gain on
investments................ 7,014 -- -- -- -- -- 7,014
Accumulated comprehensive
income (loss)................ -- 374 -- -- (374) -- --
Accumulated deficit.......... (70,775) (22,642) (24,347) (7,710) 54,699 (200) (70,975)
-------- -------- -------- ------- -------- -------- ----------
Total Shareholders'
Equity/(Deficit)...... 472,646 18,250 (121) (3,751) (14,378) 658,800 1,131,446
-------- -------- -------- ------- -------- -------- ----------
$493,194 $ 33,944 $ 12,773 $ 5,882 $(19,378) $698,599 $1,225,014
======== ======== ======== ======= ======== ======== ==========
</TABLE>
F-7
<PAGE> 132
CRITICAL PATH, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------------------------------------------
HISTORICAL
----------------------------------------------------------------------------
CRITICAL PATH FABRIK DOTONE AMPLITUDE ISOCOR FAXNET DOCSPACE ADJUSTMENTS PRO FORMA
------------- ------- ------- --------- ------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............... $ 897 $11,542 $ 3,627 $ 3,473 $23,279 $11,233 $ 103 $ -- $ 54,154
Cost of net revenues....... (2,346) (4,340) (1,906) (1,426) (7,858) (2,858) -- -- (20,734)
-------- ------- ------- ------- ------- ------- ------ --------- ---------
(1,449) 7,202 1,721 2,047 15,421 8,375 103 -- 33,420
-------- ------- ------- ------- ------- ------- ------ --------- ---------
Operating Expenses:
Sales and marketing...... 1,687 4,094 746 3,410 13,138 3,460 175 -- 26,710
Research and
development............ 2,098 2,439 224 1,635 5,885 2,417 209 -- 14,907
General and
administrative......... 3,814 2,654 1,298 1,777 3,556 7,647 81 -- 20,827
Acquisition bonus........ -- -- -- -- -- -- -- 10,641(c) 10,641
Amortization of
intangible assets...... -- -- -- -- -- -- -- 295,196(d) 295,196
Foreign exchange loss
(gain)................. 1
Stock-based expenses..... 2,400 -- 7 -- -- -- 21 -- 2,428
-------- ------- ------- ------- ------- ------- ------ --------- ---------
Total Operating
Expenses......... 9,999 9,187 2,275 6,822 22,579 13,524 487 305,837 370,709
Loss from operations....... (11,448) (1,985) (554) (4,775) (7,158) (5,149) (384) (305,837) (337,289)
-------- ------- ------- ------- ------- ------- ------ --------- ---------
Interest and other income,
net...................... (13) (235) (235) 67 993 (422) (5) -- 149
-------- ------- ------- ------- ------- ------- ------ --------- ---------
Net loss................... $(11,461) $(2,220) $ (789) $(4,708) $(6,165) $(5,571) $ (389) $(305,837) $(337,140)
======== ======= ======= ======= ======= ======= ====== ========= =========
Pro forma net loss per
share(e)
Net loss per
share -- basic and
diluted................ $ (0.81) $ (11.31)
======== =========
Weighted average shares--
basic and diluted...... 14,194 109 600 3,697 5,030 2,579 3,606 29,815
======== =========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------------------------------------------
HISTORICAL
----------------------------------------------------------------------------
CRITICAL PATH FABRIK DOTONE AMPLITUDE ISOCOR FAXNET DOCSPACE ADJUSTMENTS PRO FORMA
------------- ------- ------- --------- ------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues.............. $ 7,968 $ 4,506 $ 1,978 $ 5,109 $24,272 $10,800 $ 84 $ -- $ 54,717
Cost of net revenues...... (13,860) (1,627) (1,288) (2,063) (8,889) (3,740) -- -- (31,467)
-------- ------- ------- ------- ------- ------- ------- --------- ---------
(5,892) 2,879 690 3,046 15,383 7,060 84 -- 23,250
-------- ------- ------- ------- ------- ------- ------- --------- ---------
Operating Expenses:
Sales and marketing..... 8,760 1,625 374 4,752 10,466 5,872 1,243 -- 33,092
Research and
development........... 4,705 527 154 1,615 4,227 2,047 450 -- 13,725
General and
administrative........ 7,919 1,500 800 2,596 3,456 8,403 5,464 -- 30,138
Acquisition bonus....... 570 -- -- -- -- -- -- 570
Amortization of
intangible assets..... 9,813 -- -- -- -- -- -- 211,585(d) 221,398
Foreign exchange loss
(gain)................ 39
Stock-based expenses.... 25,244 -- 21 -- -- -- 176 -- 25,441
-------- ------- ------- ------- ------- ------- ------- --------- ---------
Total Operating
Expenses........ 57,011 3,652 1,349 8,963 18,149 16,322 7,372 211,585 324,364
Loss from operations...... (62,903) (773) (659) (5,917) (2,766) (9,262) (7,288) (211,585) (301,114)
-------- ------- ------- ------- ------- ------- ------- --------- ---------
Interest and other income,
net..................... 4,663 (109) (238) 50 (127) (397) (27) -- 3,776
-------- ------- ------- ------- ------- ------- ------- --------- ---------
Net loss.................. $(58,240) $ (882) $ (897) $(5,867) $(2,893) $(9,659) $(7,315) $(211,585) $(297,338)
======== ======= ======= ======= ======= ======= ======= ========= =========
Pro forma net loss per
share(e)
Net loss per
share -- basic and
diluted............... $ (2.26) $ (6.97)
======== =========
Weighted average
shares -- basic and
diluted............... 25,789 109 706 4,107 5,030 2,845 4,092 42,678
======== =========
</TABLE>
F-8
<PAGE> 133
CRITICAL PATH, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(UNAUDITED)
The following adjustments were applied to the Company's historical
consolidated financial statements and those of Fabrik, dotOne, Amplitude,
ISOCOR, FaxNet and docSpace to arrive at the pro forma condensed combined
financial data. The pro forma adjustments are preliminary and based upon
management's estimates and valuations of the tangible and intangible net assets
acquired.
(a) Reflects adjustments to eliminate assets, liabilities and equity that
were not acquired by the Company.
(b) The elements of the purchase price and the allocation of the purchase
price, assuming the acquisitions occurred on September 30 ,1999, for
pro forma purposes, is as follows:
<TABLE>
<CAPTION>
FABRIK DOTONE AMPLITUDE ISOCOR FAXNET DOCSPACE TOTAL
------- ------- --------- -------- -------- -------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash paid.............................. $12,000 $17,500 $ 45,000 $ -- $ 20,000 $ 30,000 $ 124,500
Value of stock issued.................. 8,000 35,000 141,300 225,700 154,800 234,000 798,800
Value of options assumed............... -- 3,200 22,000 37,200 7,300 -- 69,700
Assumption of Subordinated Notes***.... 4,200 4,200
Estimated acquisition costs............ 100 1,300 6,100 11,100 13,000 10,000 41,600
------- ------- -------- -------- -------- -------- ----------
Total purchase price.......... $20,100 $57,000 $214,400 $274,000 $199,300 $274,000 $1,038,800
======= ======= ======== ======== ======== ======== ==========
Net tangible assets/(liabilities)*..... 500 (1,700) 4,400 5,650 (15,700) (12,550) (19,400)
Intangible assets:
In-process technology**.............. -- -- -- 200 -- -- 200
Assembled workforce.................. 400 1,500 3,800 3,400 900 500 10,500
Customer base........................ 2,100 4,600 600 9,800 14,300 -- 31,400
Existing technology.................. -- 600 4,100 18,300 20,300 -- 43,300
Patented/proprietary technology...... -- -- -- -- -- 21,500 21,500
Goodwill............................. 17,100 52,000 201,500 236,650 179,500 264,550 951,300
------- ------- -------- -------- -------- -------- ----------
Total purchase price
allocation.................. $20,100 $57,000 $214,400 $274,000 $199,300 $274,000 $1,038,800
======= ======= ======== ======== ======== ======== ==========
</TABLE>
- -------------------------
* Included in net tangible assets are deferred tax liabilities arising
from differences between the book and tax bases of the net assets
acquired, (primarily intangibles, excluding goodwill).
** Amount will be expensed in the period that the acquisition will be
consummated. Accordingly, the in-process technology is reflected in the
Pro Forma Condensed Combined Balance Sheet as a reduction of
Accumulated Deficit.
*** Critical Path assumed subordinated notes issued in October 1999 by
FaxNet for proceeds of $4.2 million. The notes matured upon
consummation of the merger.
(c) Pursuant to the purchase agreements between Critical Path, Amplitude,
FaxNet, and ISOCOR, Critical Path is obligated to establish retention
bonuses in the amount of $10 million, $1.5 million and $741,000,
respectively, to provide incentive for certain employees of these
companies to remain employed with Critical Path for one year following
the date of acquisition (as which time the bonus will be paid). The
bonuses will be amortized over their respective one year period. As of
September 30, 1999, the adjusted Amplitude bonus pool was $8.4 million.
It was reduced due to voluntary termination of certain employees under
the bonus plan.
(d) To record amortization of: assembled workforce totaling $10.5 million
over the estimated period of benefit of two to three years, acquired
customer list totaling $31.4 million over the estimated period of
benefit of three to eight years, existing technology totaling $43.3
million over the estimated period of benefit of three to four years,
patented/proprietary technology totaling
F-9
<PAGE> 134
CRITICAL PATH, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
$21.5 million over the estimated period of benefit of three years and
goodwill totaling $951.3 million over the estimated period of benefit
of three to eight years.
(e) Pro forma basic net loss per share for the year ended December 31, 1998
and the nine months ended September 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 result from inclusion of
actual shares issued or estimated shares to be issued in conjunction
with the consummated or pending acquisitions, respectively, as if such
shares were outstanding from January 1, 1998. In accordance with the
definitive purchase agreements, 15% of the stock consideration to
dotOne (approximately 105,973 shares), 10% of the stock consideration
to Amplitude (approximately 410,725 shares), 266,099 of stock
consideration to FaxNet, and 11.875% of stock consideration to docSpace
(approximately 485,958 shares) will be held in a time-lapsing escrow
and have been excluded from the pro forma basic and diluted net loss
per share for the year ended December 31, 1998. However, for the nine
months ended September 30, 1999, these shares are no longer held in
escrow due to the passage of time and, therefore, have been included in
the pro forma basic and diluted net loss per share.
F-10
<PAGE> 135
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholders' equity, of cash
flows and of comprehensive income present fairly, in all material respects, the
financial position of ISOCOR (the "Company") and its subsidiaries at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period 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.
/s/ PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
February 10, 1999
F-11
<PAGE> 136
ISOCOR
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 10,784 $ 9,656 $ 10,258
Marketable securities.............................. 9,677 9,456 9,009
Trade accounts receivable, net..................... 9,100 8,900 7,431
Other current assets............................... 1,993 1,805 2,682
-------- -------- --------
Total current assets....................... 31,554 29,817 29,380
Property and equipment, net.......................... 2,405 2,380 2,262
Other assets......................................... 264 928 2,302
-------- -------- --------
Total assets............................... $ 34,223 $ 33,125 $ 33,944
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 839 $ 1,009 $ 1,033
Accrued expenses................................... 3,667 4,634 6,882
Deferred revenues.................................. 3,678 5,708 6,109
Other current liabilities.......................... 222 1,863 1,519
-------- -------- --------
Total current liabilities.................. 8,406 13,214 15,543
Other long-term liabilities.......................... 133 146 151
-------- -------- --------
Total liabilities.......................... 8,539 13,360 15,694
Commitments and contingencies
Shareholders' equity:
Preferred stock, authorized 2,000,000 shares, none
issued or outstanding........................... -- -- --
Common stock, authorized 50,000,000 shares, issued
and outstanding 9,551,931 and 9,888,038 and
10,401,939 shares in 1997 and 1998 and September
30, 1999, respectively.......................... 39,359 39,758 40,518
Notes receivable from shareholders................. (56) (15) --
Accumulated deficit................................ (13,584) (19,749) (22,642)
Deferred compensation.............................. (130) (56) --
Accumulated comprehensive income (loss)............ 95 (173) 374
-------- -------- --------
Total shareholders' equity................. 25,684 19,765 18,250
-------- -------- --------
Total liabilities and shareholders'
equity................................... $ 34,223 $ 33,125 $ 33,944
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-12
<PAGE> 137
ISOCOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Products.................................. $21,288 $15,620 $13,959 $10,019 $14,456
Services.................................. 5,106 6,398 9,320 6,339 9,816
------- ------- ------- ------- -------
Total revenues.................... 26,394 22,018 23,279 16,358 24,272
------- ------- ------- ------- -------
Cost of revenues:
Products.................................. 2,663 2,863 2,787 1,746 2,340
Services.................................. 2,405 2,804 5,071 3,372 6,549
------- ------- ------- ------- -------
Total cost of revenues............ 5,068 5,667 7,858 5,118 8,889
------- ------- ------- ------- -------
Gross profit................................ 21,326 16,351 15,421 11,240 15,383
------- ------- ------- ------- -------
Operating expenses:
Engineering............................... 9,041 7,867 5,885 4,238 4,227
Sales and marketing....................... 10,142 13,973 13,138 9,960 10,466
Administration............................ 2,676 2,967 3,556 2,472 3,456
Agency grants............................. (500) (69) -- -- --
Severance costs........................... -- 681 -- -- --
------- ------- ------- ------- -------
Total operating expenses.......... 21,359 25,419 22,579 16,670 18,149
------- ------- ------- ------- -------
Loss from operations........................ (33) (9,068) (7,158) (5,430) (2,766)
Acquisition costs......................... (227) -- -- -- --
Gain/(loss) from currency fluctuations.... (82) 39 241 301 (631)
Interest income........................... 1,010 1,170 1,008 783 623
------- ------- ------- ------- -------
Income/(loss) before income taxes and
minority interest...................... 668 (7,859) (5,909) (4,346) (2,774)
Provision for income taxes................ 185 45 237 114 114
------- ------- ------- ------- -------
Income/(loss) before minority interest.... 483 (7,904) (6,146) (4,460) (2,888)
Minority interest......................... -- -- 19 19 5
------- ------- ------- ------- -------
Net income/(loss)........................... $ 483 $(7,904) $(6,165) $(4,479) $(2,893)
======= ======= ======= ======= =======
Net income/(loss) per share, basic.......... $ 0.06 $ (0.83) $ (0.63) $ (0.46) $ (0.28)
======= ======= ======= ======= =======
Weighted average shares outstanding,
basic..................................... 7,733 9,485 9,737 9,767 10,251
======= ======= ======= ======= =======
Net income/(loss) per share, diluted........ $ 0.05 $ (0.83) $ (0.63) $ (0.46) $ (0.28)
======= ======= ======= ======= =======
Weighted average shares outstanding,
diluted................................... 9,808 9,485 9,737 9,767 10,251
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-13
<PAGE> 138
ISOCOR
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBERS OF SHARES)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
-------------------- -------------------- ------------------- ------------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------- ---------- ------- --------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31,
1995....................... 1,875,000 $4,846 2,066,655 $8,341 857,142 $4,450 150,000 $ 653
Initial public offering
(IPO), net offering costs of
$2,430...................... -- -- -- -- -- -- -- --
Conversion of preferred
stock to common stock at
IPO........................ (1,875,000) (4,846) (2,066,655) (8,341) (857,142) (4,450) (150,000) (653)
Issuance of common stock.... -- -- -- -- -- -- -- --
Amortization of stock option
deferred compensation...... -- -- -- -- -- -- -- --
Payments received on notes
receivable................. -- -- -- -- -- -- -- --
Net income.................. -- -- -- -- -- -- -- --
Currency translation........ -- -- -- -- -- -- -- --
---------- ------- ---------- ------- -------- ------- -------- -----
BALANCES, DECEMBER 31,
1996....................... -- -- -- -- -- -- -- --
Issuance of common stock.... -- -- -- -- -- -- -- --
Amortization of stock option
deferred compensation...... -- -- -- -- -- -- -- --
Issuance of notes
receivable, net of payments
received................... -- -- -- -- -- -- -- --
Net loss.................... -- -- -- -- -- -- -- --
Currency translation........ -- -- -- -- -- -- -- --
---------- ------- ---------- ------- -------- ------- -------- -----
BALANCES, DECEMBER 31,
1997....................... -- -- -- -- -- -- -- --
Issuance of common stock.... -- -- -- -- -- -- -- --
Amortization of stock option
deferred compensation...... -- -- -- -- -- -- -- --
Issuance of notes
receivable, net of payments
received................... -- -- -- -- -- -- -- --
Net loss.................... -- -- -- -- -- -- -- --
Currency translation........ -- -- -- -- -- -- -- --
---------- ------- ---------- ------- -------- ------- -------- -----
BALANCES, DECEMBER 31,
1998....................... -- -- -- -- -- -- -- --
Issuance of common stock
(unaudited)................ -- -- -- -- -- -- -- --
Amortization of stock option
deferred compensation
(unaudited)................ -- -- -- -- -- -- -- --
Payments received on notes
receivable (unaudited)..... -- -- -- -- -- -- -- --
Net loss (unaudited)........ -- -- -- -- -- -- -- --
Currency translation
(unaudited)................ -- -- -- -- -- -- -- --
Loss from unrealized
holdings (unaudited)....... -- -- -- -- -- -- -- --
---------- ------- ---------- ------- -------- ------- -------- -----
BALANCES, SEPTEMBER 30, 1999
(UNAUDITED)................ -- -- -- -- -- -- -- --
========== ======= ========== ======= ======== ======= ======== =====
<CAPTION>
COMMON STOCK ACCUMULATED
-------------------- COMPREHENSIVE
NUMBER OF NOTES DEFERRED ACCUMULATED INCOME
SHARES AMOUNT RECEIVABLE COMPENSATION DEFICIT (LOSS) TOTAL
---------- ------- ---------- ------------ ----------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31,
1995....................... 1,661,967 $ 616 $(45) $(280) $ (6,163) $ 69 $12,487
Initial public offering
(IPO), net offering costs of
$2,430...................... 2,300,000 18,270 -- -- -- -- 18,270
Conversion of preferred
stock to common stock at
IPO........................ 5,007,130 18,290 -- -- -- -- 0
Issuance of common stock.... 346,144 1,886 -- -- -- -- 1,886
Amortization of stock option
deferred compensation...... -- -- -- 75 -- -- 75
Payments received on notes
receivable................. -- -- 19 -- -- -- 19
Net income.................. -- -- -- -- 483 -- 483
Currency translation........ -- -- -- -- -- (16) (16)
---------- ------- ---- ----- -------- ----- -------
BALANCES, DECEMBER 31,
1996....................... 9,315,241 39,062 (26) (205) (5,680) 53 33,204
Issuance of common stock.... 236,690 312 -- -- -- -- 312
Amortization of stock option
deferred compensation...... -- -- -- 75 -- -- 75
Issuance of notes
receivable, net of payments
received................... -- -- (30) -- -- -- (30)
Net loss.................... -- -- -- -- (7,904) -- (7,904)
Currency translation........ -- -- -- -- -- 27 27
---------- ------- ---- ----- -------- ----- -------
BALANCES, DECEMBER 31,
1997....................... 9,551,931 39,374 (56) (130) (13,584) 80 25,684
Issuance of common stock.... 336,107 399 -- -- -- -- 399
Amortization of stock option
deferred compensation...... -- -- -- 74 -- -- 74
Issuance of notes
receivable, net of payments
received................... -- -- 41 -- -- -- 41
Net loss.................... -- -- -- -- (6,165) -- (6,165)
Currency translation........ -- -- -- -- -- (268) (268)
---------- ------- ---- ----- -------- ----- -------
BALANCES, DECEMBER 31,
1998....................... 9,888,038 39,773 (15) (56) (19,749) (188) 19,765
Issuance of common stock
(unaudited)................ 513,901 745 -- -- -- -- 745
Amortization of stock option
deferred compensation
(unaudited)................ -- -- -- 56 -- -- 56
Payments received on notes
receivable (unaudited)..... -- -- 15 -- -- -- 15
Net loss (unaudited)........ -- -- -- -- (2,893) -- (2,893)
Currency translation
(unaudited)................ -- -- -- -- -- 616 616
Loss from unrealized
holdings (unaudited)....... -- -- -- -- -- (54) (54)
---------- ------- ---- ----- -------- ----- -------
BALANCES, SEPTEMBER 30, 1999
(UNAUDITED)................ 10,401,939 $40,518 $ -- $ -- $(22,642) $ 374 $18,250
========== ======= ==== ===== ======== ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-14
<PAGE> 139
ISOCOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ 483 $ (7,904) $ (6,165) $ (4,478) $ (2,893)
Adjustments to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Provision for doubtful accounts,
returns and price protection......... 2,771 2,916 2,012 569 (69)
Depreciation and amortization.......... 1,304 1,373 1,419 840 827
Amortization of deferred
compensation......................... 75 75 74 56 56
Deferred rent.......................... (21) (26) -- -- --
Minority interest...................... -- -- -- -- (19)
(Increase)/decrease in:
Trade accounts receivable............ (5,322) (1,735) (598) (998) 961
Other current assets................. 104 (538) 624 (702) (1,074)
Other assets......................... (81) (5) 51 (116) (372)
Increase/(decrease) in:
Accounts payable..................... (220) 105 (139) 233 97
Accrued expenses..................... 615 467 1,222 417 1,278
Deferred revenues.................... 1,220 1,176 1,908 2,164 717
Other current liabilities............ 34 (224) (46) 120 --
Product development obligation....... (445) (380) -- -- --
Other long term-liabilities.......... (71) (18) (96) 183 24
-------- -------- -------- -------- --------
Net cash (used) provided by operating
activities........................ 446 (4,718) 266 (1,712) (467)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Cash paid for acquisition, net of cash
acquired............................... -- -- (675) (917) --
Purchase of property and equipment........ (1,782) (952) (1,051) (413) (821)
Purchase of marketable securities......... (11,739) (13,669) (32,231) (30,209) (15,678)
Sale of marketable securities............. -- 1,000 28,453 27,491 15,124
Marketable securities at maturity......... -- 14,731 3,999 3,999 1,000
Sale of minority interest in
non-consolidated subsidiary............ 547 -- -- -- --
-------- -------- -------- -------- --------
Net cash provided (used) by investing
activities........................ (12,974) 1,110 (1,505) (49) (375)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from the sale of stock, net...... 22,595 285 438 321 706
Cost related to initial public offering... (2,430) -- -- -- --
-------- -------- -------- -------- --------
Net cash provided by financing
activities........................ 20,165 285 438 321 706
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash..... (143) 733 (327) (510) 738
-------- -------- -------- -------- --------
Net increase (decrease) in cash...... 7,494 (2,590) (1,128) (1,950) 602
Cash and cash equivalents, beginning of
period.................................... 5,880 13,374 10,784 10,784 9,656
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period.... $ 13,374 $ 10,784 $ 9,656 $ 8,834 $ 10,258
======== ======== ======== ======== ========
Supplemental disclosure of cash flow
information income taxes paid............. $ 100 -- -- -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-15
<PAGE> 140
ISOCOR
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss)........................ $ 483 $(7,904) $(6,165) $(4,479) $(2,893)
Loss from unrealized holdings............ -- -- -- -- (54)
Income/(loss) from foreign currency
translation............................ (16) 27 (268) (326) 616
------- ------- ------- ------- -------
Comprehensive income (loss).............. $ 467 $(7,877) $(6,433) $(4,805) $(2,331)
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-16
<PAGE> 141
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
ISOCOR (the "Company") develops, markets and supports electronic messaging
and directory infrastructure software products and services that enable
businesses to engage in electronic communications over corporate networks and
the Internet.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. Intercompany accounts and
transactions are eliminated in consolidation.
Unaudited interim financial information
The financial information at September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position of such data and the
operating results and cash flows for such periods. Results of the September 30,
1999 nine month period are not necessarily indicative of the results for the
entire year.
Use of estimates
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
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying value of
these instruments approximate market value because of their short maturity.
Marketable securities
The Company invests excess cash in a diversified portfolio consisting of a
variety of securities including commercial paper, corporate notes and U.S.
Government obligations all with maturities of one year or less. All of the
Company's marketable securities have been classified as "available-for-sale"
securities and are reported at fair value based on quoted market prices as
required by Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities."
Concentration of credit risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash, cash equivalents and
accounts receivable. The Company's accounts receivable are derived from sales
directly to customers and indirectly through resellers, systems integrators and
OEMs. The Company performs ongoing credit evaluations of its customers before
granting uncollateralized credit and to date has not experienced any unusual
credit related losses. At December 31, 1997 and 1998 and nine months ended
September 30, 1999, United States, Ireland and Other Europe represented 53%,
34%, 13% and 25%, 34%, 41% and 21%, 36% and 43%, respectively of the Company's
net accounts receivable.
F-17
<PAGE> 142
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1997 and 1998 and nine months ended September 30, 1999, the
Company had balances held in U.S. banks of approximately $1,486,000, $1,805,000
and $1,573,000, respectively, which exceeded federally insured limits. Cash
equivalents and marketable securities are managed by major investment firms in
accordance with the Company's investment policy.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over estimated useful
lives of three to five years. Maintenance and repairs are expensed as incurred,
while renewals and betterments are capitalized. Upon the sale or retirement of
property and equipment, the accounts are relieved of the cost and the related
accumulated depreciation, and any resulting gain or loss is included in
operations.
Foreign currency translation
Results of operations for foreign entities are translated using the average
exchange rates during the period. Foreign entities' assets and liabilities are
translated to U.S. dollars using the exchange rates in effect at the balance
sheet date, and resulting translation adjustments are recorded in a separate
component of shareholders' equity. Actual gains or losses incurred on currency
transactions in other than the entities' functional currencies are included in
operations in the current period.
Comprehensive income
In January 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements.
Revenue recognition
In January 1998, the Company adopted the AICPA Accounting Standards
Executive Committee Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," as amended by SOP 98-4. SOP 97-2, as amended, supercedes the
previous software revenue recognition standard, SOP 91-1. For software contracts
not requiring software modification, the Company generally recognizes product
revenue when all the following criteria are met: (1) persuasive evidence of an
arrangement exists, (2) delivery has occurred, (3) the vendor's fee is fixed or
determinable, and (4) collectibility is probable. In addition, for contracts
with multiple obligations (e.g. deliverable and undeliverable products, services
and maintenance), revenue must be allocated to each component of the contract
based on evidence of fair value which is specific to the Company, or for
products not being sold separately, the price established by management. When
the Company enters into a license agreement with a customer requiring
significant customization of the software products, the Company recognizes
revenue related to the license using contract accounting. Deferred revenues
represent the difference between amounts invoiced and amounts recognized as
revenues under software development and maintenance agreements. The Company
recognizes service revenues from customer support and maintenance fees ratably
over the term of the service period, which is typically 12 months. Payments for
maintenance fees are generally made in advance. The Company recognizes service
revenues from training activities as the services are provided. Amounts received
in connection with a product development arrangement (See Note 12) under which
the Company is committed to specific efforts are recognized as reductions in
associated product development costs as those costs are incurred.
F-18
<PAGE> 143
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Segment reporting
The Company operates in a single reportable segment; the development,
marketing and support of electronic messaging and directory infrastructure
software. The Company's operations consist of engineering, sales and marketing,
administration and support in both the United States and Europe.
Agency grants
Agency grants are recognized as reductions in operating expenses as earned
under the respective terms of the agreements.
Software development costs
Costs related to the conceptual formulation and design of software products
are expensed as engineering expense. Based on the Company's development process,
technological feasibility is established upon completion of a working model. To
date, costs incurred by the Company between completion of the working model and
the point at which the product is ready for general release have been
immaterial.
Excess of cost over net assets acquired
The excess of cost over net assets acquired is amortized over the estimated
useful life of one to five years using the straight line method. The Company
periodically reviews and evaluates whether there has been a permanent impairment
in the value of intangibles. Factors considered in the evaluation include
current operating results, trends and anticipated undiscounted cash flows.
Income taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense represents the
tax payable in connection with the current period operations plus or minus the
change during the period in deferred tax assets and liabilities. (See Note 11).
Reclassifications
Certain reclassifications have been made to the 1996, 1997 and 1998
financial statements to conform with the 1999 presentation.
Computation of net income (loss) per common share
Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the period. Diluted net income per common share is computed by dividing
net income (loss) by the weighted average number of shares of common stock
outstanding plus the number of additional common shares that would have been
outstanding if all dilutive potential common shares had been issued. Potential
common shares related to stock options and preferred stock are excluded from the
computation when their effect is antidilutive.
F-19
<PAGE> 144
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share (EPS) computations for the years ended
December 31 and nine months ended September 30, 1998 and 1999 (in thousands).
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------- ------------------------------
1996 1997 1998 1998 1999
------ ------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted
EPS -- Net income (loss)............ $ 483 $(7,904) $(6,165) $(4,478) $(2,893)
DENOMINATOR:
Denominator for basic
EPS -- Weighted average shares.... 7,733 9,485 9,737 9,767 10,251
Effect of dilutive securities:
Stock options..................... 989 -- -- -- --
Preferred Stock................... 1,086 -- -- -- --
------ ------- ------- ------- -------
Denominator for diluted EPS --
Adjusted weighted average shares
and assumed conversions........... 9,808 9,485 9,737 9,767 10,251
</TABLE>
Securities that could potentially dilute basic EPS in the future that were
not included in the computation of diluted EPS because to do so would have been
antidilutive were 2,050,265 and 2,339,291 shares for the years ended December
31, 1997 and 1998, respectively, and 2,369,331 and 1,999,687 shares for the nine
months ended September 30, 1998 and 1999, respectively.
All per share information has been given retroactive effect for the 1 for
2.5 reverse stock split which occurred on January 26, 1996 for all outstanding
shares of common and preferred stock. All of the 475,000 common shares of the
Company issued to effect the business combination with NetCS have been fully
weighted for all periods presented for the computation of the weighted average
number of shares outstanding as required for "pooling of interests" accounting
treatment.
2. INITIAL PUBLIC OFFERING
In March 1996, the Company completed the public offering and sale of
2,300,000 shares of its common stock at $9 per share resulting in net proceeds
to the Company of approximately $18,270,000 after offering costs, underwriting
discounts and commissions. The Company's shares are traded on The Nasdaq Stock
Market under the symbol "ICOR."
3. MARKETABLE SECURITIES
The Company held the following positions (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Corporate notes............................................. $8,182 $9,456 $5,030
U.S. Government obligations................................. 1,495 -- 3,979
------ ------ ------
$9,677 $9,456 $9,009
====== ====== ======
</TABLE>
Realized gains and losses are based on the book value of the specific
securities sold and were immaterial during the years ended December 31, 1996,
1997, 1998 and for the nine months ended
F-20
<PAGE> 145
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999. At December 31, 1997, 1998 and September 30, 1999, the
difference between cost and market value of the Company's marketable securities
was not material.
4. ACCOUNTS RECEIVABLE
Trade accounts receivable, net of allowances were (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Accounts receivable........................................ $10,609 $11,035 $ 9,384
Less: Allowance for doubtful accounts, returns and price
protection................................................. (1,509) (2,135) (1,953)
------- ------- -------
$ 9,100 $ 8,900 $ 7,431
======= ======= =======
</TABLE>
As of December 31, 1997, 1998 and September 30, 1999, approximately 47%,
75% and 79% of the Company's trade accounts receivable were from customers
located in Europe, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (dollars in thousands).
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Computer equipment.......................................... $ 5,180 $ 6,575
Office equipment and furniture.............................. 1,876 2,187
------- -------
7,056 8,762
Less accumulated depreciation............................... (4,651) (6,382)
------- -------
$ 2,405 $ 2,380
======= =======
</TABLE>
For the years ended December 31, 1996, 1997 and 1998 depreciation expense
was $1,276,000, $1,362,000 and $1,107,000, respectively.
6. ACQUISITIONS
On July 15, 1998, the Company acquired a 60 percent interest in System
Wizards S.p.A., which is primarily a services company, and also distributes the
Company's products in Italy, for $933,000 of which $720,000 was paid in cash at
closing and $213,000 will be paid in installments through July 2000. $165,000 is
included in other current liabilities and $48,000 is included in other long-term
liabilities in the accompanying consolidated balance sheets as of December 31,
1998 and September 30, 1999 for these remaining installments. The Company
accounted for this transaction as a purchase and accordingly, the purchase price
was allocated to assets acquired and liabilities assumed based upon their fair
value. The $843,000 paid in excess of the net assets acquired has been allocated
to goodwill, which is being amortized using the straight line method over an
estimated life of five years and is included in other assets in the accompanying
consolidated balance sheets as of December 31, 1998 and September 30, 1999, net
of accumulated amortization of $79,000 and $205,000, respectively. The Company
is committed to purchase the remaining 40% of System Wizards within the period
of January 1, 2000 and December 31, 2001 for a contingent amount based on
revenues and net profits of System Wizards for the four quarters preceding
exercise of the Company's option to purchase the remaining 40%, subject to
various adjustments and maximums. The results of operations for this investment
have been included in the consolidated statements of operations for the period
subsequent to the acquisition and were insignificant prior to the acquisition.
F-21
<PAGE> 146
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In October 1995, the Company acquired a 60 percent interest in a sales and
distribution company located in Switzerland for 29,658 shares of Preferred
Series B stock and $279,000 in cash. The transaction was recorded as a purchase
and, accordingly, the purchase price was allocated to assets acquired and
liabilities assumed based upon their fair values. The $355,000 paid in excess of
the net assets acquired is being amortized using the straight line method over
an estimated useful life of five years and is included in other assets in the
accompanying consolidated balance sheets as of December 31, 1997 and 1998 and
September 30, 1999, net of accumulated amortization of $122,000, $188,000 and
$212,000, respectively. The Company is committed to purchase the remaining 40
percent of this sales and distribution company prior to January 8, 2000, at a
price approximating net revenues for the four quarters preceding the Company's
exercise of its option to purchase the remaining 40%, subject to various
adjustments and maximums. The Company has estimated the cost to acquire the
remaining 40% to be $1,000,000. This estimate is included in other assets and
accrued expenses in the accompanying consolidated balance sheet as of September
30, 1999. A final purchase price allocation to the net assets acquired will be
made in the first quarter of 2000. The pro forma effect of acquiring the
remaining minority interest to the results of operations is immaterial.
7. COMMITMENTS AND CONTINGENCIES
The Company leases its offices and operating facilities under various
operating leases which expire at various dates through 2002. Certain leases
contain free rent periods and renewal options and provisions to increase monthly
rentals at specified intervals. The consolidated statements of operations
reflect rent expense on a straight-line basis over the term of the respective
leases.
Total rental expense for the years ended December 31, 1996, 1997 and 1998
was $1,128,000, $1,418,000 and $1,593,000, respectively.
Future minimum rental commitments under operating leases are as follows
(dollars in thousands):
<TABLE>
<S> <C>
For the years ending December 31
1999........................................................ $1,414
2000........................................................ 756
2001........................................................ 317
2002........................................................ 93
------
$2,580
======
</TABLE>
As more fully described in Note 6, the Company is committed to purchase the
remaining 40 percent interest not already owned by the Company of a sales and
distribution company located in Switzerland and a services company located in
Italy.
From time to time, the Company is involved in various legal proceedings in
the normal course of business. The Company is not currently involved in any
litigation which, in management's opinion, would have a material adverse effect
on its business, operating results, financial condition or cash flows.
F-22
<PAGE> 147
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ACCRUED EXPENSES
Accrued expenses were (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Salaries and related expenses........................ $1,197 $1,262 $1,859
Payable to shareholder............................... -- -- 1,000
Royalties............................................ 499 401 503
Commissions.......................................... 464 461 738
Corporate and sales taxes............................ 184 351 290
Other................................................ 1,323 2,159 2,492
------ ------ ------
$3,667 $4,634 $6,882
====== ====== ======
</TABLE>
9. LONG-TERM LIABILITIES
Long term liabilities were (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Minority interest........................................... $ 79 $ 98
Deferred purchase payments.................................. -- 48
Deferred rent............................................... 6 --
Deferred tax liability...................................... 48 --
---- ----
$133 $146
==== ====
</TABLE>
10. SEVERANCE COSTS
In June and October 1997, the Company approved and completed a
restructuring of its United States and European operations pursuant to which
certain employees were terminated. A total of $681,000 in severance costs were
charged to operating expenses in 1997, of which $364,000 relates to engineering,
$190,000 to sales and marketing, and $127,000 to administration. The total
number of employees terminated was 35 within the following categories: 22 in
engineering, 12 in sales and marketing, and one in administration.
Approximately, $671,000 and $10,000 were paid in 1997 and 1998, respectively. No
amounts remain in the consolidated balance sheet as of December 31, 1998.
11. INCOME TAXES
The sources of income (loss) before income taxes are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
1996 1997 1998 1998 1999
----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
United States.......................... $(182) $(1,881) $(4,516) $(3,461) $(2,617)
Foreign................................ 850 (5,978) (1,393) (884) (157)
----- ------- ------- ------- -------
Income (loss) before income taxes...... $ 668 $(7,859) $(5,909) $(4,345) $(2,774)
===== ======= ======= ======= =======
</TABLE>
On an interim basis, the Company provides for income taxes using its
estimated effective tax rate for the year for foreign and domestic source
income. As of September 30, 1999, there are net operating loss carryforwards
which remain in certain foreign jurisdictions. The taxes provided relate
primarily to certain foreign source income.
F-23
<PAGE> 148
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the provision for income taxes are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Current:
U.S. Federal................................................ $ 18 $-- $ --
State..................................................... 5 1 1
Foreign................................................... 254 52 249
---- --- ----
277 53 250
---- --- ----
Deferred-foreign.......................................... (92) (8) (13)
---- --- ----
Total............................................. $185 $45 $237
==== === ====
</TABLE>
The Company's provision for income taxes is primarily attributable to
taxable income in foreign jurisdictions, as the Company did not generate taxable
income in the United States in 1997 and 1998, and in 1996 the Company utilized
$390,000 of tax loss carryforwards to offset income otherwise taxable in the
United States.
The components of the Company's net deferred taxes are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for inventory, sales returns and doubtful
accounts.................................................... $ 320 $ 384
Accrued vacation.......................................... 63 56
Deferred revenues......................................... 954 1,584
Property and equipment.................................... 194 141
Net operating loss carryforward........................... 1,258 2,861
Other..................................................... 36 54
Total deferred tax assets......................... 2,825 5,080
------- -------
Valuation allowance....................................... (2,825) (5,080)
------- -------
Net deferred tax assets........................... -- --
Deferred tax liability, property, equipment and computer
software............................................... (48) --
------- -------
Net deferred taxes................................ $ (48) $ 0
======= =======
</TABLE>
The valuation allowance on deferred tax assets increased by $341,000 and
$2,255,000 in 1997 and 1998, respectively. SFAS No. 109, "Accounting for Income
Taxes," requires that management evaluate a variety of factors in reaching a
conclusion regarding whether a valuation allowance against deferred tax assets
is required. The Company has considered a number of factors which impact the
likelihood that the deferred tax assets will be recovered, including the
Company's history of operating losses for federal and state tax reporting
purposes and the likelihood that U.S. operations will generate taxable income
during the carryforward period for unused net operating loss carryforwards.
Management is unable to project significant taxable income from U.S. operations
during the next two years and beyond and has therefore concluded, based upon a
weighting of all available evidence, that it is more likely than not that
deferred tax assets will not be realized. Accordingly, the Company has
established a full valuation allowance against its U.S. federal deferred tax
assets. Management evaluates on a quarterly basis the recoverability of the
deferred tax assets and the level of valuation allowance. At such time as it is
determined more likely than not that deferred tax assets are realizable, the
valuation allowance would be appropriately reduced.
F-24
<PAGE> 149
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1998, the Company had net operating loss carryforwards
for federal and state income tax reporting purposes of approximately $7.5
million and $3.5 million, respectively. These carryforwards, if unused, expire
in various periods from 1999 to 2010.
The overall effective tax rate differs from the statutory tax rate for the
years ended December 31 are as follows:
<TABLE>
<CAPTION>
% OF PRETAX INCOME
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Tax provision based on the federal statutory rate........... 34.0% 34.0% 34.0%
U.S. loss not providing current tax benefit................. (31.3) (34.0) (34.0)
Foreign taxes, net.......................................... 25.0 .6 4.0
----- ----- -----
Effective tax rate.......................................... 27.7% .6% 4.0%
===== ===== =====
</TABLE>
The Company has significant operations and generates a substantial portion
of its taxable income in Ireland. Under a tax holiday due to terminate in 2010,
the Company is taxed in Ireland on its "manufacturing income" at a 10% rate. To
qualify for this 10% tax rate, the Company must carry out "software development
services" or "technical or consultancy services" (as defined in the Irish
Finance Act 1980) in Ireland and qualify for an employment grant from the IDA.
If the Company ceases to comply with these qualifications, all or a part of its
taxable profits may be subject to a 32% tax rate on its post disqualification
date taxable profits. Should this occur, or should Irish tax laws be rescinded
or changed, the Company's net income could be materially adversely affected.
12. SHAREHOLDERS' EQUITY
Preferred Stock
At December 31, 1998, the Company has 2,000,000 shares of undesignated
Preferred Stock authorized but none issued or outstanding. On March 14, 1996,
the date of the initial public offering, all outstanding shares of Series A, B,
C and D Preferred Stock were canceled upon their automatic conversion to Common
Stock. Series A, B, C and D Preferred Stock had stated annual dividend rates of
$.22500, $.32175, $.39375 and $.90 per share, respectively. No dividends were
ever declared or paid.
The Series A, B, C and D Preferred Stock had a $2.50, $3.575, $4.375 and
$10.00 liquidation preference over shares of Common Stock, respectively, and
were redeemable anytime after July 19, 1998, upon written consent to redemption
of a majority of the holders, at liquidation preference, plus declared and
unpaid dividends, if any.
In connection with the issuance of Series C Preferred Stock in November
1993, the Company provided the investor an option to purchase equity securities
of the Company under certain conditions associated with sales by the investor
and its affiliates of the Company's products in excess of specified minimum
levels. The investor exercised that option and purchased 39,942 shares of Common
Stock upon the closing of the initial public offering on March 14, 1996 at 80%
of the per share price of such offering.
In December 1995, the Company entered into a Series D Preferred Stock
Purchase Agreement with a strategic investor. The agreement provided for total
consideration to the Company of $3,000,000, of which $1,500,000 was received in
1995 in exchange for 150,000 shares of the Company's Series D Preferred Stock
and the Company's commitment to product development efforts estimated to cost
$825,000. These costs were accrued with the remaining proceeds of $653,000, net,
attributed to the Company's Series D Preferred Stock. Per the terms of the
agreement, the number of shares of Common Stock issued upon automatic conversion
at the initial public offering date of this Series D Preferred Stock was
calculated to provide effective per share pricing to this investor of 80% of the
price per share of Common Stock paid by
F-25
<PAGE> 150
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the public on that date. The investor was also committed to acquire and did
acquire under the terms of the agreement, additional shares of the Company's
Series D Preferred Stock with an aggregate purchase price of $1,500,000 at the
initial public offering date of March 14, 1996. These shares also automatically
converted into Common Stock such that the effective price per share of the
Common Stock was the same as the price to public in the initial public offering
on March 14, 1996.
13. STOCK OPTION AND EMPLOYEE BENEFIT PLANS
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost
other than that required to be recognized by APB 25 for the difference between
the fair value of the Company's Common Stock at the grant date and the exercise
price of the options has been recognized. Had compensation cost for the
Company's two stock option plans been determined based on the fair value at the
grant date for awards in 1996, 1997 and 1998 consistent with the fair value
provisions of SFAS No. 123, the Company's net income and income per share would
have been reduced to the pro forma amounts indicated below (amounts in thousands
except per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
------ -------- -------
<S> <C> <C> <C>
Net income (loss) as reported............................. $ 483 $ (7,904) $(6,165)
Net loss, pro forma....................................... $ (584) $(11,068) $(8,883)
Net income (loss) per share basic, as reported............ $ 0.06 $ (0.83) $ (0.63)
Net loss per share basic, pro forma....................... $(0.08) $ (1.17) $ (0.91)
Net income (loss) per share diluted, as reported.......... $ 0.05 $ (0.83) $ (0.63)
Net loss per share diluted, pro forma..................... $(0.08) $ (1.17) $ (0.91)
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996, 1997 and 1998.
<TABLE>
<CAPTION>
1996 1997 1998
---- ----- ----
<S> <C> <C> <C>
Risk free interest rate..................................... 6.10% 6.13% 5.10%
Expected lives (years)...................................... 4 4 4
Expected volatility......................................... 70% 100% 100%
Expected dividends.......................................... 0 0 0
</TABLE>
1992 Stock Option Plan
The Company's 1992 Stock Option Plan (the "1992 Option Plan") permits the
grant of both incentive stock options designed to qualify under IRC Section 422
and non-qualified stock options. A total of 2,950,000 shares of Common Stock has
been reserved for issuance under the 1992 Option Plan. Incentive stock options
may only be granted to employees of the Company whereas non-qualified stock
options may be granted to employees and consultants. Each option, once vested,
allows the optionee the right to purchase one share of the Company's Common
Stock. The Board of Directors determines the exercise price of the options based
on the fair market value of such shares on the date of grant; options granted to
date generally vest ratably over four years and expire ten years from the date
of the grant. Compensation expense equal to the difference between the assumed
fair value of the Company's Common Stock at the grant date and the exercise
price of the options, if any, is recognized ratably over the vesting period.
F-26
<PAGE> 151
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1996 Directors' Stock Option Plan
In 1996, the Company adopted the 1996 Directors' Stock Option Plan (the
"Directors' Plan"). A total of 150,000 shares of Common Stock has been reserved
for issuance under the Directors' Plan. The Directors' Plan provides for the
grant of nonstatutory stock options to nonemployee directors of the Company
("outside directors"), including an option to purchase 10,000 shares of Common
Stock on the date on which the optionee first becomes a nonemployee director of
the Company or January 18, 1996 with respect to the Company's then current
nonemployee directors ("First Option"). Each First Option granted vests in
installments cumulatively as to 25% of the shares subject to the First Option on
each of the first, second, third and fourth anniversaries of the date of grant
of the First Option. Thereafter, each outside director will be automatically
granted an option to purchase 2,500 shares of Common Stock on the first calendar
day of the Company's fiscal year commencing in or after 1997 if, on such date,
the optionee shall have served on the Company's Board of Directors for at least
six months ("subsequent option"). The subsequent options shall vest on the
fourth anniversary of the date of grant, subject to continued service as an
outside director. The exercise price per share of all options granted under the
Directors' Plan shall be equal to the fair market value of a share of the
Company's Common Stock on the date of grant of the option.
The Directors' Plan was amended in 1999 to increase the number of shares
subject to the First Option to 25,000 shares of Common Stock and to increase the
number of shares subject to the subsequent options to 6,250 shares of Common
Stock and to provide for an additional option grant of 15,000 shares for any
director elected to the Company's Board of Directors during 1999, but prior to
the effectiveness of the increase in the size of the First Option described
above.
1999 STOCK OPTION PLAN
In 1999, the Company adopted the 1999 Stock Option Plan (the "1999 Option
Plan") permitting the grant of both incentive stock options designed to qualify
under IRC Section 423 and non-qualified stock options. A total of 3,350,000
shares of Common Stock have been reserved for issuance under the 1999 Option
Plan.
F-27
<PAGE> 152
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables summarize certain information relative to the 1992
Option Plan, the Directors' Plan, and the 1999 Option Plan.
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED FAIR
EXERCISE PRICE AVERAGE VALUE AT
SHARES RANGE EXERCISE PRICE GRANT DATE
--------- ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1995... 1,051,387 $.3750 to $7.50 $0.83
Granted Option price = Grant date
market price....................... 1,219,700 $6.44 to $12.50 $7.06 $4.96
Exercised.......................... (139,554) $.3750 to $5.00 $0.49
Canceled or expired................ (123,945) $.3750 to $12.50 $5.13
---------
Outstanding at December 31, 1996... 2,007,588 $.3750 to $12.50 $1.96
=========
Granted Option price = Grant date
market price..................... 683,000 $2.313 to $5.50 $2.86 $2.27
Option price < Grant date market
price......................... 119,500 $2.625 $2.63
Exercised.......................... (143,497) $.3750 to $2.625 $0.90
Canceled or expired................ (616,326) $.3750 to $8.00 $5.75
---------
Outstanding at December 31, 1997... 2,050,265 $.3750 to $8.00 $2.23
=========
Granted Option price = Grant date
market price..................... 787,200 $1.625 to $3.00 $2.84 $1.97
Exercised.......................... (194,912) $.375 to $2.75 $0.78
Canceled or expired................ (303,262) $.375 to $8.00 $2.77
---------
Outstanding at December 31, 1998... 2,339,291 $.375 to $8.00 $1.71
=========
Granted Option price = Grant date
market price (unaudited)......... 334,480 $4.563 to $7.5625 $6.68 $4.97
Exercised (unaudited).............. (481,455) $.375 to $3.25 $1.23
Canceled or expired (unaudited).... (192,629) $.625 to $7.5625 $3.33
---------
Outstanding at September 30, 1999
(unaudited)...................... 1,999,687 $0.375 to $.800 $2.50
=========
</TABLE>
The following table summarizes information about the stock options at:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- SEPTEMBER 30,
1996 1997 1998 1999
------- ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Options exercisable..................... 504,769 817,517 978,853 942,107
Options available for future grant...... 570,328 384,154 250,216 458,365
</TABLE>
The following table summarizes information about the stock options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER
OUTSTANDING AS OF WEIGHTED AVERAGE
OPTIONS OUTSTANDING DECEMBER 31, REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES 1998 CONTRACTUAL LIFE EXERCISE PRICE
------------------------ ----------------- ---------------- ----------------
<S> <C> <C> <C>
$0.00 to $1.99............... 2,271,250 8.0 $1.62
$2.00 to $3.99............... 43,041 4.3 $2.80
$4.00 to $5.99............... 5,000 8.0 $5.50
$6.00 to $8.00............... 20,000 7.0 $8.00
--------- --- -----
2,339,291 7.9 $1.71
=========
</TABLE>
F-28
<PAGE> 153
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
NUMBER
EXERCISABLE AS OF
OPTIONS EXERCISABLE DECEMBER 31, WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES 1998 EXERCISE PRICE
------------------------ ----------------- ----------------
<S> <C> <C>
$0.00 to $1.99................................ 952,379 $1.38
$2.00 to $3.99................................ 9,498 $2.68
$4.00 to $5.99................................ 2,394 $5.50
$6.00 to $8.00................................ 14,582 $8.00
-------
978,853 $1.50
=======
</TABLE>
The following table summarizes information about the stock options
outstanding and exercisable at September 30, 1999 (all information is
unaudited):
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OPTIONS OUTSTANDING OUTSTANDING AS OF REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES SEPTEMBER 30, 1999 CONTRACTUAL LIFE EXERCISE PRICE
------------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C>
$0.00 to $1.99............. 1,677,187 7.6 $1.73
$2.00 to $3.99............. 17,500 8.2 $2.64
$4.00 to $5.99............. 65,000 8.5 $5.24
$6.00 to $8.00............. 240,000 9.0 $7.13
--------- --- -----
1,999,687 7.8 $2.50
=========
</TABLE>
<TABLE>
<CAPTION>
NUMBER
OPTIONS EXERCISABLE EXERCISABLE AS OF WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES SEPTEMBER 30, 1999 EXERCISE PRICE
------------------------ ------------------ ----------------
<S> <C> <C>
$0.00 to $1.99.............................. 922,107 $1.67
$2.00 to $3.99.............................. 5,000 $2.38
$4.00 to $5.99.............................. -- $0.00
$6.00 to $8.00.............................. 15,000 $8.00
------- -----
942,107 $1.50
=======
</TABLE>
Effective April 1, 1997, (the "1997 Grant Date") all optionees under the
1992 Option Plan holding stock options with exercise prices in excess of the
fair market value of the Company's Common Stock received one-for-one repricing
of their then-existing unexercised stock options with a new exercise price set
at $2.625 per share, the closing sales price and fair market value of the
Company's Common Stock on the 1997 Grant Date. The number of stock options
affected was 1,235,065. Other than the change in the exercise price, the
affected options remained the same.
Effective December 11, 1998, (the "1998 Grant Date") all then-current
employees and consultants holding options under the 1992 Option Plan with
exercise prices in excess of the fair market value of the Company's Common Stock
received one-for-one repricing of their then-existing unexercised stock options
with a new exercise price set at $1.8125 per share, the closing sales price and
fair market value of the Company's Common Stock on the 1998 Grant Date. The
number of stock options effected was 1,857,900. Other than the change in the
exercise price, the affected options remained the same.
1996 Employee Stock Purchase Plan
In 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the
"Purchase Plan"). A total of 250,000 shares of Common Stock have been reserved
for issuance under the Purchase Plan. The Purchase Plan enables eligible
employees to purchase Common Stock at 85% of the lower of the fair market value
of the Company's Common Stock on the first day or the last day of each six-month
purchase
F-29
<PAGE> 154
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
period. As of December 31, 1997 and 1998, there were 96,901 and 144,946 shares,
respectively, issued under the Purchase Plan.
401(k) Salary Reduction Plan and Trust
In 1992, the Company adopted the ISOCOR 401(k) Salary Reduction Plan and
Trust (the "Plan") for all qualified employees electing participation in the
Plan. Employees can contribute 2% - 15% of eligible earnings to the Plan subject
to Internal Revenue Service limitations. No Company contributions were made to
the Plan for the years ended December 31, 1996, 1997 and 1998.
14. GEOGRAPHICAL AREA INFORMATION
The Company operates in a single reportable segment; the development,
marketing and support electronic messaging and directory infrastructure
software. The Company's operations consist of engineering, sales and marketing,
administration and support in both the United States and Europe.
Revenues for the years ended December 31 and identifiable assets as of
December 31 classified by the major geographical areas in which the Company
operates, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
REVENUES:
United States........................................... $10,927 $ 11,077 $ 7,917
Ireland................................................. 15,932 13,382 13,751
Other Europe............................................ 7,226 8,245 12,773
Intercompany elimination................................ (7,691) (10,686) (11,162)
------- -------- --------
$26,394 $ 22,018 $ 23,279
======= ======== ========
IDENTIFIABLE ASSETS:
United States........................................... $29,304 $ 26,123 $ 21,207
Ireland................................................. 9,146 5,393 5,650
Other Europe............................................ 2,848 2,707 6,268
------- -------- --------
Total......................................... $41,298 $ 34,223 $ 33,125
======= ======== ========
</TABLE>
The Company's intercompany eliminations represent transfers of goods and
services between its subsidiaries. Export sales from the United States and
Ireland for the years ended December 31, 1996, 1997, 1998 and the nine months
ended September 30, 1999 were $2,131,000, $2,086,000 and $2,485,000,
respectively. The majority of these sales were made to Asia and South America.
The Company currently relies significantly on resellers in Europe for
certain elements of marketing and distribution of its software products. In the
event the Company is unable to retain its resellers, there is no assurance that
the Company will succeed in replacing them. Any changes in the Company's
distribution channel could have a significant impact on sales and adversely
affect operating results.
15. RELATED PARTY TRANSACTIONS
Included in related party revenues for the years ended December 31, 1996,
1997, 1998 and for the nine months ended September 30, 1999 was approximately
$272,000, $95,000, $45,000 and $0, respectively, relating to software license
agreements with a shareholder.
Included in revenue for the year ended December 31, 1996, 1997, 1998 and
for the nine months ended September 30, 1999 was approximately $292,000,
$58,000, $345,000 and $584,000 respectively relating to a software license and
maintenance agreement with an affiliate of a shareholder. Included in accounts
receivable as of December 31, 1997 and 1998 and for the nine months ended
September 30, 1999
F-30
<PAGE> 155
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
was $46,000, $82,000 and $309,000, respectively, relating to this distributor.
Included in accounts payable as of December 31, 1997, 1998 and for the nine
months ended September 30, 1999 was $96,000, $0 and $0, respectively, relating
to the consulting services.
Included in other assets as of September 30, 1999 was $500,000 for a loan
to Paul Gigg, Chief Executive Officer and $14,000 in accrued interest. The loan
was made pursuant to his relocation to the Los Angeles area and is
collateralized by real property currently owned by Mr. Gigg.
During 1997 and 1998, the Company reflected as a reduction of operating
expenses $380,000 and $0, respectively, relating to product development efforts
committed to and performed by the Company under the Series D Preferred Stock
Purchase Agreement discussed in Note 12 above.
16. AGENCY GRANTS
During 1992, 1994 and 1996, the IDA approved grant agreements with one of
the Company's international subsidiaries for approximately $750,000, $850,000
and $793,000, respectively, over six years. The Company reflected as reduction
of operating expenses $413,000, $69,000 and $0 relating to these grants for the
years ended December 31, 1996, 1997 and 1998, respectively. These grants are
based upon the Company's creation and fulfillment of new jobs in Ireland and
include remedy provisions employed by the IDA to pursue partial revocation of
amounts granted in the event the recipient of the grant substantially vacates
its presence in Ireland during a period of five to seven years from date of
grant. While the Company's level of employment within Ireland in 1997 and 1998
has declined, the Company's plans include a commitment to a significant
continuing presence in Ireland. There can be no assurance that the IDA will not
seek partial revocation of prior grants, that the Company will continue to
qualify for this grant aid or be eligible for future grants or that the
Company's results of operations will not be materially adversely affected by the
loss of grant aid.
The Economic and Technological Finance Authority -- Berlin ("Authority")
makes grants to promote research and development in small and medium-sized
German-owned companies located in Berlin. The grants are paid quarterly based
upon actual development costs, including salaries, and depend upon the work
being carried out in Berlin. The Company reflected $87,000 in the year ended
December 31, 1996 and no reduction of operating expenses relating to these
grants for the years ended December 31, 1997 and 1998. Although remedy
provisions exist for the recoverability of such grants if certain conditions are
not met, the Company has been assured by the Authority that no recovery of the
grants made to NetCS is contemplated, and accordingly, no liability has been
recognized in the financial statements for this contingency. The Company is no
longer eligible to receive these grants in Germany.
17. SUBSEQUENT EVENT (UNAUDITED)
On October 20, 1999, Critical Path, Inc. signed a definitive acquisition
agreement to acquire the Company in an all stock transaction. Shareholders of
the Company will receive 0.4707 shares of Critical Path, Inc. common stock for
each share of the Company. This transaction is expected to close in the spring
of 2000, subject to various conditions including approval by the Company's
shareholders.
F-31
<PAGE> 156
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 7, which is as of March 26, 1999
F-32
<PAGE> 157
CRITICAL PATH, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 1 $ 14,791 $ 146,833
Restricted cash......................................... -- 325 325
Accounts receivable, net................................ -- 121 4,952
Prepaid expenses and other current assets............... 4 138 19,168
------- -------- ---------
Total current assets............................ 5 15,375 171,278
Investments............................................... -- -- 11,514
Notes receivable from officers............................ -- 500 716
Property and equipment, net............................... 501 4,687 30,862
Intangible assets, net.................................... -- -- 278,487
Other assets.............................................. 44 101 337
------- -------- ---------
$ 550 $ 20,663 $ 493,194
======= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities................ $ 609 $ 760 $ 8,332
Accrued compensation and benefits....................... 18 89 2,693
Deferred revenue, current............................... -- 500 971
Convertible promissory notes payable.................... 420 -- --
Convertible promissory notes payable-related party...... 427 -- --
Capital lease obligations, current...................... 55 1,502 3,686
------- -------- ---------
Total current liabilities....................... 1,529 2,851 15,682
Deferred revenue, long-term............................... -- -- 202
Capital lease obligations, long-term...................... 42 2,454 4,664
------- -------- ---------
1,571 5,305 20,548
------- -------- ---------
Commitments and contingencies (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 43,046 net of 134 treasury shares at cost of $229
(unaudited) shares issued and outstanding............ 2 8 43
Additional paid-in capital................................ 51 46,390 612,898
Notes receivable from shareholders........................ -- (1,151) (1,107)
Unearned compensation..................................... -- (17,371) (75,427)
Unrealized gain on investment............................. -- -- 7,014
Accumulated deficit....................................... (1,074) (12,535) (70,775)
------- -------- ---------
Total shareholders' equity (deficit)............ (1,021) 15,358 472,646
------- -------- ---------
$ 550 $ 20,663 $ 493,194
======= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE> 158
CRITICAL PATH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 19,
1997 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -------------------
1997 1998 1998 1999
-------------- ------------ ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues(1)............................... $ -- $ 897 $ 292 $ 7,968
Cost of net revenues(2)....................... -- (2,346) (1,253) (13,860)
------- -------- ------- --------
Gross profit (loss)......................... -- (1,449) (961) (5,892)
------- -------- ------- --------
Operating expenses:
Research and development.................... 454 2,098 1,237 4,705
Sales and marketing......................... 244 1,687 836 8,760
General and administrative.................. 358 3,814 2,088 7,919
Acquisition-related bonus compensation...... -- -- -- 570
Amortization of intangibles................. -- -- -- 9,813
Stock-based expenses........................ -- 2,400 868 25,244
------- -------- ------- --------
Total operating expenses............ 1,056 9,999 5,029 57,011
------- -------- ------- --------
Loss from operations.......................... (1,056) (11,448) (5,990) (62,903)
Interest and other income..................... -- 375 120 5,074
Interest expense(3)........................... (18) (388) (262) (411)
Net loss...................................... $(1,074) $(11,461) $(6,132) $(58,240)
------- -------- ------- --------
Other comprehensive income, before tax:
Unrealized gain (loss) on investment........ $ -- $ -- $ -- $ 7,014
------- -------- ------- --------
Other comprehensive income (loss), before
tax......................................... -- -- -- 7,014
Income tax effect........................... -- -- -- --
------- -------- ------- --------
Other comprehensive income (loss), net of
tax......................................... $ -- $ -- $ -- $ 7,014
Comprehensive loss.......................... $(1,074) $(11,461) $(6,132) $(51,226)
======= ======== ======= ========
Net loss per share-basic and diluted.......... $ (0.54) $ (2.94) $ (1.78) $ (2.26)
======= ======== ======= ========
Weighted average shares-basic and diluted..... 1,994 3,899 3,445 25,715
======= ======== ======= ========
</TABLE>
- ---------------
(1) Includes $231, $102, and $106 of stock-based charges in the year ended
December 31, 1998, and the nine months ended September 30, 1998 and 1999,
respectively
(2) Includes $193, $66, and $3,901 of stock-based charges in the year ended
December 31, 1998, and the nine months ended September 30, 1998 and 1999,
respectively
(3) Includes $161, $145, and $48 of stock-based charges in the year ended
December 31, 1998 and the nine months ended September 30, 1998 and 1999,
respectively
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE> 159
CRITICAL PATH, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
---------------- --------------- PAID-IN FROM UNEARNED UNREALIZED
SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDERS COMPENSATION GAIN
------- ------ ------ ------ ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception, February 19, 1997
Issuance of Common Stock....... -- $ -- 2,394 $ 2 $ 51 $ -- $ -- $ --
Net loss....................... -- -- -- -- -- -- -- --
------- ---- ------ --- -------- ------- --------- ---------
Balance at December 31, 1997... -- -- 2,394 2 51 -- -- --
Issuance of Common Stock....... -- -- 3,975 4 82 (85) -- --
Exercise of stock options...... -- -- 1,925 2 1,104 (1,066) -- --
Issuance of Series A Preferred
Stock, net.................... 12,725 13 -- -- 9,111 -- -- --
Issuance of Series B Preferred
Stock, net.................... 3,637 4 -- -- 15,437 -- -- --
Issuance of warrants and stock
purchase rights............... -- -- -- -- 723 -- -- --
Unearned compensation.......... -- -- -- -- 19,882 -- (19,882) --
Amortization of unearned
compensation.................. -- -- -- -- -- -- 2,511 --
Net loss....................... -- -- -- -- -- -- -- --
------- ---- ------ --- -------- ------- --------- ---------
Balance at December 31, 1998... 16,362 17 8,294 8 46,390 (1,151) (17,371) --
Issuance of Common Stock
(unaudited)................... -- -- 1,091 1 2,399 -- -- --
Exercise of stock options and
stock warrants (unaudited).... -- -- 851 -- 239 (29) -- --
Issuance of Preferred Stock,
net (unaudited)............... 3,550 3 -- -- 12,493 -- -- --
Conversion of preferred to
common stock (unaudited)...... (19,912) (20) 19,912 20 -- -- -- --
Unearned compensation
(unaudited)................... -- -- -- -- 87,214 -- (87,214) --
Amortization of unearned
compensation (unaudited)...... -- -- -- -- -- -- 29,158 --
Issuance of common stock in
initial public offering, net
(unaudited)................... -- -- 8,175 9 254,908 -- -- --
Issuance of common stock in
acquisitions (unaudited)...... 4,857 5 209,484 -- -- --
Repayment of shareholder notes
(unaudited)................... -- -- -- -- 73 --
Purchase of treasury stock
(unaudited)................... -- -- (134) -- (229) -- -- --
Unrealized gain on investment
(unaudited)................... 7,014
Net loss (unaudited)........... -- -- -- -- -- -- --
------- ---- ------ --- -------- ------- --------- ---------
Balance at September 30, 1999
(unaudited)................... -- $ -- 43,046 $43 $612,898 $(1,107) $ 75,427 $ 7,014
======= ==== ====== === ======== ======= ========= =========
<CAPTION>
TOTAL
SHAREHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
----------- -------------
<S> <C> <C>
Inception, February 19, 1997
Issuance of Common Stock....... $ -- $ 53
Net loss....................... (1,074) (1,074)
-------- ---------
Balance at December 31, 1997... (1,074) (1,021)
Issuance of Common Stock....... -- 1
Exercise of stock options...... -- 40
Issuance of Series A Preferred
Stock, net.................... -- 9,124
Issuance of Series B Preferred
Stock, net.................... -- 15,441
Issuance of warrants and stock
purchase rights............... -- 723
Unearned compensation.......... -- --
Amortization of unearned
compensation.................. -- 2,511
Net loss....................... (11,461) (11,461)
-------- ---------
Balance at December 31, 1998... (12,535) 15,358
Issuance of Common Stock
(unaudited)................... -- 2,400
Exercise of stock options and
stock warrants (unaudited).... -- 210
Issuance of Preferred Stock,
net (unaudited)............... -- 12,496
Conversion of preferred to
common stock (unaudited)...... -- --
Unearned compensation
(unaudited)................... -- --
Amortization of unearned
compensation (unaudited)...... -- 29,158
Issuance of common stock in
initial public offering, net
(unaudited)................... -- 254,917
Issuance of common stock in
acquisitions (unaudited)...... -- 209,489
Repayment of shareholder notes
(unaudited)................... 73
Purchase of treasury stock
(unaudited)................... -- (229)
Unrealized gain on investment
(unaudited)................... -- 7,014
Net loss (unaudited)........... (58,240) (58,240)
-------- ---------
Balance at September 30, 1999
(unaudited)................... $(70,775) $ 472,646
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
<PAGE> 160
CRITICAL PATH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 19,
1997 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED SEPTEMBER 30,
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) $(6,132) $(58,240)
Adjustments to reconcile net loss to net cash used
in operating activities:
Provision for doubtful accounts................. -- 50 -- 135
Depreciation and amortization................... 26 1,019 597 14,017
Common stock issued for services................ 3 -- -- --
Amortization of warrants and stock purchase
rights........................................ -- 473 329 14,006
Amortization of unearned compensation........... -- 2,511 852 15,293
Changes in assets and liabilities:
Accounts receivable........................... -- (171) (232) (1,562)
Prepaid expenses and other assets............. (48) (86) (27) (3,997)
Accounts payable and accrued expenses......... 609 151 (389) 2,928
Accrued compensation and benefits............. 18 71 60 2,018
Deferred revenue.............................. -- 500 1,100 (438)
------- -------- ------- --------
Net cash used in operating activities...... (466) (6,943) (3,842) (15,840)
------- -------- ------- --------
Cash flows from investing activities:
Notes receivable from officers.................... -- (500) -- (122)
Property and equipment purchases.................. (409) (491) (491) (21,843)
Purchase of investments........................... -- -- -- (4,500)
Payments for acquisitions, net of cash acquired... -- -- -- (78,223)
Loans to third parties............................ -- -- -- (15,000)
Restricted cash................................... -- (325) -- --
------- -------- ------- --------
Net cash used in investing activities...... (409) (1,316) (491) (119,688)
------- -------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of Preferred Stock, net.... -- 23,445 23,445 12,496
Proceeds from issuance of Common Stock............ 50 41 5 257,372
Proceeds from equipment lease line................ -- 198 198 --
Proceeds from convertible promissory notes
payable......................................... 847 500 500 --
Repayment of convertible promissory notes
payable......................................... -- (227) (227) --
Proceeds from payments of shareholder notes
receivable...................................... -- -- -- 97
Principal payments on lease obligations........... (21) (908) (489) (2,166)
Purchase of treasury stock........................ -- -- -- (229)
------- -------- ------- --------
Net cash provided by financing
activities............................... 876 23,049 23,432 267,570
------- -------- ------- --------
Net increase in cash and cash equivalents........... 1 14,790 19,099 132,042
Cash and cash equivalents at beginning of period.... -- 1 1 14,791
------- -------- ------- --------
Cash and cash equivalents at end of period.......... $ 1 $ 14,791 $19,100 $146,833
======= ======== ======= ========
Supplemental cash flow disclosure:
Cash paid for interest............................ $ 1 $ 244 $ 117 $ 363
Non-cash investing and financing activities:
Property and equipment leases..................... $ 118 $ 4,714 $ 4,152 $ 5,863
Common Stock issued for notes receivable.......... $ -- $ 1,151 $ 85 $ 29
Conversion of notes payable into Preferred
Stock........................................... $ -- $ 1,120 $ 1,120 $ --
Unrealized gain on investment..................... $ 7,014
Common stock and options issued for
acquisitions.................................... $209,489
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-36
<PAGE> 161
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Critical Path, Inc. was incorporated in California on February 19, 1997.
Critical Path, along with its subsidiaries (collectively referred to herein as
the "Company") 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 consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. 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 nine months ended September 30, 1999, these two customers
accounted for approximately 23% (unaudited) and 7% (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.
Property and equipment
Property and equipment are stated at cost. Depreciation 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. Gains
and losses on disposals are included in income at amounts equal to the
difference between the net book value of the disposed assets and the proceeds
received upon disposal. Expenditures
F-37
<PAGE> 162
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for replacements and betterments are capitalized, while expenditures for
maintenance and repairs are charged against earnings as incurred. Assets under
construction are not depreciated until placed in service.
Intangible Assets
The Company uses modeling techniques on new acquisitions and long-range
business plans, revised annually, to assess whether a revision of the existing
estimated useful lives of intangible assets is necessary.
Goodwill. The excess of the purchase price paid over the fair value of net
assets acquired in business combinations is recorded as goodwill and is
amortized over its expected useful period, between three and eight years, using
the straight-line method.
Other intangible assets. Other intangible assets primarily include
assembled workforce, customer base, and existing technology. These intangible
assets are amortized on a straight-line basis over the lives which the Company
expects to be benefited, which range from 2 to 8 years.
Valuation of Long-Lived Assets
The Company periodically evaluates the carrying value of long-lived assets
and certain indentifiable intangibles for impairment, when events and
circumstances indicate that the book value of an asset may not be recoverable.
An impairment loss is recognized whenever the review demonstrates that the book
value of a long-lived asset is not recoverable. Since February 19, 1997
(inception) through September 30, 1999 (unaudited), no impairment losses have
been identified.
Revenue recognition
The Company derives most of its 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.
The Company also derives email-hosting revenue by providing users of LAN
email systems a universal bridge to send messages outside their network. The
Company charges message fees in addition to monthly service fees for this
bridge, and recognize revenue in the period such services are provided. Other
set-up fees are comprised of customized installation of email services. Payments
are based on a contractual fee for the customization, and revenue is recognized
upon completion of the work. Consulting revenues are billed and recognized on a
monthly basis as the service is performed. Amounts billed or received in advance
of service delivery are recorded as deferred revenue.
Revenues for software licenses for which collection of the resulting
receivable is deemed probable are recognized upon delivery of the product
provided there is persuasive evidence of an arrangement the fee is fixed and
determinable and the agreement does not require significant customization of the
software. Revenues from software maintenance are recognized ratably over the
maintenance term.
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.
F-38
<PAGE> 163
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 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 consolidated 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 September 30, 1999, 28,607,997 and
19,182,785 (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.
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
F-39
<PAGE> 164
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
components in financial statements. Comprehensive income, as defined, includes
all changes in equity (net assets) during a period from non-owner sources.
Unrealized gain on marketable securities (unaudited)
In May 1999, the Company made a minority investment of $3 million in the
common stock of Starmedia Network, Inc. Based on the closing price of Starmedia
stock at September 30, 1999, the fair value of the Company's investment was
$10.0 million and was recorded as an investment in the assets section of the
Company's balance sheet. The excess of the investment's carrying value over its
cost was recorded as an unrealized gain on investments and included in the
equity section of the Company's consolidated balance sheet.
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 September
30, 1999 and for the nine months ended September 30, 1998 and 1999, are
unaudited. The unaudited interim consolidated financial statements have been
prepared on the same basis as the annual consolidated 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 September 30, 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 nine months ended September 30, 1999, are not necessarily
indicative of the results to be expected for the year ending December 31, 1999.
Reclassifications
Certain amounts previously reported have been reclassified to conform with
the current period presentation.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of Effective Date of FASB Statement No. 133".
SFAS 133, as amended by SFAS 137, is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000, with earlier application encouraged.
Critical Path does not currently use derivative instruments.
F-40
<PAGE> 165
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1998
---- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable......................................... $ -- $ 171
Less: Allowance for doubtful accounts.................. -- (50)
---- -------
$ -- $ 121
==== =======
Property and equipment, net:
Computer equipment and software........................... $440 $ 5,247
Furniture and fixtures.................................... 34 74
Leasehold improvements.................................... 53 411
---- -------
527 5,732
Less: Accumulated depreciation and amortization........ (26) (1,045)
---- -------
$501 $ 4,687
==== =======
</TABLE>
Property and equipment includes $118,000 and $4,832,000 of assets under
capital leases at December 31, 1997 and 1998, respectively. Accumulated
depreciation of assets under capital leases totaled $3,000 and $765,000 at
December 31, 1997 and 1998, respectively.
Depreciation expense of assets totaled $26,000 and $1,019,000 at December
31, 1997 and 1998, respectively.
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 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.
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 for the year
ended December 31, 1998.
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, the Company had deferred tax assets of approximately
$4,001,000. Management believes that, based on a number of factors, it is more
likely than not that the deferred tax
F-41
<PAGE> 166
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. 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, 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 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 September 30, 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 AND CONTINGENCIES
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, totaled $33,000 and $220,000, respectively.
F-42
<PAGE> 167
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
------- ---------
(IN THOUSANDS)
<S> <C> <C>
YEAR ENDING DECEMBER 31,
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 three year terms. Certain agreements require minimum performance
standards regarding the availability and 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.
F-43
<PAGE> 168
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Contingencies
The Company is party to various legal proceedings in the ordinary course of
its business. The Company believes that the ultimate outcome of these matters
will not have a material adverse impact on its financial position, results of
operations, or operating cash flow.
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.
Reverse Stock Split
On March 1, 1999 (unaudited), 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 the
consolidated financial statements for the period from February 19, 1997
(inception) through December 31, 1997 and the year ended December 31, 1998 have
been retroactively adjusted to reflect this reverse stock split.
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.
In January 1999 (unaudited), 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.
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.
F-44
<PAGE> 169
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-45
<PAGE> 170
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
Exercise of Stock Purchase Rights
In January 1999 (unaudited), 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.
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.
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
F-46
<PAGE> 171
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 milestones. The following table summarizes the shares
underlying each milestone and the related exercise price:
<TABLE>
<CAPTION>
SHARES
UNDERLYING EXERCISE
WARRANT PRICE
---------- --------
<S> <C> <C>
Milestone 1............................................. 814,254 $ 4.26
Milestone 2............................................. 407,128 5.50
Milestone 3............................................. 407,128 6.60
Milestone 4............................................. 407,128 8.80
Milestone 5............................................. 407,128 11.00
---------
Totals........................................ 2,442,766
=========
</TABLE>
In the quarter ended June 30, 1999, the Company amended the vesting terms
of its agreement with ICQ. The revised vesting terms did not impact the shares
underlying the first milestone, which vested immediately upon the execution of
the agreement. The shares underlying each of the remaining milestones vest on
the date in a quarter in which ICQ completes a minimum registration of 100,000
sub-branded ICQ mailboxes, compared to 250,000 sub-branded ICQ mailboxes as
provided in the terms of the original agreement. The amended agreement also
provides that only one milestone may be achieved on a quarterly basis.
Using the Black-Scholes option pricing model and assuming a term of seven
years and expected volatility of 90%, the initial fair value of the warrant on
the effective date of the agreement approximated $16.5 million, which is being
amortized to advertising expense using the straight-line method over four years.
The shares underlying the second through fifth milestones are remeasured at each
subsequent reporting date until each sub-branded ICQ mailbox registration
threshold is achieved and the related warrant shares vest at which time the fair
value attributable to that tranche of the warrant is fixed. In the event such
remeasurement results in increases or decreases from the initial fair value,
which could be substantial, these increases or decreases will be recognized
immediately, if the fair value of the shares underlying the milestone has been
previously recognized, or over the remaining term, if not.
F-47
<PAGE> 172
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
---------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Outstanding at beginning of period...................... -- --
Granted................................................. 10,595,453 $0.74
Exercised............................................... (1,924,723) 0.58
Canceled................................................ (918,174) 0.16
----------
Outstanding at end of period............................ 7,752,556 0.86
==========
Options exercisable at period end....................... 939,522 0.02
==========
Weighted average minimum value of options granted during
period................................................ 1.56
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT
DECEMBER 31, 1998 OPTIONS EXERCISABLE 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
========= =======
</TABLE>
F-48
<PAGE> 173
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>
YEAR ENDED
DECEMBER 31,
------------
1997 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Risk-free interest rates.................................... 6.0% 5.9%
Expected lives (in years)................................... 4.0 4.0
Dividend yield.............................................. 0.0% 0.0%
Expected volatility......................................... 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.
Unearned stock-based compensation
In connection with certain stock option grants and common stock issuances
during the year ended December 31, 1998, the Company recognized unearned
compensation totaling $19,882,000, which is being amortized over the vesting
periods of the related options. In the first quarter of 1999, the Company
recorded an additional $18.1 million (unaudited) of unearned compensation
related to the grant of stock options in the months of January 1999 and March
1999 to purchase 1,789,110 shares (unaudited) of common stock at exercise prices
ranging between $3.39 and $7.13 per share. Amortization expense recognized
during the year ended December 31, 1998 and the nine months ended September 30,
1999 and 1998, totaled approximately $2,511,000, $13,334,000 (unaudited) and
$852,000 (unaudited), respectively.
During the nine months ended September 30, 1999, the Company also incurred
a one-time stock-based charge of approximately $2 million (unaudited) in
connection with a severance agreement for a terminated employee. This expense
was charged to cost of net revenues.
NOTE 9 -- SUBSEQUENT EVENTS:
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 $114.1 million.
On June 2, 1999, the Company completed its secondary public offering of
3,000,000 shares of common stock and realized net proceeds of $140.7 million.
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.
Acquisitions (unaudited)
On May 26, 1999, the Company acquired substantially all the operating
assets of the Connect Service business of Fabrik Communications ("Fabrik"). The
acquisition has been accounted for using the purchase method of accounting and,
accordingly, the net assets and results of operations Fabrik's Connect
F-49
<PAGE> 174
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Service have been included in the Company's consolidated financial statements
since the acquisition date. The purchase price has been allocated to the
tangible and intangible net assets acquired on the basis of their respective
fair values on the date of acquisition. The total purchase price was
approximately $20.1 million, consisting of $12.0 million cash, common stock
valued at $8.0 million, and other acquisition-related expenses of approximately
$100,000. Of the total purchase price, approximately $500,000 was allocated to
property and equipment, and the remainder was allocated to intangible assets,
including customer list ($2.1 million), assembled workforce ($400,000) and
goodwill ($17.1 million). The acquired intangible assets will be amortized over
their estimated useful lives of two to three years. Goodwill will be amortized
using the straight-line method over three years, resulting in a quarterly charge
of approximately $1.4 million during the amortization period.
The following cash and non-cash entries were recorded in connection with
the acquisition of the Connect Service business of Fabrik Communications:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fair value of assets acquired............................... $20,100
Liabilities assumed......................................... --
Fair value of common stock issued........................... 8,000
-------
Cash paid, including acquisition costs...................... 12,100
Less: cash acquired......................................... --
-------
Net cash paid............................................... $12,100
=======
</TABLE>
On July 21, 1999, the Company acquired dotOne Corporation ("dotOne"), a
leading corporate email messaging service provider. The acquisition has been
accounted for using the purchase method of accounting and, accordingly, the net
assets and results of operations of dotOne have been included in the Company's
consolidated financial statements since the acquisition date. The purchase price
has been allocated to the tangible net liabilities and intangible net assets
acquired on the basis of their respective fair values on the date of
acquisition. The total purchase price was approximately $57.0 million,
consisting of $17.5 million cash, common stock valued at $35.0 million, assumed
stock options with an estimated fair market value of $3.2 million, and other
acquisition-related expenses of approximately $1.3 million. Of the total
purchase price, approximately $1.7 million was allocated to net tangible
liabilities, and the remainder was allocated to intangible assets, including
customer list ($4.6 million), assembled workforce ($1.5 million), existing
technology ($600,000), and goodwill ($52.0 million). The acquired intangible
assets will be amortized over their estimated useful lives of three to five
years. Goodwill will be amortized using the straight-line method over three
years, resulting in a quarterly charge of $4.3 million during the amortization
period.
The following cash and non-cash entries were recorded in connection with
the dotOne acquisition:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fair value of assets acquired............................... $60,484
Liabilities assumed......................................... 3,497
Fair value of common stock and options issued............... 38,200
-------
Cash paid, including acquisition costs...................... 18,787
Less: cash acquired......................................... 419
-------
Net cash paid............................................... $18,368
=======
</TABLE>
On August 31, 1999, the Company acquired Amplitude Software Corporation
("Amplitude"), a leading provider of Internet calendaring and resource
scheduling solutions. The acquisition has been accounted for using the purchase
method of accounting and, accordingly, the net assets and results of
F-50
<PAGE> 175
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
operations of Amplitude have been included in the Company's consolidated
financial statements since the acquisition date. The purchase price has been
allocated to the tangible and intangible net assets acquired on the basis of
their respective fair values on the date of acquisition. The total purchase
price was $214.4 million, consisting of $45.0 million cash, common stock valued
at $141.3 million, assumed stock options with an estimated fair market value of
$22.0 million, and other acquisition-related expenses of approximately $6.1
million. Of the total purchase price, approximately $4.4 million was allocated
to net tangible assets, and the remainder was allocated to intangible assets,
including customer list ($600,000), assembled workforce ($3.8 million), existing
technology ($4.1 million), and goodwill ($201.5 million). The acquired
intangible assets will be amortized over their estimated useful lives of two to
four years. Goodwill will be amortized using the straight-line method over four
years, resulting in a quarterly charge of approximately $12.6 million during the
amortization period.
The following cash and non-cash entries were recorded in connection with
the Amplitude acquisition:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fair value of assets acquired............................... $217,916
Liabilities assumed......................................... 3,536
Fair value of common stock and options issued............... 163,289
--------
Cash paid, including acquisition costs...................... 51,091
Less: cash acquired......................................... 3,337
--------
Net cash paid............................................... $ 47,754
========
</TABLE>
The following unaudited pro forma summary presents the Company's consolidated
results of operations for the nine months ended September 30, 1999 and 1998 as
if the acquisitions had been consummated at the beginning of each period. The
pro forma consolidated results of operations include certain pro forma
adjustments, including the amortization of intangible assets, the reduction of
interest income for lower cash balances as a result of the elimination of the
Fabrik cash balance which was not acquired by the Company.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
--------- --------
<S> <C> <C>
Net Revenues.......................................... $ 19,573 $ 14,275
Net loss.............................................. (114,949) (70,683)
Net loss per share:
Basic and diluted (3.84) (8.51)
</TABLE>
The pro forma results are not necessarily indicative of those that would
have actually occurred had the acquisitions taken place at the beginning of the
periods presented.
Revaluation of Common Stock Warrant Issued for Services (unaudited)
On August 19, 1999, one of the registration milestones specified within the
ICQ warrant agreement had been achieved. The shares underlying this milestone
were remeasured using the closing price of our common stock on August 19, 1999,
the date on which the milestone was achieved. The closing price of our common
stock on August 19, 1999 was $36.6875. The remaining shares underlying the third
through the fifth milestones of the ICQ warrant were remeasured using the
closing price of our common stock on September 30, 1999 of $40.34375. Together,
these remeasurement calculations resulted in a revised fair value of the warrant
of $64.9 million as of September 30, 1999.
As of September 30, 1999, only two of the five milestones had been
attained. On October 16, 1999, the Company attained the third registration
milestone. The Company expects that future changes in the
F-51
<PAGE> 176
CRITICAL PATH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
trading price of our common stock at the end of each quarter, and at the time
certain milestones are achieved, will cause additional substantial changes in
the ultimate amount of the related stock-based charges.
On October 21, 1999, the Company announced that it had signed a definitive
agreement to acquire all outstanding shares of ISOCOR, a provider of
standards-based messaging and directory software products and services. On
December 6, 1999, the Company acquired all outstanding shares in FaxNet
("FaxNet"), a supplier of fax and integrated messaging solutions.
On November 4, 1999, the Company announced that it had signed a definitive
agreement to acquire all outstanding shares in The docSpace Company, Inc.
("docSpace"), a provider of secure file delivery and storage services. The
closing of these transactions is contingent upon approval by the companies'
shareholders, approval by regulatory agencies, and other provisions within the
agreements. Should these acquisitions close, the Company intends to account for
each of them using the purchase method of accounting and, accordingly, the
respective purchase prices will be allocated to the tangible net assets acquired
on the basis of their respective fair values on the date of the respective
acquisitions.
On November 24, 1999, the Company acquired Xeti, Inc., a leading developer
of standards-based public key infrastructure solutions. 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 total
purchase price of approximately $20.5 million consisted of $2.0 million in cash
and common shares valued at $18.5 million. The Company also assumed the stock
option plans of Xeti, Inc.
Acquisition-related bonus program (unaudited)
In connection with its acquisitions of Amplitude, FaxNet, and ISOCOR, the
Company established a retention bonus program in the aggregate amount of $10
million to provide incentive for former Amplitude, FaxNet, and ISOCOR employees
to continue their employment with Critical Path. Payment of bonuses to the
listed employees will occur one year following the date of acquisition, unless
the listed employees voluntarily terminate their employment with the Company
prior to the respective acquisition's one year anniversary. The aggregate amount
of the eligible bonuses will be adjusted downward at each point that a former
Amplitude, FaxNet, and ISOCOR employee chooses to terminate his or her
employment with the Company. The amount of any such downward adjustment
corresponds to the amount that the terminating employee would have received had
he or she elected to continue employment with the Company. A ratable share of
the adjusted eligible bonus amount will be accrued and charged to compensation
expense over the respective 12 months commencing on the date the bonuses are
granted. As of September 30, 1999, the adjusted eligible Amplitude bonus amount
was $8.4 million, and the ratable charge to compensation expense was $700,000.
Based on the functions of the employees scheduled to receive acquisition
bonuses, $130,000 of the compensation charge was allocated to cost of net
revenues and $570,000 was allocated to operating expenses.
Note receivable (unaudited)
In July 1999, Critical Path advanced $10 million to a privately-held
company pursuant to a promissory note. The note bears interest at the prime rate
of interest as stipulated in the Wall Street Journal. The amount was advanced in
connection with the Company's evaluation of the obligor for potential
acquisition. Under the terms of the note, all principal and accrued interest is
repayable within 90 days of written demand by the holder. Upon the decision by
Critical Path not to proceed with an acquisition of the obligor, Critical Path
presented a demand notice for repayment on August 18, 1999. All amounts owed to
Critical Path pursuant to this note were due to be paid not later than November
16, 1999, however, Critical Path has granted obligor an extension until December
31, 1999.
F-52
<PAGE> 177
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.
Ernst & Young LLP
Palo Alto, California
November 6, 1998
F-53
<PAGE> 178
FABRIK COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------- MARCH 31,
1997 1998 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
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-54
<PAGE> 179
FABRIK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 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-55
<PAGE> 180
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
------------------------ ------------------ PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDER
---------- ----------- --------- ------ ---------- -----------
<S> <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)
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 --
Forgiveness of note receivable from
shareholder................................... -- -- -- -- -- 4,125
Repurchase of common stock...................... -- -- (267,708) (268) (2,586) --
Issuance of stock options to consultants........ -- -- -- -- 73,923 --
Exercise of stock options....................... -- -- 115,206 115 7,069 --
Net loss........................................ -- -- -- -- -- --
---------- ----------- --------- ------ -------- -------
Balances at September 30, 1997.................... 18,981,456 15,500,965 5,277,498 5,277 186,531
Repurchase of common stock...................... -- -- (30,625) (31) (582) --
Translation loss................................ -- -- -- -- -- --
Exercise of stock options....................... -- -- 325,459 326 25,243 --
Net loss........................................ -- -- -- -- -- --
---------- ----------- --------- ------ -------- -------
Balances at September 30, 1998.................... 18,981,456 15,500,965 5,572,332 5,572 211,192
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).................... -- -- -- -- -- --
Exercise of stock options (unaudited)........... -- -- 119,407 119 20,242 --
Net loss (unaudited)............................ -- -- -- -- -- --
---------- ----------- --------- ------ -------- -------
Balances at March 31, 1999 (unaudited)............ 20,231,456 $16,990,965 5,691,739 $5,691 $231,434 $ --
========== =========== ========= ====== ======== =======
<CAPTION>
SHAREHOLDERS' DEFICIT
------------------------------------------
CUMULATIVE TOTAL
TRANSLATION ACCUMULATED SHAREHOLDERS'
ADJUSTMENT DEFICIT DEFICIT
----------- ------------ -------------
<S> <C> <C> <C>
Balances at September 30, 1996.................... $ -- $ (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.................................. -- -- --
Issuance of Series E redeemable convertible
preferred stock at $1.20 per share, net of
issuance costs of $7,773...................... -- -- --
Issuance of preferred stock warrants............ -- -- 61,580
Forgiveness of note receivable from
shareholder................................... -- 4,125
Repurchase of common stock...................... -- -- (2,854)
Issuance of stock options to consultants........ -- 73,923
Exercise of stock options....................... -- -- 7,184
Net loss........................................ -- (6,735,411) (6,735,411)
-------- ------------ ------------
Balances at September 30, 1997.................... -- (11,003,510) (10,811,702)
Repurchase of common stock...................... -- -- (613)
Translation loss................................ (8,562) -- (8,562)
Exercise of stock options....................... -- -- 25,569
Net loss........................................ -- (2,220,170) (2,220,170)
-------- ------------ ------------
Balances at September 30, 1998.................... (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)......... -- -- --
Translation loss (unaudited).................... (5,898) -- (5,898)
Exercise of stock options (unaudited)........... -- -- 20,361
Net loss (unaudited)............................ -- (945,920) (945,920)
-------- ------------ ------------
Balances at March 31, 1999 (unaudited)............ $(14,460) $(14,169,600) $(13,946,935)
======== ============ ============
</TABLE>
See accompanying notes.
F-56
<PAGE> 181
FABRIK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
------------------------- ---------------------------
1997 1998 1998 1999
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................... $(6,735,411) $(2,220,170) $ (991,614) $ (945,920)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............. 942,674 1,434,942 720,495 713,030
Issuance of options to consultants........ 73,923 -- -- --
Forgiveness of note receivable 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
liabilities.......................... 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 Series D
redeemable convertible preferred stock.... 7,465,957 -- -- --
Proceeds from issuance of Series 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 redeemable
convertible preferred stock in exchange
for promissory notes................... $ 1,612,015 $ -- $ -- $ --
=========== =========== =========== ===========
Issuance of preferred stock warrants...... $ 61,580 $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-57
<PAGE> 182
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1999 AND 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 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.
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.
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<PAGE> 183
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
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.
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
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<PAGE> 184
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
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.
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.
F-60
<PAGE> 185
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
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, 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.
F-61
<PAGE> 186
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
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, 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
F-62
<PAGE> 187
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
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 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
F-63
<PAGE> 188
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
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.
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>
F-64
<PAGE> 189
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
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.
The following table summarizes information concerning currently outstanding
and exercisable options at March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED-
AVERAGE WEIGHTED-
REMAINING AVERAGE NUMBER WEIGHTED-
NUMBER CONTRACTUAL EXERCISE EXERCISABLE AVERAGE
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-65
<PAGE> 190
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND 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 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
F-66
<PAGE> 191
FABRIK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE SIX MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
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.
13. EVENT SUBSEQUENT TO DATE OF AUDITORS REPORT
On May 26, 1999 Critical Path, Inc. acquired substantially all of the
operating assets of the Company's Connect Service business for approximately
$12.0 million in cash and 109,091 shares of Critical Path, Inc. common stock.
F-67
<PAGE> 192
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
F-68
<PAGE> 193
DOTONE CORPORATION
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------- JUNE 30,
1997 1998 1999
----------- ----------- -----------
(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.
F-69
<PAGE> 194
DOTONE CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
JANUARY 1 TO YEAR 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.
F-70
<PAGE> 195
DOTONE CORPORATION
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
TELTRUST DATA
SERVICES, LLC
SERIES A PREFERRED STOCK COMMON STOCK MEMBERS' EQUITY
------------------------ --------------------- ------------------------- SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT UNITS AMOUNT RECEIVABLE
---------- ---------- --------- -------- ---------- ----------- ------------
<S> <C> <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 -- -- (100,000)
Net loss................ -- -- -- -- -- -- --
---------- ---------- --------- -------- ---------- ----------- ---------
BALANCE AT SEPTEMBER 30,
1997.................. 79,268,080 1,600,000 6,000,000 100,000 -- -- (100,000)
Unearned compensation... -- -- -- 116,338 -- -- --
Amortization of unearned
compensation.......... -- -- -- -- -- -- --
Proceeds from
subscription
receivable............ -- -- -- -- -- -- 100,000
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
ACCUMULATED UNEARNED STOCKHOLDERS'
DEFICIT COMPENSATION DEFICIT
----------- ------------ -------------
<S> <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............ -- -- --
Net loss................ (788,312) -- (788,312)
----------- --------- -----------
BALANCE AT SEPTEMBER 30,
1997.................. (1,677,110) -- (77,110)
Unearned compensation... -- (116,338) --
Amortization of unearned
compensation.......... -- 6,911 6,911
Proceeds from
subscription
receivable............ -- -- 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.
F-71
<PAGE> 196
DOTONE CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
JANUARY 1 TO YEAR 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
activities:
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
Accrued 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
None-cash transactions:
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
========== ========= ========= ===========
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
exchanged for notes payable.......... $ 620,496 $ -- $ -- $ --
None-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.
F-72
<PAGE> 197
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.
F-73
<PAGE> 198
DOTONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (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.
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
F-74
<PAGE> 199
DOTONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Accounts receivable.................................... $573,420 $565,435
Less: Allowance for doubtful accounts.................. (15,298) (25,070)
-------- --------
$558,122 $540,365
======== ========
</TABLE>
PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at September 30:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE 1997 1998
----------- --------- --------
<S> <C> <C> <C>
Computer equipment and software.................. 3 - 5 years $ 752,421 $497,146
Furniture and fixtures........................... 3 - 7 years 60,979 20,611
--------- --------
813,400 517,757
Less: Accumulated depreciation................... (213,302) (64,206)
--------- --------
$ 600,098 $453,551
========= ========
</TABLE>
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.
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>
F-75
<PAGE> 200
DOTONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 loss 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>
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 exceed $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.
F-76
<PAGE> 201
DOTONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (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.
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").
F-77
<PAGE> 202
DOTONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
JANUARY 1 TO YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
------------- -------------
<S> <C> <C>
Net loss:
As reported....................................... $(788,312) $(788,142)
Pro forma....................................... $(788,312) $(788,501)
</TABLE>
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>
Weighted average fair value of options granted:
<TABLE>
<CAPTION>
1997 1998
----- -----
<S> <C> <C>
All options................................................. $ -- $2.16
Exercise price below market............................... $ -- $2.16
Exercise price above market............................... $ -- $ --
</TABLE>
F-78
<PAGE> 203
DOTONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
at September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS 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>
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
JANUARY 1 TO YEAR ENDED
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 consummation 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.
F-79
<PAGE> 204
[KPMG LOGO]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Amplitude Software Corporation, Inc.:
We have audited the accompanying balance sheets of Amplitude Software
Corporation, Inc. (the Company) as of December 31, 1998 and 1997, and the
related statements of operations, 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 financial position of Amplitude Software
Corporation, Inc. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
--------------------------------------
March 5, 1999, except for Note 9
which is as of August 31, 1999
F-80
<PAGE> 205
AMPLITUDE SOFTWARE CORPORATION, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1997 1998 1999
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 4,248,991 $ 584,123 $ 5,581,905
Accounts receivable, net of allowance for doubtful
accounts receivable of $54,324 and $13,580 in 1998
and 1997, respectively............................ 567,892 1,045,456 3,162,370
Prepaid expenses and other current assets............ 28,417 26,674 130,772
----------- ----------- ------------
Total current assets......................... 4,845,300 1,656,253 8,875,047
Property and equipment, net............................ 394,694 744,348 1,300,512
Other assets........................................... 49,042 63,463 93,576
----------- ----------- ------------
Total assets................................. $ 5,289,036 $ 2,464,064 $ 10,269,135
=========== =========== ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Revolving and equipment facilities, short term....... $ 141,112 $ 991,665 $ 553,853
Accounts payable..................................... 264,279 457,241 497,696
Accrued and other current liabilities................ 129,713 647,225 1,275,512
Deferred revenue..................................... 127,143 456,453 692,070
----------- ----------- ------------
Total current liabilities.................... 662,247 2,552,584 3,019,131
Equipment facility, long term.......................... 197,568 -- 387,296
Deferred revenue....................................... 8,905 156,324 208,973
----------- ----------- ------------
Total liabilities............................ 868,720 2,708,908 3,615,400
----------- ----------- ------------
Series B, B-1 and C Redeemable convertible preferred
stock, no par value; 12,050,722 shares authorized;
11,919,988 and 11,956,830 issued and outstanding in
1997 and 1998 respectively; liquidation preference of
$8,457,608 and $8,492,608 in 1997 and 1998
respectively; aggregate redemption amount of
$8,293,968 and $8,328,968 in 1997 and 1998,
respectively......................................... 8,293,968 8,328,968 18,622,220
----------- ----------- ------------
Shareholders' deficit:
Convertible preferred stock, no par value; 2,500,000
shares authorized, issued and outstanding;
liquidation preference of $150,000 in 1997 and
1998 and June 30, 1999............................ 25,824 25,824 25,824
Common stock, no par value; 50,000,000 shares
authorized; 4,336,250 and 4,409,351 shares issued
and outstanding in 1997 and 1998, respectively.... 33,168 41,174 146,878
Cumulative translation adjustment.................... 5,572
Note receivable for common stock..................... (24,000) (24,000) (24,000)
Accumulated deficit.................................. (3,908,644) (8,616,810) (12,122,759)
----------- ----------- ------------
Total shareholders' deficit.................. (3,873,652) (8,573,812) (11,968,485)
----------- ----------- ------------
Total liabilities and shareholders'
deficit.................................... $ 5,289,036 $ 2,464,064 $ 10,269,135
=========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-81
<PAGE> 206
AMPLITUDE SOFTWARE CORPORATION, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
---------------------------- --------------------------
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1997 1998 1998 1999
------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Software.............................. $ 962,162 $ 2,499,388 $ 1,038,715 $ 3,055,086
Support and maintenance............. 86,473 361,090 118,712 364,006
Contract services and other......... 423,458 612,405 288,261 404,662
----------- ----------- ----------- -----------
Total revenue............... 1,472,093 3,472,883 1,445,688 3,823,754
Cost of revenues...................... 478,877 1,425,883 547,196 1,178,895
----------- ----------- ----------- -----------
Gross profit................ 993,216 2,047,000 898,492 2,644,859
----------- ----------- ----------- -----------
Operating expenses:
Research and development............ 1,012,579 1,634,935 657,902 1,134,316
Sales and marketing................. 2,109,189 3,410,031 1,557,214 3,048,488
General and administrative.......... 1,042,082 1,777,484 707,945 1,996,455
----------- ----------- ----------- -----------
4,163,850 6,822,450 2,923,061 6,179,259
----------- ----------- ----------- -----------
Operating loss.............. (3,170,634) (4,775,450) (2,024,569) (3,534,400)
Other income, net..................... 40,770 67,284 58,908 28,451
----------- ----------- ----------- -----------
Net loss.................... $(3,129,864) $(4,708,166) $(1,965,661) $ 3,505,949
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-82
<PAGE> 207
AMPLITUDE SOFTWARE CORPORATION, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK NOTE
SERIES A COMMON STOCK CUMULATIVE RECEIVABLE FOR
--------------------- -------------------- TRANSLATION COMMON ACCUMULATED
SHARES AMOUNT SHARES AMOUNT ADJUSTMENT STOCK DEFICIT
---------- -------- --------- -------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31,
1996........................ 2,500,000 25,824 4,055,000 24,330 (24,000) (778,780)
Exercise of stock options..... -- -- 281,250 8,838 -- --
Net loss...................... -- -- -- -- -- (3,129,864)
--------- ------- --------- -------- ----- ------- -----------
Balances as of December 31,
1997........................ 2,500,000 25,824 4,336,250 33,168 (24,000) (3,908,644)
Exercise of stock options..... -- -- 73,101 8,006 -- --
Net loss...................... -- -- -- -- -- (4,708,166)
--------- ------- --------- -------- ----- ------- -----------
Balances as of December 31,
1998........................ 2,500,000 $25,824 4,409,351 $ 41,174 (24,000) (8,616,810)
Currency translation
adjustment.................. -- -- -- -- 5,572 -- --
Exercise of stock options..... -- -- 393,043 105,704 -- -- --
Net Loss...................... -- -- -- -- -- -- (3,505,949)
--------- ------- --------- -------- ----- ------- -----------
Balances as of June 30,
1999........................ 2,500,000 $25,824 4,802,394 $146,878 5,572 (24,000) (12,122,759)
========= ======= ========= ======== ===== ======= ===========
<CAPTION>
TOTAL
SHAREHOLDERS'
DEFICIT
-------------
<S> <C>
Balances as of December 31,
1996........................ (752,626)
Exercise of stock options..... 8,838
Net loss...................... (3,129,864)
-----------
Balances as of December 31,
1997........................ (3,873,652)
Exercise of stock options..... 8,006
Net loss...................... (4,708,166)
-----------
Balances as of December 31,
1998........................ (8,573,812)
Currency translation
adjustment.................. 5,572
Exercise of stock options..... 105,704
Net Loss...................... (3,505,949)
-----------
Balances as of June 30,
1999........................ (11,968,485)
===========
</TABLE>
See accompanying notes to financial statements.
F-83
<PAGE> 208
AMPLITUDE SOFTWARE CORPORATION, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
--------------------------- -------------------------
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
CURRENCY TRANSLATION GAIN 1997 1998 1998 1999
------------------------- ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(3,129,864) (4,708,166) (1,965,661) (3,505,949)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization....... 88,811 204,617 75,202 193,719
Currency translation gain........... 5,606
Changes in operating assets and liabilities:
Accounts receivable......................... (550,613) (477,564) (114,049) (2,117,086)
Prepaid expenses and other current assets... (27,325) (7,767) (9,151) (104,470)
Accounts payable............................ 140,773 192,962 (12,958) 40,864
Accrued and other current liabilities....... 108,302 517,512 65,728 628,603
Deferred revenue............................ 64,847 476,729 780,308 288,267
----------- ---------- ---------- ----------
Net cash used in operating
activities........................ (3,305,069) (3,801,677) (1,180,581) (4,570,446)
----------- ---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment......... (409,689) (547,637) (199,934) (750,098)
Other assets................................ (13,427) (11,545) (2,586) (30,113)
----------- ---------- ---------- ----------
Net cash used in investing
activities........................ (423,116) (559,182) (202,520) (780,211)
----------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from debt borrowings............... 338,680 652,985 4,040 --
Repayment of debt borrowings................ (50,516)
Proceeds from issuance of common stock...... 8,838 8,006 105,704
Net proceeds from issuance of convertible
preferred stock.......................... 5,813,973 -- --
Net proceeds from issuance of redeemable
preferred stock.......................... -- 35,000 10,293,251
----------- ---------- ---------- ----------
Net cash provided by financing
activities........................ 6,161,491 695,991 4,040 10,348,439
----------- ---------- ---------- ----------
Net (decrease) increase in cash and cash
equivalents................................. 2,433,306 (3,664,868) (1,379,061) 4,997,782
Cash and cash equivalents, beginning of
period...................................... 1,815,685 4,248,991 4,248,991 584,123
----------- ---------- ---------- ----------
Cash and cash equivalents, end of period...... $ 4,248,991 584,123 2,869,930 5,581,905
=========== ========== ========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the period for income
taxes.................................... $ 2,056 2,600 2,177 2,901
=========== ========== ========== ==========
Cash paid during the period for interest.... $ 7,215 40,161 17,707 52,628
=========== ========== ========== ==========
Noncash investing activities:
Acquisition of Clear Blue Network Systems,
Inc. for $150,000 and 300,000 shares of
Series B Preferred Stock................. $ 150,000 -- -- --
=========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-84
<PAGE> 209
AMPLITUDE SOFTWARE CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) The Company
Amplitude Software Corporation, Inc. (the Company) was incorporated in
California in May 1996 to develop web-based application software that is
designed to enhance organizational efficiency.
(b) Interim financial information (Unaudited)
The interim financial statements as of June 30, 1998, and for the six 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 statement 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 six months ended
June 30, 1998 and 1999. The financial date and other information disclosed in
these notes to financial statements related to these periods are unaudited. The
results of the six months expected for the year ending December 31, 1999.
(c) Financial Instruments and Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist primarily of cash equivalents and
short-term investments, which mainly include U.S. Treasury Bills and deposits
with a U.S. commercial bank. At December 31, 1998 and 1997, the fair values of
these instruments approximated their financial statement carrying amount.
The Company markets its software products directly to end users, and
generally does not require collateral. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for doubtful accounts
when it is considered prudent to do so.
During 1998, 17% of its revenue were derived from a single customer.
(d) Cash Equivalents
The Company considers all highly liquid instruments with maturity dates of
90 days or less to be cash equivalents. Cash equivalents as of December 31, 1998
consisted primarily of money market funds.
(e) Revenue Recognition
Revenues for software licenses for which collection of the resulting
receivable is deemed probable are recognized upon delivery of the product
provided there is persuasive evidence of an arrangement the fee is fixed and
determinable and the agreement does not require significant customization of the
software. Revenues for contract services are recognized on a
percentage-of-completion basis. Revenues from software maintenance are
recognized ratably over the maintenance term.
In October 1997, the Accounting Standards Executive Committee (AcSec) of
the American Institute of Certified Public Accountants issued Statement of
Position (SOP) 97-2, Software Revenue Recognition. The Company adopted SOP 97-2
for software transactions entered into beginning January 1, 1998. SOP 97-2
generally requires revenue earned on software arrangements involving multiple
elements (i.e., software products, upgrades/enhancements, postcontract customer
support, etc.) to be allocated to each element based on relative fair values of
the elements and revenue of each element to be recognized individually using the
most appropriate method. Adoption of SOP 97-2 did not have a material impact on
the Company's results of operations.
F-85
<PAGE> 210
AMPLITUDE SOFTWARE CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
In December 1998, AcSEC issued SOP 98-9, Software Revenue Recognition, with
Respect to Certain Arrangements, which requires recognition of revenue using the
"residual method" in a multiple element arrangement when fair value does not
exist for one or more of the delivered elements in the arrangement. Under the
"residual method," the total fair value of the undelivered elements is deferred
and subsequently recognized in accordance with SOP 97-2. The Company does not
expect a material change to its accounting for revenues as a result of the
provisions of SOP 98-9.
(f) Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to five years. Leasehold
improvements are amortized over the lesser of the related lease term or the life
of the improvement.
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of carrying values or fair values, less costs of disposal.
(g) Other Assets
Other assets are comprised primarily of deposits and organizational costs.
Organizational costs are stated at cost less accumulated amortization.
Amortization is calculated under the straight-line method over the estimated
useful life of five years.
(h) Income Taxes
The Company accounts for income taxes using an asset and liability
approach, under which tax assets and liabilities are determined based on
differences between financial reporting amounts and the tax bases of assets and
liabilities, and are measured applying enacted statutory tax rates applicable to
periods in which such assets and liabilities are expected to be realized.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
(i) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(j) Stock Option Plans
The Company uses the intrinsic value method to account for its employee
stock-based compensation plans.
(k) Development Costs
Development costs associated with new products and enhancements to existing
software products are expensed as incurred until technological feasibility is
established upon completion of a working model. To
F-86
<PAGE> 211
AMPLITUDE SOFTWARE CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
date, the Company's software development has been completed concurrent with the
establishment of technological feasibility, and, accordingly, no amounts have
been capitalized.
(l) Advertising Costs
Advertising costs are expensed as incurred and are included in sales and
marketing expense. The Company had advertising expense of approximately $15,144
and $0 for the years ended December 31, 1998 and 1997, respectively.
(m) Comprehensive Income
On January 1, 1998, the Company adopted the provisions of the SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards of
comprehensive income (loss) and its components in a full set of financial
statements. The Company's comprehensive loss consists of net loss. SFAS No. 130
requires only additional disclosures in the financial statements; it does not
affect the Company's financial position or results of operations.
(n) Segment Information
On January 1, 1998, the Company adopted the provisions of SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. SFAS No.
131 establishes annual and interim reporting standards for operating segments of
a company. SFAS No. 131 requires disclosures of selected segment-related
financial information and descriptive information about products, major
customers and geographic areas. The Company has one operating segment because it
is not organized by multiple segments for purposes of making operating decisions
or assessing performance. The chief operating decision maker is the Chief
Executive Officer (CEO). The CEO evaluates performance, makes operating
decisions and allocates resources based on financial data consistent with the
presentation in the accompanying financial statements. All of the Company's
revenues have been earned from customers in the United States and all of the
Company's long-lived assets are located in the United States.
(o) Recently Issued Accounting Pronouncements
In March 1998, the AcSec issued Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. SOP 98-1 requires that certain costs related to the development or purchase
of internal-use software be capitalized and amortized over the estimated useful
life of the software. SOP 98-1 is effective for financial statements issued for
fiscal years beginning after December 15, 1998. The Company does not expect the
adoption of SOP 98-1 will have a material impact on its results of operations.
In April, 1998, the AcSec issued SOP 98-5, Reporting on the Cost of
Start-Up Activities. SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Initial application of SOP 98-5
should be reported as the cumulative effect of a change in accounting principle.
SOP 98-5 is effective for financial statements issued for fiscal years beginning
after December 15, 1998. Upon the adoption of SOP 98-5, the Company will record
a $15,611 charge to the statement of operations for the unamortized balance of
the capitalized organization costs as of December 31, 1998.
In June, 1998, the FASB issued SFAS No. 133, Accounting for Derivative and
Hedging Activities. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments (including derivative instruments embedded in other
contracts) and for hedging activities. SFAS No. 133, as amended by SFAS No. 137,
is effective for all fiscal quarters of fiscal years beginning after June 15,
2000. To date, the Company has not entered into any derivative financial
instruments or hedging activities.
F-87
<PAGE> 212
AMPLITUDE SOFTWARE CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(2) PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1998 and 1997, consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Computer equipment.......................................... $ 598,905 $ 295,232
Software.................................................... 170,743 22,469
Furniture and fixtures...................................... 244,426 148,736
Leasehold improvements...................................... 41,196 41,196
---------- ---------
1,055,270 507,633
Less accumulated depreciation and amortization.............. (310,922) (112,939)
---------- ---------
$ 744,348 $ 394,694
========== =========
</TABLE>
(3) SHAREHOLDERS' EQUITY
(a) Common Stock
In 1996 the Company issued 4,000,000 shares of common stock to the founders
for $24,000 for which the founders signed full recourse promissory notes for the
full value of the shares. The notes are payable on May 15, 2000. The shares are
subject to a four-year vesting period under which 25% of the shares vested
immediately and an additional 1/48 of the shares vest each month thereafter. The
Company's right to repurchase unvested shares is exercisable only within 90 days
following termination of the founders employment. As of December 31, 1998 and
1997, 416,667 and 1,416,667 shares, respectively, are subject to repurchase by
the Company at the original issue price of the shares.
(b) Convertible Preferred Stock
The Company has authorized 14,550,722 shares of preferred stock and has
designated 2,500,000, 5,327,693, 1,573,029 and 5,150,000 shares as Series A, B,
B-1 and C convertible preferred stock, respectively, of which 2,500,000,
5,327,693, 1,573,029 and 5,056,108 shares, respectively, were issued and
outstanding as of December 31, 1998.
The rights, preferences, privileges, and restrictions of the preferred
stock are as follows:
- The Series A convertible preferred stock is not redeemable. The Series B,
B-1 and C redeemable convertible preferred stock may be redeemed in three
equal annual installments at any time after the fifth anniversary of the
original issue date by any holder, at a price equal to the original
issuance price, subject to certain adjustments for antidilution.
- The holders of the preferred stock are entitled to receive noncumulative
annual dividends of the greater of $0.0048, $0.045, $0.059 and $0.0855
per share per annum for Series A, B, B-1 and C, respectively, or the
dividend amount granted to common stock shareholders, when and if
declared by the Company's Board of Directors, subject to certain
adjustments for antidilution. Dividends are paid in preference and
priority to any payments of dividends to common stock shareholders.
- The liquidation preference for the Series A, B, B-1 and C preferred stock
is $0.06, $0.50, $0.6519 and $0.95 per share, respectively, plus all
declared and unpaid dividends, subject to certain adjustments for
antidilution. If the assets are insufficient to make payment in full to
all preferred stock shareholders, assets will be distributed ratably
among the preferred stock shareholders in proportion to the full amounts
to which they would otherwise be respectively entitled.
F-88
<PAGE> 213
AMPLITUDE SOFTWARE CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
- Each share of preferred stock is convertible into common stock at the
option of the holder, at any time, on a one-for-one basis, subject to
certain adjustments for antidilution. Each share of preferred stock will
automatically convert into one share of common stock, subject to certain
adjustments for antidilution, upon the earlier of (1) the vote of the
majority of the preferred stock shareholders; or (2) the closing of an
underwritten public offering with a per share price in excess of $5.00,
subject to certain adjustments for antidilution, and with gross proceeds
in excess of $10,000,000.
- The holders of preferred stock have voting rights on an "as if converted"
basis.
Redeemable convertible preferred stock activity for the two years ended
December 31, 1998 is presented below:
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK
------------------------------------------------------------------------
SERIES B SERIES B-1 SERIES C
---------------------- ---------------------- ---------------------- TOTAL TOTAL
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31,
1996....................... 5,027,693 $2,479,995 -- $ -- -- $ -- 5,027,693 $2,479,995
Issuance of Series B
redeemable preferred stock... 300,000 20,005 -- -- -- -- 300,000 20,005
Issuance of Series B-1
redeemable preferred
stock...................... -- -- 1,573,029 1,025,666 -- -- 1,573,029 1,025,666
Issuance of Series C
redeemable preferred
stock...................... -- -- -- -- 5,019,266 4,768,302 5,019,266 4,768,302
--------- ---------- --------- ---------- --------- ---------- ---------- ----------
Balances as of December 31,
1997....................... 5,327,693 2,500,000 1,573,029 1,025,666 5,019,266 4,768,302 11,919,988 8,293,968
Issuance of Series C
redeemable preferred
stock...................... -- -- -- -- 36,842 35,000 36,842 35,000
--------- ---------- --------- ---------- --------- ---------- ---------- ----------
Balances as of December 31,
1998....................... 5,327,693 $2,500,000 1,573,029 $1,025,666 5,056,108 $4,803,302 11,956,830 $8,328,968
========= ========== ========= ========== ========= ========== ========== ==========
</TABLE>
(c) Stock Option Plan
The Company has reserved 3,500,000 shares of common stock under its 1996
stock option plan (the Plan), which provides for the granting of stock options
and stock purchase rights to employees, directors, or consultants. Under the
Plan, the exercise price is not less than 100% and 85% of the fair market value
(as determined by the Board of Directors) for incentive stock options and
nonstatutory stock options, respectively.
All options have a term of no greater than 10 years from the date of grant.
Under the Plan, options shall vest over no longer than 5 years. Generally,
initial option grants vest 25% at the end of the first year and at a rate of
1/48 per month thereafter. Subsequent option grants generally vest at a rate of
1/48 per month. The Plan also provides for early exercise of options prior to
the full vesting of the option. Any unvested shares purchased are subject to
repurchase rights by the Company upon occurrence of certain events or
conditions, such as employment termination, at the original purchase price.
F-89
<PAGE> 214
AMPLITUDE SOFTWARE CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Stock option activity for the two years ended December 31, 1998 is
presented below:
<TABLE>
<CAPTION>
WEIGHTED-
SHARES AVAILABLE OUTSTANDING AVERAGE
FOR GRANT OPTIONS EXERCISE PRICE
---------------- ----------- --------------
<S> <C> <C> <C>
Balances as of December 31, 1996.................... 2,062,000 1,395,000 $0.040
Options granted..................................... (1,380,000) 1,380,000 0.064
Options exercised................................. -- (281,250) 0.031
Options canceled.................................. 553,750 (553,750) 0.046
---------- ----------
Balances as of December 31, 1997.................... 1,235,750 1,940,000 0.057
Options granted................................... (1,319,670) 1,319,670 0.316
Options exercised................................. -- (73,101) 0.110
Options canceled.................................. 517,099 (517,099) 0.087
---------- ----------
Balances as of December 31, 1998.................... 433,179 2,669,470 $0.179
========== ========== ======
Options exercisable at end of year.................. 1998 745,878 $0.095
========== ======
1997 236,041 $0.037
========== ======
Weighted-average fair value of options granted
during the year................................... 1998 $ 0.070
1997 0.012
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER REMAINING NUMBER
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE VESTED
--------------- ----------- ---------------- -------
<S> <C> <C> <C>
$0.006............................................... 130,000 7.56 105,625
0.050............................................... 686,000 8.05 369,414
0.070............................................... 562,500 8.78 168,995
0.100............................................... 681,500 9.27 32,290
0.250............................................... 126,000 9.55 7,606
0.500............................................... 249,970 9.74 55,698
0.750............................................... 233,500 9.92 6,250
--------- ---- -------
2,669,470 8.89 745,878
========= ==== =======
</TABLE>
The Company applies the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, in accounting for its stock-based compensation
plans. Had compensation cost for the Company's stock-based compensation plan
been determined consistent with the fair value approach set forth in Statement
of Financial Accounting Standards No. 123, the Company's net loss for the years
ended December 31, 1998 and 1997 would have been $11,767 and $6,410 higher,
respectively.
The fair value of options granted during the years ended December 31, 1998
and 1997, is estimated on the date of grant using the minimum value method with
the following weighted-average assumptions: no dividend yield, risk-free
interest rates of 5.20% and 5.58%, respectively, and an expected life of 5
years.
The Company accrued $43,688 in stock based compensation expense for
services rendered by non-employees during the year ended December 31, 1998.
F-90
<PAGE> 215
AMPLITUDE SOFTWARE CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(d) Employee Benefit Plan
On November 1, 1998, the Company adopted a 401(k) Profit Sharing Plan (the
401(k) Plan) that is intended to qualify under Section 401(k) of the Internal
Revenue Code of 1986, as amended. The 401(k) Plan covers substantially all of
the Company employees. Participants may elect to contribute a percentage of
their compensation to this plan, up to the statutory maximum amount. The Company
may make discretionary contributions to the 401(k) Plan. No discretionary
contributions were made during 1998.
(4) COMMITMENTS
The Company leases its facilities under several noncancelable operating
leases. Future minimum lease payments under the Company's operating leases as of
December 31, 1998, are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1999................................................... $ 520,556
2000................................................... 356,716
2001................................................... 374,262
2002................................................... 157,421
----------
Future minimum lease payments....................... $1,408,955
==========
</TABLE>
Rent expense was $345,260 and $156,721 for the years ended December 31,
1998 and 1997, respectively.
(5) INCOME TAXES
Income tax benefit for the years ended December 31, 1998 and 1997 was $0. A
reconciliation between the expected benefit computed by applying the U.S.
Federal statutory tax rate of 34% to pretax loss and the actual provision for
income taxes is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Expected benefit.......................................... $(1,601,000) $(1,063,000)
Current year operating losses, research and development
credits and temporary differences for which no tax benefit
is recognized............................................. 1,601,000 1,063,000
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
F-91
<PAGE> 216
AMPLITUDE SOFTWARE CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Deferred tax assets:
Intangibles................................................ $ 29,826 30,857
Fixed assets............................................. -- 3,569
Other accruals and reserves.............................. -- 19,522
Net operating loss carryforwards......................... 3,381,721 1,487,076
Tax credit carryforwards................................. 33,295 139,338
----------- ----------
Total gross deferred tax assets.................. 3,444,842 1,680,362
Deferred tax liabilities:
State taxes.............................................. 225,995 83,953
Fixed assets............................................. 5,709 --
Other accruals and reserves.............................. 25,607 --
----------- ----------
Total gross deferred tax liabilities............. 257,311 83,953
----------- ----------
Net deferred tax assets............................... 3,187,531 1,596,409
Less valuation allowance.............................. (3,187,531) (1,596,409)
----------- ----------
Net deferred tax assets after valuation allowance..... $ -- --
=========== ==========
</TABLE>
The net changes in the valuation allowance for the years ended December 31,
1998 and 1997 were increases of $1,591,122 and $1,291,381, respectively.
Management believes sufficient uncertainty exists regarding their ability to
realize the deferred tax assets and, accordingly, a valuation allowance has been
established against the net deferred tax assets.
As of December 31, 1998, the Company had approximately $7,559,000 and
$6,315,000 of net operating loss carryforwards for federal and state income tax
purposes, respectively. In addition, the Company had approximately $355,000 and
$195,000 of research and development tax credit carryforwards for federal and
state income tax purposes, respectively. The federal net operating loss
carryforwards expire between the years 2011 and 2018, and the state net
operating loss carryforwards expire in 2004. The federal research and
development credit carryforwards expire between the years 2011 and 2018, and the
state research and development credit can be carried forward indefinitely. The
difference between the federal and state net operating loss carryforwards is due
primarily to a state apportionment factor with less than 100%.
Federal and California tax laws impose substantial restrictions on the
utilization of net operating loss carryforwards in the event of an "ownership
change" for tax purposes, as defined in Section 382 of the Internal Revenue
Code. The Company has not yet determined if an ownership change has occurred. If
such an ownership change has occurred, utilization of the net operating loss
carryforwards will be subject to an annual limitation in future years.
(6) CLEAR BLUE MERGER
In January 1997, the Company agreed to merge with Clear-Blue Network
Systems, Inc. (Clear Blue). Clear Blue developed and licensed application
software for the calendaring and scheduling markets. The total purchase price
was $150,000, consisting of 300,000 shares of Series B preferred stock, in
exchange for all of the outstanding shares of Clear Blue. The transaction has
been accounted for using the purchase method of accounting and, accordingly, the
net assets and results of operations of Clear Blue have been included in the
Company's financial statements since the acquisition date. The purchase price
F-92
<PAGE> 217
AMPLITUDE SOFTWARE CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
has been allocated to the tangible and intangible assets acquired on the basis
of their respective fair values on the date of acquisition. Of the total
purchase price, approximately $22,000 was allocated to intangible assets. The
intangible asset is being amortized over its estimated useful life of five
years. The results of operations of Clear Blue for the year ended December 31,
1997 are included in the results of operations of the Company.
(7) INDEBTEDNESS
On June 1, 1998, the Company obtained a $385,464 revolving facility and a
$750,000 equipment facility, both collateralized by all of the Company's assets.
The equipment facility bears interest at the bank's prime rate plus .25%. The
interest rate as of December 31, 1998 was 8%. The unpaid balance of this
equipment facility is to be paid in 36 equal monthly installments commencing in
January 1, 1999.
Under the terms of the revolving facility, the bank will make advances to
the Company in an aggregate amount not to exceed 75% of eligible trade accounts
receivable. The revolving facility bears interest at the bank's prime rate plus
.25% and is payable on a monthly basis. The interest rate as of December 31,
1998 was 8%.
As of December 31, 1998, the Company's remaining liability associated with
the facilities was $991,665. The Company is not in compliance with certain
financial covenants at December 31, 1998, however, the Company has obtained a
waiver from the bank for such compliance defaults as of December 31, 1998. The
waiver covered the noncompliance for the periods ending November 30, 1998,
December 31, 1998 and January 31, 1999. It cannot be ascertained that the
Company will be in compliance with its financial covenants for a period of 12
months subsequent to December 31, 1998, thus the debt is classified as current
as of December 31, 1998.
Future minimum payments under the revolving and equipment facility as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
-------------------------
<S> <C>
1999...................................................... $604,370
2000...................................................... 202,067
2001...................................................... 185,228
--------
$991,665
========
</TABLE>
(8) ACCRUED LIABILITIES
Accrued liability categories representing amounts greater than five percent
of total current liabilities as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Compensation and related costs................. $407,075 $ 65,093
Recruiting..................................... 78,000 --
Consulting..................................... 58,688 --
Marketing...................................... 55,528 50,000
Other.......................................... 47,934 14,620
-------- --------
$647,225 $129,713
======== ========
</TABLE>
F-93
<PAGE> 218
AMPLITUDE SOFTWARE CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(9) SUBSEQUENT EVENTS
On January 26, 1999, the Company obtained $1,000,000 in exchange for
promissory notes which bear simple interest at 7.75% per annum. The notes, and
interest accrued thereon, shall be automatically converted to convertible
preferred stock upon the Company's next preferred stock equity financing. The
notes may be prepaid at any time, and mature June 20, 1999.
On February 22, 1999, the Company designated 7,000,000 shares of Series D
convertible preferred stock, of which 6,535,948 shares were subsequently sold to
investors for $10,000,000 in exchange for cash and the release of the
convertible promissory notes dated January 26, 1999. In connection with the
transaction, the redemption dates of the Series B, B-1 and C redeemable
convertible preferred stock was changed to 2004. As a result of the transaction,
the Company's authorized capital stock will consist of 43,000,000 shares of
common stock and 21,550,772 shares of preferred stock. In conjunction with the
transaction, the Company increased its reserve for stock options to 4,500,000
under its 1996 stock option plan.
On August 31, 1999, Critical Path, Inc. acquired all outstanding preferred
and common shares of the Company in exchange for $45,000,000 in cash and common
stock valued at $141,300,000.
F-94
<PAGE> 219
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of FaxNet Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in redeemable preferred stock
and stockholders' deficit and of cash flows present fairly, in all material
respects, the financial position of FaxNet Corporation and its subsidiary at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for the years then ended 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
Boston, Massachusetts
March 24, 1999, except for Note 13,
which is as of November 19, 1999
F-95
<PAGE> 220
FAXNET CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 5,181,796 $ 11,012,998 $ 1,019,822
Accounts receivable, net of allowance for doubtful
accounts of $239,000, $410,000 and $262,000 at December
31, 1997 and 1998 and September 30, 1999,
respectively........................................... 725,742 1,550,077 2,110,686
Prepaid expenses and other current assets................ 222,300 324,634 592,864
------------ ------------ ------------
Total current assets.............................. 6,129,838 12,887,709 3,723,372
Fixed assets, net.......................................... 2,191,725 4,391,136 6,107,607
Goodwill................................................... -- 1,491,399 1,378,602
Other assets............................................... 208,743 1,617,904 1,562,131
------------ ------------ ------------
$ 8,530,306 $ 20,388,148 $ 12,771,712
============ ============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt and capital lease
obligations............................................ $ 641,737 $ 2,145,418 $ 2,553,749
Accounts payable......................................... 678,075 1,366,618 1,422,705
Accrued expenses......................................... 1,052,236 2,709,569 3,712,180
------------ ------------ ------------
Total current liabilities......................... 2,372,048 6,221,605 7,688,634
Long-term debt and capital lease obligations............... 3,012,158 4,550,706 5,074,226
Put warrants............................................... 106,797 120,393 130,590
------------ ------------ ------------
Total liabilities................................. 5,491,003 10,892,704 12,893,450
------------ ------------ ------------
Commitments (Note 11) -- -- --
Redeemable preferred stock:
Series E redeemable convertible preferred stock, $.01 par
value; 12,000 shares authorized, issued and outstanding
at December 31, 1998 and September 30, 1999............ -- 12,210,082 12,759,534
Series D redeemable convertible preferred stock, $.01 par
value; 5,250 shares authorized, issued and outstanding
at December 31, 1997 and 1998 and September 30, 1999... 5,435,548 5,761,681 6,020,957
Series C redeemable convertible preferred stock, $.01 par
value; 1,000 shares authorized, issued and outstanding
at December 31, 1997 and 1998 and September 30, 1999... 1,112,100 1,178,826 1,231,873
Series B redeemable convertible preferred stock, $.01 par
value; 3,125 shares authorized, issued and outstanding
at December 31, 1997 and 1998 and September 30, 1999... 3,412,692 3,617,454 3,780,239
Series A redeemable convertible preferred stock, $.01 par
value; 2,500 shares authorized, issued and outstanding
at December 31, 1997 and 1998 and September 30, 1999... 250,000 250,000 250,000
------------ ------------ ------------
Total redeemable preferred stock.................. 10,210,340 23,018,043 24,042,603
Stockholder's deficit:
Common stock, $.01 par value per share; 9,900,000,
13,476,125 and 19,226,125 shares authorized; 2,615,300,
2,671,865 and 2,787,637 shares issued and outstanding
at December 31, 1997 and 1998 and September 30, 1999,
respectively........................................... 26,153 26,719 27,877
Additional paid-in capital............................... 13,580 114,110 155,203
Accumulated deficit...................................... (7,210,770) (13,663,428) (24,347,421)
------------ ------------ ------------
Total stockholders' deficit....................... (7,171,037) (13,522,599) (24,164,341)
------------ ------------ ------------
$ 8,530,306 $ 20,388,148 $ 12,771,712
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-96
<PAGE> 221
FAXNET CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS NINE MONTHS
DECEMBER 31, ENDED ENDED
-------------------------- SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
----------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue.............................. $ 7,247,037 $11,232,613 $ 7,985,136 $ 10,799,864
Cost of revenue...................... 1,718,065 2,857,596 1,944,025 3,739,984
----------- ----------- ----------- ------------
Gross margin............... 5,528,972 8,375,017 6,041,111 7,059,880
----------- ----------- ----------- ------------
Operating expenses:
Operations......................... 2,301,119 3,734,561 2,611,179 3,783,549
Sales and marketing................ 3,158,873 3,459,994 2,352,624 5,871,714
Research and development........... 1,514,368 2,417,447 1,712,193 2,047,455
General and administrative......... 1,935,335 2,209,022 1,641,886 2,521,822
Depreciation and amortization...... 754,124 1,703,405 1,096,070 2,097,950
----------- ----------- ----------- ------------
9,663,819 13,524,429 9,413,952 16,322,490
----------- ----------- ----------- ------------
Loss from operations....... (4,134,847) (5,149,412) (3,372,841) (9,262,610)
Interest income...................... 180,293 287,042 189,247 182,425
Interest expense..................... (315,520) (708,953) (472,953) (579,248)
----------- ----------- ----------- ------------
Net loss................... (4,270,074) (5,571,323) (3,656,547) (9,659,433)
Accretion of redeemable preferred
stock.............................. (441,668) (807,703) (523,215) (1,024,560)
----------- ----------- ----------- ------------
Net loss attributable to common
shareholders....................... $(4,711,742) $(6,379,026) $(4,179,762) $(10,683,993)
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-97
<PAGE> 222
FAXNET CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
SERIES E REDEEMABLE SERIES D REDEEMABLE SERIES C REDEEMABLE
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
----------------------- ---------------------- ----------------------
NUMBER CARRYING NUMBER CARRYING NUMBER CARRYING
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE
--------- ----------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996......... 1,000 $1,049,151
Issuance of Series D redeemable
convertible preferred stock, issuance
costs of $101,337.................... 5,250 $5,250,000
Exercise of common stock options.....
Accretion of Series B, Series C and
Series D redeemable convertible
preferred stock..................... 185,548 62,949
Net loss.............................
------ ----------- ----- ---------- ----- ----------
BALANCE AT DECEMBER 31, 1997......... 5,250 5,435,548 1,000 1,112,100
Issuance of Series E redeemable
convertible preferred stock,
issuance costs of $73,632........... 12,000 $12,000,000
Issuance of warrants to purchase
common stock........................
Exercise of common stock options.....
Accretion of Series B, Series C,
Series D and Series E redeemable
convertible preferred stock......... 210,082 326,133 66,726
Net loss.............................
------ ----------- ----- ---------- ----- ----------
BALANCE AT DECEMBER 31, 1998......... 12,000 12,210,082 5,250 5,761,681 1,000 1,178,826
Unaudited data:
Exercise of common stock options....
Accretion of Series B, Series C,
Series D and Series E redeemable
convertible preferred stock....... 549,452 259,276 53,047
Net loss.............................
------ ----------- ----- ---------- ----- ----------
Balance at September 30, 1999
(unaudited)......................... 12,000 $12,759,534 5,250 $6,020,957 1,000 $1,231,873
====== =========== ===== ========== ===== ==========
<CAPTION>
--------------------
SERIES B REDEEMABLE SERIES A REDEEMABLE
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------- -------------------- ------------------- ADDITIONAL
NUMBER CARRYING NUMBER CARRYING NUMBER PAR PAID-IN
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE CAPITAL
--------- ---------- --------- -------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996......... 3,125 $3,219,521 2,500 $250,000 2,586,300 $25,863 $ 570
Issuance of Series D redeemable
convertible preferred stock, issuance
costs of $101,337....................
Exercise of common stock options..... 29,000 290 13,010
Accretion of Series B, Series C and
Series D redeemable convertible
preferred stock..................... 193,171
Net loss.............................
----- ---------- ----- -------- --------- ------- --------
BALANCE AT DECEMBER 31, 1997......... 3,125 3,412,692 2,500 250,000 2,615,300 26,153 13,580
Issuance of Series E redeemable
convertible preferred stock,
issuance costs of $73,632...........
Issuance of warrants to purchase
common stock........................ 65,000
Exercise of common stock options..... 56,565 566 35,530
Accretion of Series B, Series C,
Series D and Series E redeemable
convertible preferred stock......... 204,762
Net loss.............................
----- ---------- ----- -------- --------- ------- --------
BALANCE AT DECEMBER 31, 1998......... 3,125 3,617,454 2,500 250,000 2,671,865 26,719 114,110
Unaudited data:
Exercise of common stock options.... 115,772 1,158 41,093
Accretion of Series B, Series C,
Series D and Series E redeemable
convertible preferred stock....... 162,785
Net loss.............................
----- ---------- ----- -------- --------- ------- --------
Balance at September 30, 1999
(unaudited)......................... 3,125 $3,780,239 2,500 $250,000 2,787,637 $27,877 $155,203
===== ========== ===== ======== ========= ======= ========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------ ------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1996......... $ (2,397,691) $ (2,371,828)
Issuance of Series D redeemable
convertible preferred stock, issuance
costs of $101,337.................... (101,337) (101,337)
Exercise of common stock options..... 13,300
Accretion of Series B, Series C and
Series D redeemable convertible
preferred stock..................... (441,668) (441,668)
Net loss............................. (4,270,074) (4,270,074)
------------ ------------
BALANCE AT DECEMBER 31, 1997......... (7,210,770) (7,171,037)
Issuance of Series E redeemable
convertible preferred stock,
issuance costs of $73,632........... (73,632) (73,632)
Issuance of warrants to purchase
common stock........................ 65,000
Exercise of common stock options..... 36,096
Accretion of Series B, Series C,
Series D and Series E redeemable
convertible preferred stock......... (807,703) (807,703)
Net loss............................. (5,571,323) (5,571,323)
------------ ------------
BALANCE AT DECEMBER 31, 1998......... (13,663,428) (13,522,599)
Unaudited data:
Exercise of common stock options.... 42,251
Accretion of Series B, Series C,
Series D and Series E redeemable
convertible preferred stock....... (1,024,560) (1,024,560)
Net loss............................. (9,659,433) (9,659,433)
------------ ------------
Balance at September 30, 1999
(unaudited)......................... $(24,347,421) $(24,164,341)
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-98
<PAGE> 223
FAXNET CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS NINE MONTHS
DECEMBER 31, ENDED ENDED
------------------------- SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
----------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(4,270,074) $(5,571,323) $(3,656,547) $(9,659,433)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 760,921 1,737,002 1,117,100 2,184,028
Changes in operating assets and liabilities:
Decrease (increase) decrease in accounts receivable... 38,557 (574,769) (744,545) (560,609)
(Increase) decrease in prepaid expenses and other
current assets..................................... (43,308) 6,834 (58,873) (268,230)
(Increase) decrease in other assets................... (159,110) 63,881 58,509 (58,602)
Increase (decrease) in accounts payable............... 25,005 (221,752) 281,353 56,087
(Decrease) increase in accrued expenses............... (416,989) 1,302,279 702,030 1,002,611
----------- ----------- ----------- -----------
Net cash used in operating activities.............. (4,064,998) (3,257,848) (2,300,973) (7,304,148)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets................................. (401,668) (752,132) (498,576) (780,159)
Cash paid in acquisitions................................. (600,000) (40,000) -- --
Cash received in acquisitions............................. -- 104,590 -- --
Advances to UniComm prior to acquisition.................. -- (750,000) (130,000) --
License of patents........................................ -- (325,000) (325,000) (500,000)
----------- ----------- ----------- -----------
Net cash used in investing activities.............. (1,001,668) (1,762,542) (953,576) (1,280,159)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale-leaseback of fixed assets.............. 355,339 -- -- --
Proceeds from issuance of long-term debt.................. 2,916,989 -- -- --
Payments for debt issuance costs.......................... (62,000) -- -- --
Repayments of long-term debt and capital lease
obligations............................................. (408,874) (1,110,872) (732,635) (1,451,120)
Proceeds from bridge notes................................ 1,008,000 -- -- --
Proceeds from issuance of preferred stock, net............ 4,140,663 11,926,368 6,000,000 --
Proceeds from issuance of common stock.................... 13,300 36,096 35,952 42,251
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities....................................... 7,963,417 10,851,592 5,303,317 (1,408,869)
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........ 2,896,751 5,831,202 2,048,768 (9,993,176)
Cash and cash equivalents at beginning of period............ 2,285,045 5,181,796 5,181,796 11,012,998
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period.................. $ 5,181,796 $11,012,998 $ 7,230,564 $ 1,019,822
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 270,095 $ 629,950 $ 436,243 $ 520,423
=========== =========== =========== ===========
Net assets and liabilities recognized upon acquisitions:
Accounts receivable....................................... $ 754,000 $ 249,000
Other current assets...................................... 58,000 109,000
Fixed assets.............................................. 1,394,000 116,000
Other assets.............................................. 37,000
Accounts payable.......................................... 1,434,000 910,000
Accrued expenses.......................................... 355,000
Long-term debt............................................ 172,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITY:
Capital lease obligations incurred for fixed assets....... $ 940,023 $ 2,933,098 $ 2,195,650 $ 2,882,971
=========== =========== =========== ===========
</TABLE>
In 1997, the Company converted $1,008,000 of bridge notes into 1,008 shares
of Series D redeemable convertible preferred stock.
In 1998, the Company issued a note payable in the amount of $1,200,000 in
conjunction with the licensing of a patent (See Note 2).
The accompanying notes are an integral part of these consolidated financial
statements.
F-99
<PAGE> 224
FAXNET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
FaxNet Corporation (the "Company") was incorporated in Delaware on June 2,
1995. The Company provides enhanced facsimile and long distance
telecommunications services to the telecommunications industry in the U.S.A. and
Latin America.
The accompanying financial statements have been prepared on a basis which
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The Company has incurred recurring
losses since inception and has a significant accumulated deficit. The Company
will require additional financing to continue its planned operations beyond
1999. Management believes the Company has the ability to raise such financing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements reflect the operations of the Company
and its wholly-owned subsidiary, UniComm International ("UniComm"). All
significant intercompany balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
invests its excess cash in money market funds of major financial institutions
that are subject to minimal credit and market risk. At December 31, 1997 and
1998, respectively, the Company has classified its cash equivalent investments,
totaling $4,876,250 and $9,974,823, as available-for-sale. These investments are
stated at cost plus accrued interest, which approximates fair market value.
REVENUE RECOGNITION
Revenue from enhanced facsimile, long distance and other services are
recognized as the services are performed.
CONCENTRATION OF CREDIT RISK
The Company's accounts receivable are generally small balances due from a
large number of customers, and there is no significant concentration of
accounts. Management believes its credit policies are prudent and reflect normal
industry terms and business risk. The Company does not anticipate nonperformance
by the counterparties and, accordingly, does not require collateral. During the
year ended December 31, 1998 and the nine months ended September 30, 1999, one
customer accounted for approximately 17% and 23% of revenue, respectively.
FIXED ASSETS
Fixed assets are recorded at cost and depreciated using the straight-line
method over their estimated useful lives. Repair and maintenance costs are
expensed as incurred.
GOODWILL
Goodwill represents the excess of cost over the fair value of net assets
acquired, and is being amortized on a straight-line basis over the estimated
useful life of 10 years. Accumulated amortization at December 31, 1998 totaled
$12,500.
F-100
<PAGE> 225
FAXNET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER ASSETS
Other assets includes a license agreement in the amount of $1,436,042, net
of accumulated amortization of $88,958. The license agreement is being amortized
on a straight-line basis over the remaining life of the underlying patent.
Amortization expense for the year ended December 31, 1998 amounted to $88,958.
RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company incurs costs to develop computer software to be licensed or
otherwise marketed to customers. Costs incurred in the research and development
of new software products and services and enhancements to existing products and
services, other than certain software development costs that qualify for
capitalization, are expensed as incurred. Software development costs incurred
subsequent to the establishment of technological feasibility, and prior to
general release of the product or service to the public, are capitalized and
amortized to cost of revenues over the estimated useful life of the related
products or services. Software development costs eligible for capitalization
have not been significant to date.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Stock options issued to employees are accounted for in accordance with
Accounting Principles Board Opinion ("APB") No. 25, and related interpretations.
ADVERTISING
Advertising costs are expensed as incurred. There were no material
advertising costs incurred for the years ended December 31, 1997 or 1998.
SEGMENT REPORTING
The Company operates in a single reportable segment: the development,
marketing and provision of enhanced facsimile and long distance services to the
telecommunications industry. The Company's operations consist of engineering,
sales and marketing, administration and support in the United States and Latin
America.
USE OF ESTIMATES
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Components particularly subject to estimation include the allowance for doubtful
accounts.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 133, as amended by SFAS 137, is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000, with
earlier application encouraged. FaxNet does not currently use derivative
instruments.
F-101
<PAGE> 226
FAXNET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial condition of the Company as of September 30, 1999
and the results of operations and of cash flows for the nine months ended
September 30, 1998 and 1999, as presented in the accompanying unaudited
consolidated financial data.
3. ACQUISITIONS
On March 12, 1997, the Company purchased the assets and assumed certain
liabilities of the fax services division of CSC Intelicom for $600,000 in cash.
This transaction has been accounted for under the purchase method and the
results of operations of the acquired business have been included in the
consolidated financial statements since the date of acquisition. The purchase
price was allocated based on estimated fair values at the date of acquisition.
On December 9, 1998, the Company purchased all of the outstanding common
stock of UniComm International Inc., ("UniComm"), a provider of fax services in
the Argentina marketplace. As consideration for the shares of UniComm, the
Company issued warrants to purchase 189,000 shares of common stock of the
Company with an exercise price of $1.00 per share. The warrants are exercisable
upon the achievement of certain future financial targets of the acquiree. This
transaction has been accounted for as a purchase and the results of operations
of the acquired business have been included in the consolidated financial
statements since the date of acquisition. The total purchase price of $105,000,
which consists of $40,000 of transaction expenses and $65,000 ascribed to the
initial value of the warrants, was allocated based on estimated fair values at
the date of acquisition. The Company made $750,000 of advances to UniComm prior
to the acquisition which were assumed at the date of acquisition.
The following unaudited pro forma consolidated information presents the
results of operations of the Company as if the UniComm and CSC Intelicom
acquisitions had taken place at the beginning of 1997.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Revenue..................................................... $ 8,649,851 $12,164,409
Net Loss.................................................... (5,477,129) (7,291,711)
</TABLE>
The unaudited pro forma consolidated results of operations have been
prepared for comparative purposes only. They do not purport to be indicative of
the results of operations that actually would have resulted had the combination
occurred at the beginning of the periods presented; or of future results of
operations of the consolidated entities.
4. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE ------------------------ SEPTEMBER 30, 1999
(YEARS) 1997 1998 (UNAUDITED)
----------- ---------- ---------- ------------------
<S> <C> <C> <C> <C>
Computer software and equipment........... 3 - 5 $ 597,390 $1,137,323 $1,795,885
Telecommunications equipment.............. 3 - 5 2,246,123 5,468,849 8,496,460
Furniture and fixtures.................... 3 - 5 120,364 222,048 276,588
---------- ---------- ----------
2,963,877 6,828,220 10,568,933
Less -- accumulated depreciation and
amortization............................ 772,152 2,437,084 4,461,326
---------- ---------- ----------
$2,191,725 $4,391,136 $6,107,607
========== ========== ==========
</TABLE>
F-102
<PAGE> 227
FAXNET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Equipment held under capital leases totaled $1,247,864 and $4,180,962 at
December 31, 1997 and 1998, respectively. Recorded accumulated amortization
related to equipment held under these leases was $156,670 and $1,227,780 at
December 31, 1997 and 1998, respectively.
In March, 1997 the Company sold certain assets for $355,000. The assets
were leased back from the purchaser over a period of three years. The resulting
lease is being accounted for as a capital lease.
5. LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Note payable, payable in five varying installments of
principal and interest at 8%, through January 2001........ $ -- $1,200,000
Note payable, payable in monthly installments of interest
only at 13%, due June 2002, collateralized by substantially
all assets of the Company, net of unamortized discount of
$68,333..................................................... 1,911,667 1,931,667
Term loan payable, payable in monthly installments of
principal and interest at 17% of $29,344 through June
2000, collateralized by telecommunications equipment...... 801,558 567,678
Obligations under capital leases at rates ranging from 7% to
15%, collateralized by computer and telecommunications
equipment................................................. 940,670 2,996,779
---------- ----------
3,653,895 6,696,124
Less -- current portion..................................... 641,737 2,145,418
---------- ----------
$3,012,158 $4,550,706
========== ==========
</TABLE>
In May 1998, the Company closed on a lease line facilities with a leasing
company. The line allows for a maximum of $1,000,000 of lease financing of which
$268,000 was drawn down by December 31, 1998. The term for each lease under the
agreement is thirty-six months, commencing on the purchase date of the asset and
the lease bears interest at a rate determined at the transaction date.
In January and June 1997, the Company closed on two lease line facilities
with two leasing companies. One line allows for a maximum of $500,000 of lease
financing which was fully drawn down by December 31, 1997. In May 1998, this
line was increased by $2 million, of which $641,000 was drawn down at December
31, 1998. The term for each lease under the agreement is thirty-six months,
commencing on the purchase date of the asset and the lease bears interest at a
rate determined at the transaction date. The second line allows for a maximum of
$3 million of financing, in the form of a three year secured term loan of which
$2,675,000 was drawn down at December 31, 1998. The remaining availability can
be drawn down as equipment leases with three year terms through June 1999. In
connection with the second line, the Company issued a warrant to purchase 22,796
shares of common stock with an exercise price of $3.29 per share to the lessor.
The value ascribed to these warrants was not significant.
In June 1997, the Company completed a debt financing by establishing a
secured financing line of up to $2 million which was fully drawn down by
December 31, 1997. In connection with the financing, the Company issued warrants
to purchase 190,321 shares of common stock with an exercise price of $0.01 per
share. If the Company has not repaid the balance of the loan by June 17, 1999,
warrants to purchase approximately 80,000 of additional shares of common stock
at an exercise price of $0.01 per share will be issued annually for each year
the loan remains unpaid through June 30, 2001. Approximately 80,000 warrants to
purchase common stock at an exercise price of $0.01 per share were issued in
June 1999. These warrants have a put option which allows the holder to sell the
warrants to the Company for cash for a period of ninety days immediately prior
to April 30, 2002, if such warrants have not been exercised prior to such time.
The price to be paid will be determined by multiplying the number of warrants by
the fair market value of the common stock underlying the warrants. The Company
accounts for this put option by
F-103
<PAGE> 228
FAXNET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accreting any adjustments to the redemption value on a prospective basis to the
earliest put date of the warrants. These put warrants, which were valued at
$100,000 at the date of the original transaction, increased to $106,797 and
$120,393 by December 31, 1997 and 1998, respectively, resulting in charges to
interest expense in the amounts of $6,797 and $13,596 for the years ended
December 31, 1997 and 1998, respectively.
Annual principal payments due in each of the next five years on long-term
debt other than capitalized leases are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 776,155
2000........................................................ 791,523
2001........................................................ 200,000
2002........................................................ 2,000,000
----------
Total............................................. $3,767,678
==========
</TABLE>
Future minimum lease payments under capitalized leases are as follows:
<TABLE>
<S> <C>
1999........................................................ $1,606,617
2000........................................................ 1,212,827
2001........................................................ 544,307
2002........................................................ 2,295
----------
Total minimum lease payments................................ 3,366,046
Less amount representing interest........................... 369,267
----------
Present value of minimum lease payments..................... $2,996,779
==========
</TABLE>
Total interest expense on these leases was approximately $82,000 and
$215,000 for the years ended December 31, 1997 and 1998, respectively.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The preferred stock has the following characteristics:
REDEMPTION
The Company is required to redeem the Series A preferred stock at a price
equal to $100 per share, plus any declared but unpaid dividends, in the three
equal annual payments beginning on June 30, 2002. The Company is also required
to redeem the Series B, Series C, Series D and Series E preferred stock at a
price equal to $1,000 per share, plus a rate of return equal to 6% per annum
plus any declared but unpaid dividends, (the "Series B, Series C, Series D and
Series E Redemption Price") in three equal annual payments beginning on June 30,
2002. The difference between the issuance price and the Series B, Series C,
Series D and Series E Redemption Price is being accreted by a charge to
accumulated deficit.
LIQUIDATION PREFERENCE
In the event of any liquidation, sale or merger of the Company, the
stockholders are entitled to receive, to the extent available, certain
liquidation preferences as defined in the certificate of incorporation. The
Series B, Series C, Series D and Series E preferred stockholders are entitled to
receive an amount equal to their original investment plus a specified rate of
return, as defined in the agreements, plus any declared but unpaid dividends in
preference to all other stockholders.
F-104
<PAGE> 229
FAXNET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Series A preferred stockholders are then entitled to an amount equal to
their original investment plus any declared but unpaid dividends after all
preferential payments are made to the Series B, Series C, Series D and Series E
preferred stockholders. The common stockholders are then entitled to receive,
after preferential payments to the preferred stockholders, an amount based on a
formula as defined in the agreement. Any remaining amounts will then be
distributed pro rata among the Series B, Series C, Series D and Series E
preferred stockholders and common stockholders.
DIVIDEND PROVISIONS
The preferred stockholders are entitled to dividends at the same rate as
declared on the common stock based on the number of shares of common stock into
which the preferred stock is convertible on the date the dividend is declared.
VOTING RIGHTS
The preferred stockholders are entitled to one vote for each share of
common stock into which the preferred stock is convertible.
CONVERSION
Each share of Series A, Series B, Series C, Series D and Series E preferred
stock is convertible at any time and at the option of the stockholder into
common stock based on a formula which currently would result in a 300-for-1, a
769.23-for-1, a 663.13-for-1, a 303.95-for-1 and a 217.86-for-1 exchange,
respectively. Each share of preferred stock will be automatically converted into
shares of common stock in the event of an initial public offering in which net
proceeds equal or exceed $10,000,000 and in which the price per share to the
public is at least $10.00.
RIGHT OF FIRST OFFER AND CO-SALE
The Series E has a right of first offer should any of the stockholders
desire to sell their shares. If the Series E preferred stockholder declines to
purchase the shares, the Company may accept this offer from the stockholder
offering the shares. If the Company declines to purchase the shares, the other
preferred stockholders' may accept this offer from the stockholder offering the
shares. Additionally, the preferred stockholders have the right to include a pro
rata portion of their shares in any sale offer to the Company or a third party.
Such rights are subject to certain restrictions as defined in the agreement.
7. COMMON STOCK
In May 1997, the Company authorized an increase in the number of all
classes of stock to 9,911,875 shares, consisting of 9,900,000 shares of common
stock and 11,875 shares of preferred stock.
In July 1998, the Company authorized an increase in the number of all
classes of stock to 13,500,000 shares, consisting of 13,476,125 shares of common
stock and 23,875 shares of preferred stock.
At December 31, 1998, the Company has 10,366,551 shares of its common stock
reserved for issuance upon conversion of the preferred stock and exercise of
authorized options and outstanding warrants.
STOCK RESTRICTIONS
At December 31, 1998, the Company had outstanding 333,300 shares of common
stock which are subject to a stock restriction agreement whereby the Company has
the right to purchase, at the original issue price, the unvested shares of
common stock in the event of termination of employment of the holder. Shares
subject to this agreement vest equally in monthly installments over a four-year
period. At December 31, 1998, the aggregate number of unvested common shares is
84,900.
F-105
<PAGE> 230
FAXNET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLAN
In March 1996, the Board of Directors adopted the 1996 Employee and
Consultant Stock Option Plan (the "Plan") which provides for the grant of
incentive stock options ("ISOs") and non-statutory options. The Board of
Directors determines the term of each option, option price, number of shares for
which each option is granted, whether restrictions will be imposed on the shares
subject to options and the rate at which each option is exercisable. The
exercise price for ISOs may not be less than the fair market value per share of
the underlying common stock on the date granted (110% of fair market value for
ISOs granted to holders of more than 10% of the voting stock of the Company) and
the term of ISOs may not exceed ten years (five years for ISOs granted to
holders of more than 10% of the voting stock of the Company). A maximum of
2,000,000 shares of common stock have been reserved for issuance pursuant to the
Plan.
Activity under the Plan for the years ended December 31, 1997 and 1998 was
as follows:
<TABLE>
<CAPTION>
1997 1998
----------------------- -----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of period..................... 603,500 $0.75 1,385,975 $0.68
Granted................................................ 939,225 0.58 500,125 0.84
Exercised.............................................. (29,000) 0.46 (56,565) 0.64
Canceled............................................... (127,750) 0.40 (510,348) 1.10
---------- ----------
Outstanding at end of period........................... 1,385,975 $0.68 1,319,187 $0.57
========== ==========
Options exercisable at end of period................... 410,388 $0.92 553,569 $0.42
========== ==========
Weighted-average fair value of options granted during
the period........................................... $ 0.15 $ 0.18
========== ==========
Options available for future grant..................... 82,025 592,248
========== ==========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
REMAINING
CONTRACTUAL NUMBER OF
NUMBER OF LIFE OPTIONS
EXERCISE PRICE OPTIONS (YEARS) EXERCISABLE
-------------- --------- ----------- -----------
<S> <C> <C> <C>
$0.10 - 0.30................................................ 368,004 7.5 263,473
$0.50 - 0.75................................................ 790,183 8.7 271,062
$1.00....................................................... 144,000 9.7 10,778
$1.89....................................................... 17,000 7.5 8,256
--------- -------
1,319,187 553,569
========= =======
</TABLE>
No compensation expense was recognized under the Plan for employee option
grants during 1997 and 1998. Had compensation cost been determined based on the
fair value of the options granted to employees at the grant date consistent with
the provisions of SFAS No. 123, the Company's net loss would have increased by
$16,110 to $4,286,184 and $33,315 to $5,604,638 and for 1997 and 1998,
respectively. Since options vest over several years and additional option grants
are expected to be made in future years, the above pro forma results are not
representative of pro forma results for future years.
F-106
<PAGE> 231
FAXNET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions for grants in 1997 and
1998: no dividend yield; risk-free interest rates of 6.0% and 5.0%,
respectively; and expected lives of 5 years.
9. INCOME TAXES
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net operating loss carryforwards........................... $ 2,556,000 $ 5,521,000
Research and development tax credit carryforwards.......... 101,000 255,000
Other...................................................... (7,000) 334,000
----------- -----------
Net deferred tax assets.................................... 2,650,000 6,110,000
Deferred tax asset valuation allowance..................... (2,650,000) (6,110,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The Company has provided a full valuation allowance for the net deferred
tax asset at December 31, 1997 and 1998 since the realization of these future
benefits is not sufficiently assured.
At December 31, 1998, available federal net operating loss carryforwards
and research and development tax credit carryforwards are as follows:
<TABLE>
<CAPTION>
NET RESEARCH AND
OPERATING DEVELOPMENT
YEAR OF LOSS TAX CREDIT
EXPIRATION CARRYFORWARDS CARRYFORWARDS
---------- ------------- -------------
<S> <C> <C>
2010....................................................... $ 45,000 $ 1,000
2011....................................................... 2,178,000 11,000
2012....................................................... 4,170,000 55,000
2018....................................................... 5,145,000 87,000
----------- --------
$11,538,000 $154,000
=========== ========
</TABLE>
At December 31, 1998, the Company had approximately $2,700,000 of foreign
net operating loss carryforwards which expire primarily in 2002 and 2003.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership could result in an annual limitation of the
amount of net operating loss carryforwards and research and development tax
credit carryforwards which can be utilized in future years.
10. RETIREMENT SAVINGS PLAN
The Company provides an employee retirement savings plan under Section
401(k) of the Internal Revenue Code (the "Plan"), which covers substantially all
employees. Under the terms of the Plan, employees may contribute a percentage of
their salary, up to a maximum of 15%, which is then invested in one or more of
several mutual funds selected by the employee. The Company may make
contributions to the Plan at its discretion. There were no contributions for the
year ended December 31, 1997. For the year ended December 31, 1998, contribution
expense amounted to approximately $29,000.
F-107
<PAGE> 232
FAXNET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS
LEASES
The Company leases its office space under noncancelable operating leases,
which expire through August 2002. Total rent expense under the leases was
approximately $265,000 and $433,000 for the years ended December 31, 1997 and
1998, respectively. The future minimum lease commitments under these leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1999........................................................ $ 619,460
2000...................................................... 471,560
2001...................................................... 314,560
2002...................................................... 199,580
----------
$1,605,160
==========
</TABLE>
COMMISSION AGREEMENT
In March 1997, the Company executed a commission agreement with a third
party. Under the agreement, the Company is obligated to pay a commission to the
third party based on a percentage of the services rendered to certain customers.
The commission percentage ranges from 15% in year one to 25% in year three.
Total commission expense recognized by the Company pursuant to this agreement
and included in sales and marketing was approximately $814,000 and $1,303,000
for the years ended December 31, 1997 and 1998, respectively.
12. GEOGRAPHICAL AREA INFORMATION
The Company operates in a single reportable segment; the development,
marketing and support provision of enhanced facsimile and long distance service
to the telecommunication industry. The Company's operations consist of
engineering, sales and marketing, administration and support in both the United
States and Latin America.
Revenues and identifiable assets classified by the major geographical areas
in which the Company operates, are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 31,
--------------------------- -------------
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
United States........................................ $7,247,037 $ 11,163,150 $ 9,793,134
Latin America........................................ -- 69,463 1,006,730
---------- ------------ ------------
$7,247,037 $ 11,232,613 $ 10,799,864
========== ============ ============
IDENTIFIABLE ASSETS:
United States........................................ $8,530,306 $ 19,785,900 $ 12,070,831
Latin America........................................ -- 602,248 700,881
---------- ------------ ------------
Total...................................... $8,530,306 $ 20,388,148 $ 12,771,712
========== ============ ============
</TABLE>
13. SUBSEQUENT EVENTS
DEBT FINANCING
In October 1999, the Company issued 10% subordinated notes and warrants to
purchase 211,250 shares of common stock with an exercise price of $1.00 per
share for proceeds of $4,225,000. The notes mature on the earlier of the third
annual anniversary of the notes or the sale, merger or underwritten public
offering of the Company. The holders of the subordinated notes have the right,
at any time after the first annual anniversary of the notes and prior
F-108
<PAGE> 233
FAXNET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to the maturity date, to convert the full outstanding principal amount of the
notes into shares of common stock of the Company at the rate of one share for
each $1.15 of principal.
ACQUISITIONS
In November 1999, the Company issued 64,850 shares of the Company's common
stock related to the contingent warrants described in Note 3. The value ascribed
to the shares of approximately $800,000 will be recorded as additional purchase
price.
AGREEMENT AND PLAN OF REORGANIZATION
On November 2, 1999, the Company entered into an Agreement and Plan of
Reorganization with Critical Path, whereby Critical Path will issue
consideration of 2,845,282 shares of its common stock and $20,000,000 in cash in
exchange for all of the outstanding capital stock of the Company, including
vested warrants and options to purchase the Company's stock. On November 2,
1999, Critical Path advanced $10 million to the Company in the form of a note
payable. Critical Path delivers advanced email and messaging services to ISPs,
web hosting companies, web portals and corporations, giving them the ability to
provide a feature-rich email and messaging service to their customers and
employees. The merger is expected to be accounted for as a purchase.
F-109
<PAGE> 234
AUDITORS' REPORT
To the Shareholders of
THE DOCSPACE COMPANY INC.:
We have audited the balance sheets of THE DOCSPACE COMPANY INC. (THE
"COMPANY") as at July 31, 1999 and 1998 and the statements of operations and
shareholders' equity (deficit) and cash flows for the year ended July 31, 1999
and the period from incorporation (November 10, 1997) to July 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at July 31, 1999 and 1998 and
the results of its operations and its cash flows for the periods then ended in
accordance with United States generally accepted accounting principles.
August 20, 1999.
Toronto, Canada.
F-110
<PAGE> 235
THE DOCSPACE COMPANY INC.
BALANCE SHEETS
JULY 31, 1999 AND 1998
(IN US$)
ASSETS
<TABLE>
<CAPTION>
1999 1998
---- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 1,485,121 $ 66,140
Accounts receivable....................................... 23,073 37,479
Goods and services tax recoverable........................ 68,236 5,734
Advances to shareholders (Note 6)......................... -- 11,265
Prepaid expenses.......................................... 89,453 1,007
----------- ---------
1,665,883 121,625
PROPERTY AND EQUIPMENT (Note 4)............................. 356,523 23,696
DEPOSITS AND OTHER ASSETS (Note 5).......................... 124,244 765
----------- ---------
$ 2,146,650 $ 146,086
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank indebtedness (Note 3)................................ $ -- $ 61,984
Accounts payable.......................................... 1,150,715 11,063
Accrued liabilities....................................... 395,646 --
Advances from shareholders (Note 6)....................... -- 99,763
Due to affiliated company (Note 6)........................ -- 21,823
Deferred revenue.......................................... 11,726 91,267
----------- ---------
1,558,087 285,900
----------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
Common shares (Note 7), no par value
Unlimited shares authorized, 42 shares outstanding..... 1,274,979 204,707
Deferred compensation..................................... (858,488) (5,453)
Share subscriptions (Note 7).............................. 3,512,124 30,223
Accumulated deficit....................................... (3,340,052) (369,291)
----------- ---------
588,563 (139,814)
----------- ---------
$ 2,146,650 $ 146,086
=========== =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-111
<PAGE> 236
THE DOCSPACE COMPANY INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1999 AND THE PERIOD
FROM INCORPORATION (NOVEMBER 10, 1997) TO JULY 31, 1998
(IN US$)
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
REVENUE..................................................... $ 182,203 $ --
----------- ---------
EXPENSES
General and administration................................ 1,774,888 77,495
Research and development.................................. 437,413 73,670
Marketing and selling..................................... 729,683 22,712
Foreign exchange (gain) loss.............................. 17,938 (4,202)
Share compensation expense (Note 6 and 7)................. 217,237 199,225
----------- ---------
3,177,159 368,900
----------- ---------
LOSS FROM OPERATIONS........................................ (2,994,956) (368,900)
Interest income (expense) and financing charges, net...... 24,195 (391)
----------- ---------
NET LOSS.................................................... $(2,970,761) $(369,291)
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-112
<PAGE> 237
THE DOCSPACE COMPANY INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
JULY 31, 1999 AND 1998
(IN US$)
<TABLE>
<CAPTION>
COMMON SHARES
----------------------------------------------------------------
NUMBER OF DEFERRED ACCUMULATED TOTAL SHAREHOLDERS'
SHARES PAID-IN CAPITAL COMPENSATION SHARE SUBSCRIPTIONS DEFICIT EQUITY (DEFICIT)
--------- --------------- ------------ ------------------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
November 10, 1997........ -- $ -- $ -- $ -- $ -- $ --
Issue of common shares for
cash on incorporation...... 42 29 -- -- -- 29
Share subscriptions........ -- -- -- 30,223 -- 30,223
Deferred compensation...... -- 23,678 (23,678) -- -- --
Compensation expense
related to share
awards................... -- -- 18,225 -- -- 18,225
Other compensation
expense.................. -- 181,000 -- -- -- 181,000
Net loss for the period.... -- -- -- -- (369,291) (369,291)
-- ---------- --------- ---------- ----------- -----------
BALANCE,
July 31, 1998............ 42 204,707 (5,453) 30,223 (369,291) (139,814)
Share subscriptions........ -- -- -- 3,481,901 -- 3,481,901
Deferred compensation...... -- 924,272 (924,272) -- -- --
Compensation expense
related to share
awards................... -- -- 71,237 -- -- 71,237
Other compensation
expense.................. -- 146,000 -- -- -- 146,000
Net loss for the year...... -- -- -- -- (2,970,761) (2,970,761)
-- ---------- --------- ---------- ----------- -----------
BALANCE,
July 31, 1999............ 42 $1,274,979 $(858,488) $3,512,124 $(3,340,052) $ 588,563
== ========== ========= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-113
<PAGE> 238
THE DOCSPACE COMPANY INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JULY 31, 1999 AND FOR THE PERIOD
FROM INCORPORATION (NOVEMBER 10, 1997) TO JULY 31, 1998
(IN US$)
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(2,970,761) $(369,291)
Adjustments to reconcile net loss to net cash used in
operating activities:
Income and expense items not affecting cash
Depreciation........................................... 152,963 3,840
Non-cash compensation (Notes 6, 7 and 8)............... 217,237 199,225
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable....................................... 14,406 (37,479)
GST recoverable........................................... (62,502) (5,734)
Prepaid expenses.......................................... (88,446) (1,007)
Accounts payable.......................................... 1,139,652 11,063
Accrued liabilities....................................... 395,646 --
Deferred revenue.......................................... (79,541) 91,267
----------- ---------
NET CASH USED IN OPERATING ACTIVITIES....................... (1,281,346) (108,116)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................ (487,980) (28,301)
Disposal of property and equipment........................ 2,190 --
Deposits and other assets................................. (123,479) --
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES....................... (609,269) (28,301)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank indebtedness......................................... (61,984) 61,984
Advances from shareholders, net........................... (88,498) 88,498
Due to affiliated company................................. (21,823) 21,823
Share capital issued...................................... -- 29
Share subscriptions....................................... 3,481,901 30,223
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 3,309,596 202,557
----------- ---------
NET INCREASE IN CASH........................................ 1,418,981 66,140
CASH BALANCE, beginning of period........................... 66,140 --
----------- ---------
CASH BALANCE, end of period................................. $ 1,485,121 $ 66,140
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-114
<PAGE> 239
THE DOCSPACE COMPANY INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(IN US$)
1. INCORPORATION AND NATURE OF OPERATIONS
The DOCSPACE Company Inc. (formerly Intrasect Technologies Inc., the
"Company") was incorporated under the laws of Canada on November 10, 1997. On
August 13, 1998, the Company was granted approval to continue under the name
"The DOCSPACE Company Inc."
The Company is a developer of a Web-based document bank with file services
that securely deliver, store and manage files using only a Web browser. Since
its inception, the Company has incurred cumulative losses of $3,340,052. To meet
its obligations as they come due and realize the carrying value of its assets,
the Company must obtain additional financing through the issue of additional
share capital. Subsequent to year end, the Company raised $5 million through the
issue of a convertible debenture note (See Note 13 Subsequent Events).
Management is of the opinion that the proceeds of this financing along with
funds from operations will allow the Company to meet its cash flow needs for the
coming year. Such cash flow needs relate primarily to continuous development and
marketing of its webtop file services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NON MONETARY TRANSACTIONS
The statement of operations includes charges for the fair value of non-cash
compensation for employee wages and professional services which were rendered to
the Company without charge during the year.
REVENUE RECOGNITION AND DEFERRED REVENUE
The Company generates revenue from licensing the rights to use its software
to corporations. The Company also generates consulting, subscription, and
maintenance revenues from integrating its software with its customers operating
environments, the sale of maintenance services and the sale of certain other
consulting and development services.
The Company has recognized revenue in accordance with the provisions of
Statement of Position ("SOP") No. 97-2, Software Revenue Recognition. Under SOP
97-2, software license revenues are recognized upon execution of a contract and
delivery of software, provided that the license fee is fixed and determinable,
no significant production, modification or customization of the software is
required and collection is considered probable by management.
Revenues from services such as consulting and training are recognized as
the services are performed. Revenues from maintenance agreements are recognized
on a straight-line basis over the term of the agreement, including amounts
allocated to maintenance periods included with software license agreements.
Software license revenues under arrangements which include significant
production, modification or customization of software are recognized under the
percentage of completion method of accounting. There were no contracts being
accounted for under the percentage of completion method as at July 31, 1999.
Subscription services revenues are recognized over the period that services
are provided.
Deferred revenue represents the license fees, consulting, subscription and
maintenance services prepayments which have been deferred in accordance with the
Company's revenue recognition criteria.
CASH AND CASH EQUIVALENTS
The Company considers all short-term deposits with original maturities of
90 days or less to be cash equivalents.
F-115
<PAGE> 240
THE DOCSPACE COMPANY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999 AND 1998
(IN US$)
GOODS AND SERVICES TAX RECOVERABLE
Goods and services tax is a federal value added tax. GST recoverable
represents input tax credits received by the Company on GST paid or payable for
certain goods and services purchased during the period.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
is computed by the declining balance method over the estimated useful lives as
set out in the following table. Depreciation recorded during the fiscal year of
incorporation reflects a pro-ration of a short year. Depreciation recorded in
the first year of the assets acquisition reflects the half year rule.
<TABLE>
<S> <C>
Computer equipment.......................................... 30% declining balance
Licenses.................................................... 100% declining balance
Application software........................................ 100% declining balance
Furniture and fixtures...................................... 20% declining balance
Leasehold improvements...................................... 20% declining balance
</TABLE>
FOREIGN CURRENCY TRANSLATION
The Company prepares its statements in US dollars since its functional
currency is the US dollar. As a result, the Company translates foreign
currencies into US dollars using the temporal method. Under this method,
monetary items are translated at the rate of exchange in effect at the balance
sheet date, non-monetary items are translated at the historical exchange rates
and revenue and expenses are translated at the average exchange rate for the
periods. Depreciation and amortization of assets are translated at the same
exchange rate as the assets to which they relate.
Exchange gains and losses on day-to-day business transactions and
unrealized exchange gains and losses on transactions of non-US dollar
denominated balances are charged to income in the period.
INCOME TAXES
As a Canadian-controlled private corporation, the Company is eligible for
reduced rates of taxation annually on the first CDN $200,000 of taxable active
business income. Tax losses, which can be carried forward for a maximum of 7
years, are recorded as assets only if it is "more likely than not" that they
will be realized.
The Company recognizes a current tax liability or asset for current taxes
payable or refundable and a deferred tax liability or asset for the estimated
future tax effects of temporary differences between the carrying value of assets
and liabilities for financial reporting and their tax basis and loss carry
forwards to the extent they are realizable. A deferred tax valuation allowance
is required if it is "more likely than not" that all or a portion of recorded
future tax assets will not be realized.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123 Accounting for Stock-Based
Compensation Arrangement. As permitted by SFAS No. 123, the Company has
continued to account for employee stock options under Accounting Principles
Board Opinion No. 25 and elected the disclosure-only alternative under the SFAS
Statement No. 123.
F-116
<PAGE> 241
THE DOCSPACE COMPANY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999 AND 1998
(IN US$)
NEW ACCOUNTING STANDARDS
The Company adopted SFAS No. 130, Reporting Comprehensive Income, effective
November 10, 1997. For the period ending July 31, 1998 and the year ended July
31, 1999, there were no material differences between the net loss reported
during the fiscal periods and the comprehensive loss for such periods.
RESEARCH AND DEVELOPMENT EXPENSES
Due to continuing technological changes and changing customer needs, the
Company has concluded that it cannot determine technological feasibility of its
various products until the development phase of the project is nearly complete.
The time period during which costs could be capitalized from the point of
reaching technological feasibility until the time of general product release is
very short and, consequently, the amounts that could be capitalized are not
material to the Company's financial position or results of operations.
Therefore, the Company charges all research and development expenses to
operations in the period incurred.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingencies at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
3. BANK INDEBTEDNESS
The Company has a line of credit for $83,000 (CDN $125,000) which bears
interest at the bank's prime lending rate and is secured by a general security
agreement. As at July 31, 1999, the Company had unutilized lines of credit of
approximately $83,000 (CDN $125,000). Furthermore, the Company has a letter of
guarantee outstanding in favour of one of its suppliers for $50,000 (CDN
$75,000).
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1999
----------------------------------
ACCUMULATED
DEPRECIATION
AND NET BOOK
COST AMORTIZATION VALUE
-------- ------------ --------
<S> <C> <C> <C>
Computer equipment.......................................... $199,965 $ 35,693 $164,272
Application software........................................ 28,879 15,807 13,072
Licenses.................................................... 199,446 99,722 99,724
Furniture and fixtures...................................... 45,794 4,660 41,134
Leasehold improvements...................................... 42,579 4,258 38,321
-------- -------- --------
$516,663 $160,140 $356,523
======== ======== ========
</TABLE>
F-117
<PAGE> 242
THE DOCSPACE COMPANY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999 AND 1998
(IN US$)
<TABLE>
<CAPTION>
1998
---------------------------------
ACCUMULATED
DEPRECIATION
AND NET BOOK
COST AMORTIZATION VALUE
------- ------------ --------
<S> <C> <C> <C>
Computer equipment.......................................... $23,996 $2,545 $21,451
Application software........................................ 2,736 967 1,769
Furniture and fixtures...................................... 512 36 476
------- ------ -------
$27,244 $3,548 $23,696
======= ====== =======
</TABLE>
5. DEPOSITS AND OTHER ASSETS
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
-------- ------------ --------
<S> <C> <C> <C>
Prepaid royalties........................................... $ 72,951 $ -- $ 72,951
Prepaid deposits............................................ 51,293 -- 51,293
-------- ------- --------
$124,244 $ -- $124,244
======== ======= ========
</TABLE>
Refundable royalties represent advance payments made by the Company on
royalty fees which are payable on certain software sales and service revenue of
the Company incorporating third party licensed software. The prepaid royalties
balance is drawn down as related sales and service revenue are earned. The
future recoverability of this balance is subject to the Company achieving
certain revenue targets.
Prepaid deposits relate to deposits paid for certain hardware leases that
will be refunded at the end of the lease term (June 2001).
6. RELATED PARTY TRANSACTIONS
During fiscal 1998, the Company acquired source code and product rights to
certain software from an unrelated party in consideration of the forgiveness of
amounts owed by the vendor to A-Live Holdings Inc. and one of its shareholders.
A-Live Holdings Inc. is a shareholder of the Company.
As well, during fiscal 1999 and 1998, certain shareholders of the Company
rendered services for non-cash consideration amounting to $146,000 and $181,000,
respectively. These amounts have been included in share compensation expense in
the statements of operations.
Balances due to and from shareholders were non-interest bearing with no
fixed repayment terms. All balances were repaid during the fiscal year 1999.
7. COMMON SHARES AND SHARE SUBSCRIPTIONS
The Company has an employee stock plan pursuant to which equity commitments
have been provided to various Canadian employees in consideration for services.
All 42 issued and outstanding common shares are held by the founding
shareholders as trustees of an employee trust for the benefit of themselves as
founders and employees who have been granted a beneficial interest in common
share equity of the Company. Forty-two shares of the Company were consistently
issued and outstanding and held by the employee trust throughout the year.
Pursuant to share subscription agreements between the Company and various
non-employee investors and pursuant to various consulting agreements, the
Company also has outstanding commitments to issue additional common shares
representing approximately 33% in aggregate on a fully diluted basis. Pursuant
to the subscription agreements, the Company has received permanent investments
totalling $3,512,124 (1998 -- $30,223) to date on
F-118
<PAGE> 243
THE DOCSPACE COMPANY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999 AND 1998
(IN US$)
account of subscription proceeds. As of the end of the fiscal year, the Board
had not yet issued shares pursuant to the subscription agreements and consulting
agreements and, pending issuance of the common shares, subscription proceeds
have been recorded as Share Subscriptions on the balance sheet.
8. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123 Accounting for Stock-Based
Compensation Arrangement. As permitted by SFAS No. 123, the Company has
continued to account for employee stock options under Accounting Principles
Board Opinion No. 25 and elected the disclosure-only alternative under FASB
Statement No. 123.
Certain employees and consultants were awarded stock at no cost to them. As
a result, the fair market value of the stock award at the time of the grant is
being charged to operations over the vesting period or expected term of benefit.
The compensation expense was $71,237 for the year ended July 31, 1999 and
$18,225 for the period ended July 31, 1998. These share awards represent
approximately 13% of the total issued and subscribed shares.
The remaining unamortized compensation charge as at July 31, 1999 is
$858,488.
For the purposes of the pro forma disclosures required by SFAS No. 123, the
fair value of each share awarded is measured at the estimated market price of a
share of the same stock as if it were vested and issued on the grant date.
The total pro forma value of shares awarded during fiscal 1999 and 1998,
respectively, was computed at approximately $924,272 and $23,678.
For purposes of pro forma disclosures, the estimated fair value of the
stocks is amortized over the stocks' vesting period. Had the Company's stock
plans been accounted for under SFAS No. 123, net loss would have remained
unchanged.
9. INCOME TAXES
The difference between the income tax provision computed at the combined
statutory Canadian federal and provincial income tax rate and the financial
statement provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Tax benefit at statutory rates.............................. $(1,295,905) $(135,129)
Valuation allowance and other differences
Domestic federal incentives producing no benefit.......... (29,596) (29,596)
Domestic losses producing no benefit...................... (1,266,309) (105,533)
----------- ---------
Effective income tax...................................... $ -- $ --
=========== =========
</TABLE>
The deferred tax assets and liabilities result from differences in the
timing of the recognition of certain income and expense items for tax and
financial accounting purposes. The sources of these differences are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
DEFERRED TAX ASSETS
Loss carryforwards.......................................... $ 1,215,748 $ 41,970
Maintenance revenue....................................... 5,232 40,723
----------- ---------
1,220,980 82,693
Less: Valuation allowance................................. (1,220,980) (82,693)
----------- ---------
Total deferred tax assets......................... $ -- $ --
=========== =========
</TABLE>
F-119
<PAGE> 244
THE DOCSPACE COMPANY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999 AND 1998
(IN US$)
The Company has recorded a valuation allowance as at July 31, 1999 and as
at July 31, 1998 for deferred tax assets related to tax loss carry forwards and
other timing differences since realization of these future benefits is
uncertain.
As at July 31, 1999, the Company has tax loss carry-forwards of
approximately $2,810,000. No potential future tax benefit has been recorded in
the accompanying financial statements for these loss carry-forwards. The loss
carry-forwards expire as follows:
<TABLE>
<CAPTION>
YEAR OF EXPIRY AMOUNT
-------------- ----------
<S> <C>
2005........................................................ $ 110,000
2006........................................................ 2,700,000
----------
$2,810,000
==========
</TABLE>
10. LEASE COMMITMENTS
The Company is committed to annual rental payments for operating leases on
premises and computers as follows:
<TABLE>
<S> <C>
2000........................................................ $ 653,994
2001........................................................ 318,568
2002........................................................ 114,035
2003........................................................ 83,556
2004........................................................ 69,630
----------
$1,239,783
==========
</TABLE>
Included in the total lease commitments is $398,261 related to office lease
commitments.
11. CONTINGENCY
The Company has been named in lawsuits claiming patent infringement and
trademark infringement. The Company has appointed legal counsel to defend
against these actions but at this time, the likely outcomes cannot be
determined. Accordingly, no amounts have been accrued in the financial
statements. Management is of the opinion that these contingencies will not have
a material effect on the financial condition and operations of the Company.
12. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosure About Fair Value of Financial Instruments,
requires disclosure about the fair value of financial instruments. Financial
instruments consist primarily of cash and cash equivalents, accounts and
contracts receivable, deposits and other assets, bank indebtedness, accounts
payable and accrued liabilities, the carrying amounts of which approximate fair
value.
INTEREST RATE RISK
The Company has bank borrowings whose interest rate is subject to the
fluctuations in the prime rate as charged by its bankers. Because of the
short-term nature of its bank borrowings, the Company is not exposed to
significant fluctuations in value due to interest rate changes.
F-120
<PAGE> 245
THE DOCSPACE COMPANY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1999 AND 1998
(IN US$)
FOREIGN EXCHANGE RISK
The Company is exposed to foreign exchange risk in that the Company reports
its results in US dollars and has operations in Canada and the United States of
America. The Company has not entered into any foreign exchange contracts, option
contracts or other foreign currency hedging arrangements.
CREDIT RISK AND CONCENTRATION OF CREDIT RISK
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. The Company has no significant off-balance sheet concentration
of credit risk such as foreign exchange contracts, option contracts or other
foreign currency hedging arrangements.
The Company is exposed to credit risk through accounts receivable.
Concentration of credit risk with respect to accounts receivable is limited to
certain customers to whom the Company makes substantial sales. Accounts
receivable credit risk is mitigated by the nature of the Company's customer base
and the dispersion of customers among industries and geographical locations.
During the fiscal year ended July 31, 1999, one customer accounted for 70% of
the Company's revenue.
13. SUBSEQUENT EVENTS
FINANCING
On August 3, 1999, the Company received proceeds of $5 million in
consideration for issuing a unsecured convertible promissory note. The note pays
interest at 8% per annum and matures August 2, 2000. The note is convertible
into approximately 10% of the common shares of the Company at the option of the
Company or automatic conversion will occur if either an acquisition of the
Company occurs or an equity or debt financing occurs as defined in the note.
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ANNEX A
[CONFORMED COPY]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
CRITICAL PATH, INC.,
INITIALIZE ACQUISITION CORP.
AND
ISOCOR
DATED AS OF OCTOBER 20, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 247
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
ARTICLE I THE MERGER.................................................. A-1
1.1 The Merger.................................................. A-1
1.2 Effective Time; Closing..................................... A-1
1.3 Effect of the Merger........................................ A-2
1.4 Articles of Incorporation; Bylaws........................... A-2
1.5 Directors and Officers...................................... A-2
1.6 Effect on Capital Stock..................................... A-2
1.7 Surrender of Certificates................................... A-3
1.8 No Further Ownership Rights in Company Common Stock......... A-4
1.9 Lost, Stolen or Destroyed Certificates...................... A-4
1.10 Tax Consequences............................................ A-5
1.11 Taking of Necessary Action; Further Action.................. A-5
1.12 Dissenting Shares........................................... A-5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF COMPANY................... A-5
2.1 Organization and Qualification; Subsidiaries................ A-5
2.2 Articles of Incorporation and Bylaws........................ A-6
2.3 Capitalization.............................................. A-6
2.4 Authority Relative to this Agreement........................ A-7
2.5 No Conflict; Required Filings and Consents.................. A-8
2.6 Compliance; Permits......................................... A-8
2.7 SEC Filings; Financial Statements........................... A-9
2.8 No Undisclosed Liabilities.................................. A-9
2.9 Absence of Certain Changes or Events........................ A-9
2.10 Absence of Litigation....................................... A-10
2.11 Employee Benefit Plans...................................... A-10
2.12 Labor Matters............................................... A-12
2.13 Registration Statement; Proxy Statement..................... A-12
2.14 Restrictions on Business Activities......................... A-12
2.15 Title to Property........................................... A-12
2.16 Taxes....................................................... A-13
2.17 Environmental Matters....................................... A-14
2.18 Brokers..................................................... A-15
2.19 Intellectual Property....................................... A-15
2.20 Agreements, Contracts and Commitments....................... A-17
2.21 Insurance................................................... A-18
2.22 Opinion of Financial Advisor................................ A-18
2.23 Board Approval.............................................. A-18
2.24 Vote Required............................................... A-18
</TABLE>
i
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<TABLE>
<CAPTION>
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<S> <C> <C>
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB..... A-18
3.1 Organization and Qualification; Subsidiaries................ A-18
3.2 Articles of Incorporation and Bylaws........................ A-18
3.3 Capitalization.............................................. A-19
3.4 Authority Relative to this Agreement........................ A-19
3.5 No Conflict; Required Filings and Consents.................. A-19
3.6 SEC Filings; Financial Statements........................... A-20
3.7 Registration Statement; Proxy Statement..................... A-20
3.8 No Undisclosed Liabilities.................................. A-20
3.9 Absence of Certain Changes or Events........................ A-21
3.10 Absence of Litigation....................................... A-21
3.11 Employee Benefit Plans...................................... A-21
3.12 Tax Returns and Audits...................................... A-23
3.13 Environmental Matters....................................... A-24
3.14 Intellectual Property....................................... A-25
3.15 Board Approval.............................................. A-26
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME......................... A-27
4.1 Conduct of Business by Company.............................. A-27
4.2 Conduct of Business by Parent............................... A-29
ARTICLE V ADDITIONAL AGREEMENTS....................................... A-29
5.1 Proxy Statement/Prospectus; Registration Statement; Other
Filings; Board Recommendations.............................. A-29
5.2 Meeting of Company Shareholders............................. A-30
5.3 Confidentiality; Access to Information...................... A-31
5.4 No Solicitation............................................. A-31
5.5 Public Disclosure........................................... A-33
5.6 Reasonable Efforts; Notification............................ A-33
5.7 Stock Options, Warrants and Employee Benefits............... A-33
5.8 Form S-8.................................................... A-34
5.9 Indemnification............................................. A-34
5.10 Nasdaq Listing.............................................. A-34
5.11 Regulatory Filings; Reasonable Efforts...................... A-34
5.12 401(k) Plan................................................. A-35
5.13 Treatment as a Reorganization............................... A-35
5.14 Certain Subsidiaries........................................ A-35
ARTICLE VI CONDITIONS TO THE MERGER.................................... A-35
6.1 Conditions to Obligations of Each Party to Effect the
Merger...................................................... A-35
6.2 Additional Conditions to Obligations of Company............. A-36
6.3 Additional Conditions to the Obligations of Parent and
Merger Sub.................................................. A-36
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER........................... A-37
7.1 Termination................................................. A-37
7.2 Notice of Termination; Effect of Termination................ A-38
7.3 Fees and Expenses........................................... A-38
7.4 Amendment................................................... A-39
7.5 Extension; Waiver........................................... A-39
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C> <C>
ARTICLE VIII GENERAL PROVISIONS.......................................... A-39
8.1 Non-Survival of Representations and Warranties.............. A-39
8.2 Notices..................................................... A-39
8.3 Interpretation; Knowledge................................... A-40
8.4 Counterparts................................................ A-41
8.5 Entire Agreement; Third Party Beneficiaries................. A-41
8.6 Severability................................................ A-41
8.7 Other Remedies; Specific Performance........................ A-41
8.8 Governing Law............................................... A-41
8.9 Rules of Construction....................................... A-41
8.10 Assignment.................................................. A-41
8.11 WAIVER OF JURY TRIAL........................................ A-42
</TABLE>
INDEX OF EXHIBITS
Exhibit A -- Form of Company Voting Agreement
Exhibit B -- Form of Stock Option Agreement
Exhibit C -- Employees Accepting Offer Letters
Exhibit D -- Form of Agreement of Merger
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AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as of
October 20, 1999, among Critical Path, Inc., a California corporation
("PARENT"), Initialize Acquisition Corp., a California corporation and a
wholly-owned subsidiary of Parent ("MERGER SUB"), and ISOCOR, a California
corporation ("COMPANY").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement (as
defined in Section 1.2 below) and in accordance with the California Corporations
Code ("CALIFORNIA LAW"), Parent and Company intend to enter into a business
combination transaction.
B. The Board of Directors of Company (i) has determined that the Merger (as
defined in Section 1.1) is fair to, and in the best interests of, Company and
its shareholders, (ii) has approved this Agreement, the Merger (as defined in
Section 1.1) and the other transactions contemplated by this Agreement and (iii)
has determined to recommend that the shareholders of Company approve this
Agreement and approve the Merger.
C. Concurrently with the execution of this Agreement, and as a condition to
and an inducement to Parent's willingness to enter into this Agreement, certain
affiliates of Company are entering into Voting Agreements in substantially the
form attached hereto as Exhibit A (the "COMPANY VOTING AGREEMENTS").
D. Concurrently with the execution of this Agreement, and as a condition to
and an inducement to Parent's willingness to enter into this Agreement, Company
shall execute and deliver a Stock Option Agreement in favor of Parent in
substantially the form attached hereto as Exhibit B (the "STOCK OPTION
AGREEMENT"). The Board of Directors of Company has approved the Stock Option
Agreement.
E. Concurrently with the execution of this Agreement, and as a condition to
and an inducement to Parent's willingness to enter into this Agreement, the
employees of Company listed on Exhibit C hereto are executing employment offer
letters with Parent which agreements shall be held in escrow until, shall be
subject to, and shall become effective upon the Closing (as defined below).
F. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "CODE").
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of California Law, Merger Sub shall be merged with and
into Company (the "MERGER"), the separate corporate existence of Merger Sub
shall cease and Company shall continue as the surviving corporation. Company as
the surviving corporation after the Merger is hereinafter sometimes referred to
as the "SURVIVING CORPORATION."
1.2 Effective Time; Closing. Subject to the conditions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing with the
Secretary of State of the State of California in accordance with the relevant
provisions of California Law a duly executed Agreement of Merger substantially
in the form of Exhibit D hereto (the "AGREEMENT OF MERGER") and officers'
certificates (collectively, the "MERGER DOCUMENTS") (the time of such filing or
such later time as may be agreed in writing by Company and Parent and specified
in the Merger Documents, being referred to herein as the "EFFECTIVE TIME") shall
be as soon as practicable on or after the Closing Date (as herein defined).
Unless the context otherwise requires, the term
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"AGREEMENT" as used herein refers to this Agreement and Plan of Reorganization,
as the same may be amended from time to time, and all exhibits and schedules
thereto. The closing of the Merger (the "CLOSING") shall take place at the
offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, at a time
and date to be specified by the parties, which shall be no later than the second
business day after the satisfaction or waiver of the conditions set forth in
Article VI, or at such other time, date and location as the parties hereto agree
in writing (the "CLOSING DATE").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Agreement of Merger and the
applicable provisions of California Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time all the property, rights,
privileges, powers and franchises of Company and Merger Sub shall vest in the
Surviving Corporation, and all debts, liabilities and duties of Company and
Merger Sub shall become the debts, liabilities and duties of the Surviving
Corporation.
1.4 Articles of Incorporation; Bylaws.
(a) At the Effective Time, the Articles of Incorporation of Merger Sub, as
in effect immediately prior to the Effective Time, shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended as provided
by law and such Articles of Incorporation of the Surviving Corporation;
provided, however, that at the Effective Time the Articles of Incorporation of
the Surviving Corporation shall be amended so that the name of the Surviving
Corporation shall be "Initialize Inc."
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be, at the Effective Time, the Bylaws of the Surviving
Corporation until thereafter amended.
1.5 Directors and Officers. The initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or appointed
and qualified. The initial officers of the Surviving Corporation shall be the
officers of Merger Sub immediately prior to the Effective Time.
1.6 Effect on Capital Stock. Subject to the terms and conditions of this
Agreement, at the Effective Time, by virtue of the Merger and without any action
on the part of Merger Sub, Company or the holders of any of the following
securities, the following shall occur:
(a) Conversion of Company Common Stock. Each share of Common Stock, no
par value, of Company (the "COMPANY COMMON STOCK") issued and outstanding
immediately prior to the Effective Time, other than any shares of Company
Common Stock to be canceled pursuant to Section 1.6(b), or which constitute
Dissenting Shares (as defined below), will be canceled and extinguished and
automatically converted (subject to Sections 1.6(e) and (f)) into the right
to receive 0.4707 shares of Common Stock of Parent (the "PARENT COMMON
STOCK") (the "EXCHANGE RATIO") upon surrender of the certificate
representing such share of Company Common Stock in the manner provided in
Section 1.7 (or in the case of a lost, stolen or destroyed certificate,
upon delivery of an affidavit (and bond, if required) in the manner
provided in Section 1.9). If any shares of Company Common Stock outstanding
immediately prior to the Effective Time are unvested or are subject to a
repurchase option, risk of forfeiture or other condition under any
applicable restricted stock purchase agreement or other agreement with
Company, then the shares of Parent Common Stock issued in exchange for such
shares of Company Common Stock will also be unvested and subject to the
same repurchase option, risk of forfeiture or other condition, and the
certificates representing such shares of Parent Common Stock may
accordingly be marked with appropriate legends. The Company shall take all
action that may be necessary to ensure that, from and after the Effective
Time, Parent is entitled to exercise any such repurchase option or other
right set forth in any such restricted stock purchase agreement or other
agreement.
(b) Cancellation of Parent-Owned Stock. Each share of Company Common
Stock held by Company or owned by Merger Sub, Parent or any direct or
indirect wholly-owned subsidiary of Company or of Parent immediately prior
to the Effective Time shall be canceled and extinguished without any
conversion thereof.
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(c) Stock Options; Employee Stock Purchase Plans. At the Effective
Time, all options to purchase Company Common Stock then outstanding under
Company's 1992 Stock Option Plan, 1996 Directors' Stock Option Plan and
1999 Stock Option Plan (collectively, the "COMPANY OPTION PLANS") shall be
assumed by Parent in accordance with Section 5.7 hereof. Purchase rights
outstanding under Company's 1996 Employee Stock Purchase Plan (the "ESPP")
shall be treated as set forth in Section 5.7.
(d) Capital Stock of Merger Sub. Each share of Common Stock, no par
value per share, of Merger Sub (the "MERGER SUB COMMON STOCK") issued and
outstanding immediately prior to the Effective Time shall be converted into
one validly issued, fully paid and nonassessable share of Common Stock, no
par value per share, of the Surviving Corporation. Each certificate
evidencing ownership of shares of Merger Sub Common Stock shall evidence
ownership of such shares of capital stock of the Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be
adjusted to reflect appropriately the effect of any stock split, reverse
stock split, stock dividend (including any dividend or distribution of
securities convertible into Parent Common Stock or Company Common Stock),
extraordinary cash dividends, reorganization, recapitalization,
reclassification, combination, exchange of shares or other like change with
respect to Parent Common Stock or Company Common Stock occurring on or
after the date hereof and prior to the Effective Time.
(f) Fractional Shares. No fraction of a share of Parent Common Stock
will be issued by virtue of the Merger, but in lieu thereof each holder of
shares of Company Common Stock who would otherwise be entitled to a
fraction of a share of Parent Common Stock (after aggregating all
fractional shares of Parent Common Stock that otherwise would be received
by such holder) shall, upon surrender of such holder's Certificates(s) (as
defined in Section 1.7(c)) receive from Parent an amount of cash (rounded
to the nearest whole cent), without interest, equal to the product of (i)
such fraction, multiplied by (ii) the average closing price of one share of
Parent Common Stock for the ten (10) most recent days that Parent Common
Stock has traded ending on the trading day immediately prior to the
Effective Time, as reported on the Nasdaq National Market System
("NASDAQ").
1.7 Surrender of Certificates.
(a) Exchange Agent. Parent shall select a bank or trust company reasonably
acceptable to Company to act as the exchange agent (the "EXCHANGE AGENT") in the
Merger.
(b) Parent to Provide Common Stock. Promptly after the Effective Time,
Parent shall make available to the Exchange Agent, for exchange in accordance
with this Article I, the shares of Parent Common Stock issuable pursuant to
Section 1.6 in exchange for outstanding shares of Company Common Stock, and cash
in an amount sufficient for payment in lieu of fractional shares pursuant to
Section 1.6(f) and any dividends or distributions to which holders of shares of
Company Common Stock may be entitled pursuant to Section 1.7(d).
(c) Exchange Procedures. Promptly after the Effective Time, Parent shall
cause the Exchange Agent to mail to each holder of record (as of the Effective
Time) of a certificate or certificates (the "CERTIFICATES"), which immediately
prior to the Effective Time represented outstanding shares of Company Common
Stock whose shares were converted into the right to receive shares of Parent
Common Stock pursuant to Section 1.6, cash in lieu of any fractional shares
pursuant to Section 1.6(f) and any dividends or other distributions pursuant to
Section 1.7(d), (i) a letter of transmittal in customary form (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall contain such other provisions as Parent may reasonably specify)
and (ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Parent Common Stock, cash in
lieu of any fractional shares pursuant to Section 1.6(f) and any dividends or
other distributions pursuant to Section 1.7(d). Upon surrender of Certificates
for cancellation to the Exchange Agent or to such other agent or agents as may
be appointed by Parent, together with such letter of transmittal, duly completed
and validly executed in accordance with the instructions thereto, the holders of
such Certificates shall be entitled to receive in exchange therefor certificates
representing the number of whole
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shares of Parent Common Stock into which their shares of Company Common Stock
were converted at the Effective Time, payment in lieu of fractional shares which
such holders have the right to receive pursuant to Section 1.6(f) and any
dividends or distributions payable pursuant to Section 1.7(d), and the
Certificates so surrendered shall forthwith be canceled. Until so surrendered,
outstanding Certificates will be deemed from and after the Effective Time, for
all corporate purposes, subject to Section 1.7(d) as to dividends and other
distributions, to evidence only the ownership of the number of full shares of
Parent Common Stock into which such shares of Company Common Stock shall have
been so converted and the right to receive an amount in cash in lieu of the
issuance of any fractional shares in accordance with Section 1.6(f) and any
dividends or distributions payable pursuant to Section 1.7(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the date of this Agreement with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holders of any unsurrendered Certificates with respect to the shares of
Parent Common Stock represented thereby until the holders of record of such
Certificates shall surrender such Certificates. Subject to applicable law,
following surrender of any such Certificates, the Exchange Agent shall deliver
to the record holders thereof, without interest, certificates representing whole
shares of Parent Common Stock issued in exchange therefor along with payment in
lieu of fractional shares pursuant to Section 1.6(f) hereof and the amount of
any such dividends or other distributions with a record date after the Effective
Time payable with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If certificates representing shares of Parent
Common Stock are to be issued in a name other than that in which the
Certificates surrendered in exchange therefor are registered, it will be a
condition of the issuance thereof that the Certificates so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the persons
requesting such exchange will have paid to Parent or any agent designated by it
any transfer or other taxes required by reason of the issuance of certificates
representing shares of Parent Common Stock in any name other than that of the
registered holder of the Certificates surrendered, or established to the
satisfaction of Parent or any agent designated by it that such tax has been paid
or is not payable.
(f) Required Withholding. Each of the Exchange Agent, Parent and the
Surviving Corporation shall be entitled to deduct and withhold from any
consideration payable or otherwise deliverable pursuant to this Agreement to any
holder or former holder of Company Common Stock such amounts as are required to
be deducted or withheld therefrom under the Code or under any provision of
state, local or foreign tax law or under any other applicable legal requirement.
To the extent such amounts are so deducted or withheld, such amounts shall be
treated for all purposes under this Agreement as having been paid to the person
to whom such amounts would otherwise have been paid.
(g) No Liability. Notwithstanding anything to the contrary in this Section
1.7, neither the Exchange Agent, Parent, the Surviving Corporation nor any party
hereto shall be liable to a holder of shares of Parent Common Stock or Company
Common Stock for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock issued in accordance with the terms hereof (including any
cash paid in respect thereof pursuant to Sections 1.6(f) and 1.7(d)) shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
shares of Company Common Stock, and there shall be no further registration of
transfers on the records of the Surviving Corporation of shares of Company
Common Stock which were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event that any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof, certificates
representing the shares of Parent Common Stock into which the shares of Company
Common Stock represented by such Certificates were converted pursuant to Section
1.6, cash for fractional shares, if any, as may be required pursuant to Section
1.6(f) and any dividends or distributions payable pursuant to Section 1.7(d);
provided, however, that
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Parent may, in its discretion and as a condition precedent to the issuance of
such certificates representing shares of Parent Common Stock, cash and other
distributions, require the owner of such lost, stolen or destroyed Certificates
to deliver a bond in such sum as it may reasonably direct as indemnity against
any claim that may be made against Parent, the Surviving Corporation or the
Exchange Agent with respect to the Certificates alleged to have been lost,
stolen or destroyed.
1.10 Tax Consequences.
(a) It is intended by the parties hereto that the Merger shall constitute a
reorganization within the meaning of Section 368 of the Code. The parties hereto
adopt this Agreement as a "plan of reorganization" within the meaning of
Sections 1.368-2(g) and 1.368-3(a) of the United States Income Tax Regulations.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Company and Merger Sub, the officers and directors of Company
and Merger Sub will take all such lawful and necessary action.
1.12 Dissenting Shares. Notwithstanding anything in this Agreement to the
contrary, shares of Company Common Stock that are outstanding immediately prior
to the Effective Time and that are held by Company shareholders who shall not
have voted such shares in favor of the Merger and who shall, after the taking of
such vote, have properly demanded payment therefor in accordance with Chapter 13
of California Law ("Dissenting Shares") shall not be converted into or be
exchangeable for the right to receive the consideration provided in Section
1.6(a), but the holders thereof shall be entitled to payment therefor in
accordance with the provisions of and subject to the conditions set forth in
Chapter 13 of California Law; provided, however, that if (a) any holder of
Dissenting Shares shall subsequently deliver a written withdrawal of such
holder's demand for payment of such shares at their fair market value (with the
written approval of Company or the Surviving Corporation), (b) any holder fails
to establish such holder's entitlement to dissenters' rights or (c) neither any
holder of Dissenting Shares nor the Surviving Corporation has filed a petition
demanding a determination of the value of all Dissenting Shares within the time
provided in California Law, such holder or holders, as the case may be, shall
forfeit the right to payment of such shares at their fair market value and such
shares shall thereupon be deemed to have been converted into and to have become
exchangeable for, as of the Effective Time, the right to receive the
consideration provided in Section 1.6(a) of this Agreement, without any interest
thereon, upon surrender of the certificate or certificates representing such
Dissenting Shares.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY
As of the date hereof and as of the Closing Date, Company represents and
warrants to Parent and Merger Sub, subject to such exceptions as are
specifically disclosed in writing in the disclosure letter supplied by Company
to Parent dated as of the date hereof and certified by a duly authorized officer
of Company, which disclosure shall provide an exception to or otherwise qualify
the representations or warranties of Company specifically referred to in such
disclosure and such other representations and warranties to the extent such
disclosure shall reasonably appear to be applicable to such other
representations or warranties (the "COMPANY SCHEDULE"), as follows:
2.1 Organization and Qualification; Subsidiaries.
(a) Each of Company and its Subsidiaries (as defined in Section 8.3) is a
corporation duly incorporated, formed or validly existing and in good standing
to the extent applicable, as the case may be, under the laws of the jurisdiction
of its incorporation and has the requisite corporate power and authority to own,
lease and operate its assets and properties and to carry on its business as it
is now being conducted, except where the failure to do so would not,
individually, or in the aggregate, have a Material Adverse Effect (as defined in
Section 8.3). Each of Company and its subsidiaries is in possession of all
franchises, grants, authorizations,
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licenses, permits, easements, consents, certificates, approvals and orders
("APPROVALS") necessary to own, lease and operate the properties it purports to
own, operate or lease and to carry on its business as it is now being conducted,
except where the failure to have such Approvals would not, individually or in
the aggregate, have a Material Adverse Effect on Company.
(b) Company has no Subsidiaries except for the entities identified in
Section 2.1(b) of the Company Schedule. Neither Company nor any of its
Subsidiaries has agreed nor is obligated to make nor is bound by any written,
oral or other agreement, contract, subcontract, lease, binding understanding,
instrument, note, option, warranty, purchase order, license, sublicense,
insurance policy, benefit plan, commitment or undertaking of any nature, as of
the date hereof or as may hereafter be in effect (a "CONTRACT") under which it
may become obligated to make, any future investment in or capital contribution
to any other entity. Neither Company nor any of its Subsidiaries directly or
indirectly owns any equity or similar interest in or any interest convertible,
exchangeable or exercisable for, any equity or similar interest in, any
corporation, partnership, joint venture or other business, association or
entity.
(c) Company and each of its Subsidiaries is qualified to do business as a
foreign corporation, (or other entity, as applicable) and is in good standing,
under the laws of all jurisdictions where the nature of their business requires
such qualification and where the failure to so qualify would have a Material
Adverse Effect on the Company.
2.2 Articles of Incorporation and Bylaws. Company has previously furnished
to Parent a complete and correct copy of its Amended and Restated Articles of
Incorporation and Bylaws as amended to date (together, the "COMPANY CHARTER
DOCUMENTS"). Such Company Charter Documents and equivalent organizational
documents of each Subsidiary are in full force and effect. Company is not in
violation of any of the provisions of Company Charter Documents, and no
Subsidiary of Company is in violation of its equivalent organizational
documents.
2.3 Capitalization.
(a) The authorized capital stock of Company consists of 50,000,000 shares
of Company Common Stock and 2,000,000 shares of Preferred Stock ("COMPANY
PREFERRED STOCK"), no par value. At the close of business three (3) business
days prior to the date hereof, (i) 10,422,135 shares of Company Common Stock
were issued and outstanding, all of which are validly issued, fully paid and
nonassessable; (ii) no shares of Company Common Stock were held by Subsidiaries
of Company; (iii) 225,016 shares of Company Common Stock were available for
future issuance pursuant to Company's ESPP; (iv) 2,950,000 shares of Company
Common Stock were reserved for issuance upon the exercise of outstanding options
to purchase Company Common Stock under the 1992 Stock Option Plan; (v) 150,000
shares of Company Common Stock were reserved for issuance upon the exercise of
outstanding options to purchase Company Common Stock under the 1996 Directors'
Stock Option Plan; (vi) 350,000 shares of Company Common Stock were reserved for
issuance upon the exercise of outstanding options to purchase Company Common
Stock under the 1999 Stock Option Plan; (vii) 104,866 shares of Company Common
Stock were available for future grant under the 1992 Stock Option Plan; (viii)
65,000 shares of Company Common Stock were available for future grant under the
1996 Directors' Stock Option Plan; (ix) 224,500 shares of Company Common Stock
were available for future grant; and (x) sufficient shares of Company Common
Stock were reserved for future issuance pursuant to the Stock Option Agreement.
As of the date hereof, no shares of Company Preferred Stock were issued or
outstanding. Section 2.3(a) of the Company Schedule sets forth the following
information with respect to each Company Stock Option (as defined in Section
5.8) outstanding as of the date of this Agreement: (i) the name and address of
the optionee; (ii) the particular plan pursuant to which such Company Stock
Option was granted; (iii) the number of shares of Company Common Stock subject
to such Company Stock Option; (iv) the exercise price of such Company Stock
Option; (v) the date on which such Company Stock Option was granted; (vi) the
applicable vesting schedule; (vii) the date on which such Company Stock Option
expires; and (viii) whether the exercisability of such option will be
accelerated in any way by the transactions contemplated by this Agreement, and
indicates the extent of acceleration. Company has made available to Parent
accurate and complete copies of all stock option plans pursuant to which Company
has granted such Company Stock Options that are currently outstanding and the
form of all stock option agreements evidencing
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such Company Stock Options. All shares of Company Common Stock subject to
issuance as aforesaid, upon issuance on the terms and conditions specified in
the instrument pursuant to which they are issuable, would be duly authorized,
validly issued, fully paid and nonassessable. Except as set forth in Section
2.3(a) of the Company Schedule, there are no commitments or agreements of any
character to which Company is bound obligating Company to accelerate the vesting
of any Company Stock Option as a result of the Merger. All outstanding shares of
Company Common Stock, all outstanding Company Stock Options, and all outstanding
shares of capital stock of each Subsidiary of Company have been issued and
granted in compliance with (i) all applicable securities laws and other
applicable Legal Requirements (as defined below) and (ii) all requirements set
forth in applicable Contracts. For the purposes of this Agreement, "LEGAL
REQUIREMENTS" means any federal, state, local, municipal, foreign or other law,
statute, constitution, principle of common law, resolution, ordinance, code,
edict, decree, rule, regulation, ruling or requirement issues, enacted, adopted,
promulgated, implemented or otherwise put into effect by or under the authority
of any Governmental Entity (as defined below) and (ii) all requirements set
forth in applicable contracts, agreements, and instruments.
(b) Except for securities Company owns free and clear of all liens,
pledges, hypothecations, charges, mortgages, security interests, encumbrances,
claims, infringements, interferences, options, rights of first refusal,
preemptive rights, community property interests or restrictions of any nature
(including any restriction on the voting of any security, any restriction on the
transfer of any security or other asset, any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset) directly
or indirectly through one or more Subsidiaries, and except for shares of capital
stock or other similar ownership interests of Company's Subsidiaries that are
owned by certain nominee equity holders as required by the applicable law of the
jurisdiction of organization of such Subsidiaries (which shares or other
interests do not materially affect Company's control of such Subsidiaries), as
of the date of this Agreement, there are no equity securities, partnership
interests or similar ownership interests of any class of equity security of any
Subsidiary of Company, or any security exchangeable or convertible into or
exercisable for such equity securities, partnership interests or similar
ownership interests, issued, reserved for issuance or outstanding. Except as set
forth in Section 2.3(b) of the Company Schedule or as set forth in Section
2.3(a) hereof and except for the Stock Option Agreement, there are no
subscriptions, options, warrants, equity securities, partnership interests or
similar ownership interests, calls, rights (including preemptive rights),
commitments or agreements of any character to which Company or any of its
Subsidiaries is a party or by which it is bound obligating Company or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, or repurchase, redeem or otherwise acquire, or cause the repurchase,
redemption or acquisition of, any shares of capital stock, partnership interests
or similar ownership interests of Company or any of its Subsidiaries or
obligating Company or any of its Subsidiaries to grant, extend, accelerate the
vesting of or enter into any such subscription, option, warrant, equity
security, call, right, commitment or agreement. As of the date of this
Agreement, except as contemplated by this Agreement and except as set forth in
Section 2.3(b) of the Company Schedule, there are no registration rights and
there is, except for Company Voting Agreements, no voting trust, proxy, rights
plan, antitakeover plan or other agreement or understanding to which Company or
any of its Subsidiaries is a party or by which they are bound with respect to
any equity security of any class of Company or with respect to any equity
security, partnership interest or similar ownership interest of any class of any
of its Subsidiaries.
2.4 Authority Relative to this Agreement. Company has all necessary
corporate power and authority to execute and deliver this Agreement, the
Agreement of Merger and the Stock Option Agreement, and to perform its
obligations hereunder and thereunder and, subject to obtaining the approval of
the shareholders of Company of this Agreement, the Agreement of Merger and the
Merger, to consummate the transactions contemplated hereby and thereby
(including the Merger). The execution and delivery of this Agreement, the
Agreement of Merger and the Stock Option Agreement by Company and the
consummation by Company of the transactions contemplated hereby and thereby
(including the Merger) have been duly and validly authorized by all necessary
corporate action on the part of Company and no other corporate proceedings on
the part of Company are necessary to authorize this Agreement, the Agreement of
Merger or the Stock Option Agreement or to consummate the transactions so
contemplated (other than the approval of this Agreement, the Agreement of Merger
and the Merger by holders of a majority of the outstanding shares of Company
Common Stock in accordance with California Law and the Company Charter
Documents). This
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Agreement, the Agreement of Merger and the Stock Option Agreement have been duly
and validly executed and delivered by Company and, assuming the due
authorization, execution and delivery thereof by Parent and Merger Sub,
constitute legal and binding obligations of Company, enforceable against Company
in accordance with their respective terms, except as may be limited by
bankruptcy, insolvency, reorganization or other similar laws affecting the
enforcement of creditors' rights generally and by general equitable principles.
2.5 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement, the Agreement of Merger
and the Stock Option Agreement by Company do not, and the performance of this
Agreement and the Stock Option Agreement by Company shall not, (i) conflict with
or violate the Company Charter Documents or the equivalent organizational
documents of any of Company's Subsidiaries, (ii) subject to obtaining the
approval of Company's shareholders of this Agreement and the Merger and
compliance with the requirements set forth in Section 2.5(b) below, conflict
with or violate any law, rule, regulation, order, judgment or decree applicable
to Company or any of its Subsidiaries or by which its or any of their respective
properties is bound or affected, or (iii) result in any breach of or constitute
a default (or an event that with notice or lapse of time or both would become a
default) under, or materially impair Company's or any of its Subsidiaries'
rights or alter the rights or obligations of any third party under, or give to
others any rights of termination, amendment, acceleration or cancellation of, or
result in the creation of a lien or encumbrance on any of the properties or
assets of Company or any of its Subsidiaries pursuant to, any material note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Company or any of its
Subsidiaries is a party or by which Company or any of its Subsidiaries or its or
any of their respective properties are bound or affected, except, with respect
to clauses (ii) or (iii), for any such conflicts, violations, breaches, defaults
or other occurrences that would not, individually and in the aggregate, have a
Material Adverse Effect on Company or any of its Subsidiaries taken as a whole.
(b) The execution and delivery of this Agreement, the Agreement of Merger
and the Stock Option Agreement by Company do not, and the performance of this
Agreement by Company will not, require any consent, approval, authorization or
permit of, or filing with or notification to, any court, administrative agency,
commission, governmental or regulatory authority, domestic or foreign (a
"GOVERNMENTAL ENTITY"), except (A) for applicable requirements, if any, of the
Securities Act of 1933, as amended (the "SECURITIES ACT"), the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), state securities laws
("BLUE SKY LAWS"), the pre-merger notification requirements of the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT") and of
foreign Governmental Entities and the rules and regulations thereunder, the
rules and regulations of Nasdaq, and the filing and recordation of the Merger
Documents as required by California Law and (B) where the failure to obtain such
consents, approvals, authorizations or permits, or to make such filings or
notifications, would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on Company or, after the Effective
Time, Parent, or prevent consummation of the Merger or otherwise prevent the
parties hereto from performing their obligations under this Agreement.
2.6 Compliance; Permits.
(a) Except as set forth in Section 2.6(a) of the Company Schedule, neither
Company nor any of its Subsidiaries is in conflict with, or in default or
violation of, (i) any law, rule, regulation, order, judgment or decree
applicable to Company or any of its Subsidiaries or by which its or any of their
respective properties is bound or affected, or (ii) any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Company or any of its Subsidiaries is a
party or by which Company or any of its Subsidiaries or its or any of their
respective properties is bound or affected, except for any conflicts, defaults
or violations that (individually or in the aggregate) would not cause Company to
lose any material benefit or incur any material liability. No investigation or
review by any Governmental Entity is pending or, to the knowledge of Company,
threatened against Company or its Subsidiaries, nor has any Governmental Entity
indicated to Company an intention to conduct the same, other than, in each such
case, those the outcome of which could not, individually or in the aggregate,
reasonably be expected to have the effect of prohibiting or materially impairing
any acquisition of property that is material to
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Company and its Subsidiaries taken as a whole by Company or any of its
Subsidiaries or the conduct of business by Company and its Subsidiaries taken as
a whole.
2.7 SEC Filings; Financial Statements.
(a) Company has made available to Parent a correct and complete copy of
each report, schedule, registration statement and definitive proxy statement
filed by Company with the Securities and Exchange Commission ("SEC") for the two
calendar years prior to the date of this Agreement (the "COMPANY SEC REPORTS"),
which are all the forms, reports and documents required to be filed by Company
with the SEC for the two calendar years prior to the date of this Agreement. The
Company SEC Reports (A) were prepared in accordance with the requirements of the
Securities Act or the Exchange Act, as the case may be, and (B) did not at the
time they were filed (and if amended or superseded by a filing prior to the date
of this Agreement then on the date of such filing) contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. None of Company's
Subsidiaries is required to file any reports or other documents with the SEC.
(b) Each set of consolidated financial statements (including, in each case,
any related notes thereto) contained in Company SEC Reports was prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes thereto or, in the case of unaudited statements, do not contain
footnotes as permitted by Form 10-Q of the Exchange Act) and each fairly
presents in all material respects the consolidated financial position of Company
and its Subsidiaries at the respective dates thereof and the consolidated
results of its operations and cash flows for the periods indicated, except that
the unaudited interim financial statements were or are subject to normal
adjustments which were not or are not expected to be material in amount.
(c) Company has previously furnished to Parent a complete and correct copy
of any amendments or modifications, which have not yet been filed with the SEC
but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Company with the SEC pursuant to
the Securities Act or the Exchange Act.
2.8 No Undisclosed Liabilities. Except as set forth in Section 2.8 of the
Company Schedule, neither Company nor any of its Subsidiaries has any
liabilities (absolute, accrued, contingent or otherwise) of a nature required to
be disclosed on a balance sheet or in the related notes to the consolidated
financial statements prepared in accordance with GAAP which are, individually or
in the aggregate, material to the business, results of operations or financial
condition of Company and its Subsidiaries taken as a whole, except (i)
liabilities provided for in Company's balance sheet included in Company's report
on Form 10-Q filed on August 13, 1999 or (ii) liabilities incurred since June
30, 1999 in the ordinary course of business, none of which is material to the
business, results of operations or financial condition of Company and its
Subsidiaries, taken as a whole.
2.9 Absence of Certain Changes or Events. Except as set forth in Section
2.9 of the Company Schedule, since June 30, 1999, there has not been: (i) any
Material Adverse Effect on Company, (ii) any declaration, setting aside or
payment of any dividend on, or other distribution (whether in cash, stock or
property) in respect of, any of Company's or any of its Subsidiaries' capital
stock, or any purchase, redemption or other acquisition by Company of any of
Company's capital stock or any other securities of Company or its Subsidiaries
or any options, warrants, calls or rights to acquire any such shares or other
securities except for repurchases from employees following their termination
pursuant to the terms of their pre-existing stock option or purchase agreements,
(iii) any split, combination or reclassification of any of Company's or any of
its Subsidiaries' capital stock, (iv) any granting by Company or any of its
Subsidiaries of any increase in compensation or fringe benefits, except for
normal increases of cash compensation in the ordinary course of business
consistent with past practice, or any payment by Company or any of its
Subsidiaries of any bonus, except for bonuses made in the ordinary course of
business consistent with past practice, or any granting by Company or any of its
Subsidiaries of any increase in severance or termination pay or any entry by
Company or any of its Subsidiaries into any currently effective employment,
severance, termination or indemnification agreement or any agreement the
benefits of which are contingent or the terms of which are materially altered
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upon the occurrence of a transaction involving Company of the nature
contemplated hereby, (v) entry by Company or any of its Subsidiaries into any
licensing or other agreement with regard to the acquisition or disposition of
any Intellectual Property (as defined in Section 2.19) other than licenses in
the ordinary course of business consistent with past practice or any amendment
or consent with respect to any licensing agreement filed or required to be filed
by Company with the SEC, (vi) any material change by Company in its accounting
methods, principles or practices, except as required by concurrent changes in
GAAP, or (vii) any revaluation by Company of any of its assets, including,
without limitation, writing down the value of capitalized inventory or writing
off notes or accounts receivable or any sale of assets of Company other than in
the ordinary course of business.
2.10 Absence of Litigation. Except as set forth in Section 2.10 of the
Company Schedule, there are no claims, actions, suits or proceedings pending or,
to the knowledge of Company, threatened (or, to the knowledge of Company, any
governmental or regulatory investigation pending or threatened) against Company
or any of its Subsidiaries or any properties or rights of Company or any of its
Subsidiaries, before any court, arbitrator or administrative, governmental or
regulatory authority or body, domestic or foreign.
2.11 Employee Benefit Plans.
(a) All employee compensation, incentive, fringe or benefit plans,
programs, policies, commitments or other arrangements (whether or not set forth
in a written document and including, without limitation, all "employee benefit
plans" within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) covering any active, former
employee, director or consultant of Company, any Subsidiary of Company or any
trade or business (whether or not incorporated) which is a member of a
controlled group or which is under common control with Company within the
meaning of Section 414 of the Code (an "AFFILIATE"), with respect to which
Company has liability, are listed in Section 2.11(a) of the Company Schedule
(collectively, the "PLANS"). Company has provided, or will provide within five
(5) business days of the date hereof, to Parent: (i) correct and complete copies
of all documents embodying each Plan including (without limitation) all
amendments thereto, all related trust documents, and all material written
agreements and contracts relating to each such Plan; (ii) the three (3) most
recent annual reports (Form Series 5500 and all schedules and financial
statements attached thereto), if any, required under ERISA or the Code in
connection with each Plan; (iii) the most recent summary plan description
together with the summary(ies) of material modifications thereto, if any,
required under ERISA with respect to each Plan; (iv) all IRS or DOL
determination, opinion, notification and advisory letters; (v) all material
correspondence to or from any governmental agency relating to any Plan; (vi)
samples of all COBRA forms and related notices; (vii) all discrimination tests
for each Plan for the most recent three (3) plan years; (viii) the most recent
annual actuarial valuations, if any, prepared for each Plan; (ix) if the Plan is
funded, the most recent annual and periodic accounting of Plan assets; (x) all
material written agreements and contracts relating to each Plan, including, but
not limited to, administrative service agreements, group annuity contracts and
group insurance contracts; (xi) all material communications to employees or
former employees, relating to any amendments, terminations, establishments,
increases or decreases in benefits, acceleration of payments or vesting
schedules or other events which would result in any material liability under any
Plan or proposed Plan; (xii) all policies pertaining to fiduciary liability
insurance covering the fiduciaries for each Plan; and (xiii) all registration
statements, annual reports (Form 11-K and all attachments thereto) and
prospectuses prepared in connection with any Plan. None of the Plans is
self-insured.
(b) Each Plan has been maintained and administered in all material respects
in compliance with its terms and with the requirements prescribed by any and all
statutes, orders, rules and regulations, including but not limited to ERISA and
the Code, which are applicable to such Plans. No suit, action or other
litigation (excluding claims for benefits incurred in the ordinary course of
Plan activities) has been brought, or to the knowledge of Company is threatened,
against or with respect to any such Plan. There are no audits, inquiries or
proceedings pending or, to the knowledge of Company, threatened by the Internal
Revenue Service (the "IRS") or Department of Labor (the "DOL") with respect to
any Plans. All contributions, reserves or premium payments required to be made
or accrued as of the date hereof to the Plans have been timely made or accrued.
Any Plan intended to be qualified under Section 401(a) of the Code and each
trust intended to qualify under Section 501(a) of the Code (i) has either
obtained a favorable determination, notification,
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advisory and/or opinion letter, as applicable, as to its qualified status from
the IRS or still has a remaining period of time under applicable Treasury
Regulations or IRS pronouncements in which to apply for such letter and to make
any amendments necessary to obtain a favorable determination, and (ii)
incorporates or has been amended to incorporate all provisions required to
comply with the Tax Reform Act of 1986 and subsequent legislation to the extent
such amendment or incorporation is required as of the Closing Date. Company does
not have any plan or commitment to establish any new Plan, to modify any Plan
(except to the extent required by law or to conform any such Plan to the
requirements of any applicable law, in each case as previously disclosed to
Parent in writing, or as required by this Agreement), or to enter into any new
Plan. Each Plan can be amended, terminated or otherwise discontinued after the
Effective Time in accordance with its terms, without liability to Parent,
Company or any of its Affiliates (other than ordinary administration expenses
and expenses for benefits accrued but not yet paid).
(c) Neither Company, any Subsidiary of Company, nor any of their Affiliates
has at any time ever maintained, established, sponsored, participated in, or
contributed to any plan subject to Title IV of ERISA or Section 412 of the Code
and at no time has Company or any Subsidiary of Company contributed to or been
requested to contribute to any "multiemployer plan," as such term is defined in
ERISA or to any plan described in Section 413(c) of the Code. Neither Company,
any Subsidiary of Company, nor any officer or director of Company or any
Subsidiary of Company is subject to any liability or penalty under Section 4975
through 4980B of the Code or Title I of ERISA. No "prohibited transaction,"
within the meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA,
and not otherwise exempt under Section 408 of ERISA, has occurred with respect
to any Plan which could subject Company or any Subsidiary of Company to material
liabilities.
(d) Neither Company, any of its Subsidiaries, nor any of their Affiliates
has, prior to the Effective Time and in any material respect, violated any of
the health continuation requirements of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA"), the requirements of the Family
Medical Leave Act of 1993, as amended, the requirements of the Women's Health
and Cancer Rights Act, as amended, the requirements of the Newborns' and
Mothers' Health Protection Act of 1996, as amended, or any similar provisions of
state law applicable to employees of Company or any of its Subsidiaries. None of
the Plans promises or provides retiree medical or other retiree welfare benefits
to any person except as required by applicable law, and neither Company nor any
of its Subsidiaries has represented, promised or contracted (whether in oral or
written form) to provide such retiree benefits to any employee, former employee,
director, consultant or other person, except to the extent required by statute.
(e) Neither Company nor any of its Subsidiaries is bound by or subject to
(and none of its respective assets or properties is bound by or subject to) any
arrangement with any labor union. No employee of Company or any of its
Subsidiaries is represented by any labor union or covered by any collective
bargaining agreement and, to the knowledge of Company, no campaign to establish
such representation is in progress. There is no pending or, to the knowledge of
Company, threatened labor dispute involving Company or any of its Subsidiaries
and any group of its employees nor has Company or any of its Subsidiaries
experienced any labor interruptions over the past three (3) years, and Company
and its Subsidiaries consider their relationships with their employees to be
good. The Company and its Subsidiaries are in compliance in all material
respects with all applicable material foreign, federal, state and local laws,
rules and regulations respecting employment, employment practices, terms and
conditions of employment and wages and hours.
(f) Except as disclosed on Schedule 2.11(f) of the Company Schedule,
neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including
severance, unemployment compensation, golden parachute, bonus or otherwise)
becoming due to any shareholder, director or employee of Company or any of its
Subsidiaries under any Plan or otherwise, (ii) materially increase any benefits
otherwise payable under any Plan, or (iii) result in the acceleration of the
time of payment or vesting of any such benefits.
(g) Each International Employee Plan (as defined below) has been
established, maintained and administered in all material respects in compliance
with its terms and conditions and with the requirements prescribed by any and
all statutory or regulatory laws that are applicable to such International
Employee Plan.
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Furthermore, no International Employee Plan has unfunded liabilities that, as of
the Effective Time, will not be offset by insurance or fully accrued. Except as
required by law, no condition exists that would prevent Company or Parent from
terminating or amending any International Employee Plan at any time for any
reason. For purposes of this Section "INTERNATIONAL EMPLOYEE PLAN" shall mean
each Plan that has been adopted or maintained by Company or any Subsidiary of
Company, whether informally or formally, for the benefit of current or former
employees of Company or any Subsidiary of Company outside the United States.
(h) Except as set forth on Section 2.11(h) of Company's Schedule, no
payment or benefit that will or may be made by the Company or Parent or any of
their respective affiliates in connection with the Merger with respect to any
Employee will be characterized as an "excess parachute payment", within the
meaning of Section 280G(b)(1) of the Code.
2.12 Labor Matters. Except as set forth on Section 2.12 of Company's
Schedule, (i) there are no material controversies pending or, to the knowledge
of Company, threatened, between Company or any of its Subsidiaries and any of
their respective employees which controversies have or will have a Material
Adverse Effect on Company or any of its Subsidiaries; (ii) as of the date of
this Agreement, neither Company nor any of its Subsidiaries is a party to any
collective bargaining agreement or other labor union contract applicable to
persons employed by Company or any of its Subsidiaries nor does Company or any
of its Subsidiaries know of any activities or proceedings of any labor union to
organize any such employees; and (iii) as of the date of this Agreement, neither
Company nor any of its Subsidiaries has any knowledge of any strikes, slowdowns,
work stoppages or lockouts, or threats thereof, by or with respect to any
employees of Company or any of its Subsidiaries.
2.13 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by Company for inclusion or incorporation by
reference in (i) the registration statement on Form S-4 to be filed with the SEC
by Parent in connection with the issuance of the Parent Common Stock in or as a
result of the Merger (the "S-4") will, at the time the S-4 becomes effective
under the Securities Act, contains any untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary in
order to make such statements therein, in light of the circumstances under which
they are made, not misleading; and (ii) the proxy statement/prospectus to be
filed with the SEC by Company pursuant to Section 5.1(a) hereof (the "PROXY
STATEMENT/PROSPECTUS") will, at the date mailed to the shareholders of Company
and at the time of the special shareholders meeting of Company (the "COMPANY
SHAREHOLDERS' MEETING") in connection with the transactions contemplated hereby
and as of the Effective Time, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. The Proxy Statement/ Prospectus will comply as to
form in all material respects with the provisions of the Exchange Act and the
rules and regulations promulgated by the SEC thereunder. Notwithstanding the
foregoing, Company makes no representation or warranty with respect to any
information supplied by Parent or Merger Sub which is contained in any of the
foregoing documents.
2.14 Restrictions on Business Activities. There is no agreement,
commitment, judgment, injunction, order or decree binding upon Company or any of
its Subsidiaries or to which Company or any of its Subsidiaries is a party which
has or could reasonably be expected to have the effect of prohibiting or
materially impairing any business practice of Company or any of its
Subsidiaries, any acquisition of property by Company or any of its Subsidiaries
or the conduct of business by Company or any of its Subsidiaries as currently
conducted other than such effects, individually or in the aggregate, which have
not had and will not have, a Material Adverse Effect on Company any its
Subsidiaries taken as a whole.
2.15 Title to Property. Neither Company nor any of its Subsidiaries owns
any material real property. Company and each of its Subsidiaries have good and
defensible title to all of their material properties and assets, free and clear
of all liens, charges and encumbrances except liens for taxes not yet due and
payable and such liens or other imperfections of title, if any, as do not
materially detract from the value of or materially interfere with the present
use of the property affected thereby; and all leases pursuant to which Company
or any of its Subsidiaries lease from others material real or personal property
are in good standing, valid and effective in accordance with their respective
terms, and there is not, under any of such leases, any existing
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material default or event of default of Company or any of its Subsidiaries or,
to Company's knowledge, any other party (or any event which with notice or lapse
of time, or both, would constitute a material default and in respect of which
Company or any of its Subsidiaries has not taken adequate steps to prevent such
default from occurring), except where the lack of such good standing, validity
and effectiveness or the existence of such default or event of default would not
have a Material Advance Effect on Company and its Subsidiaries taken as a whole.
All the plants, structures and equipment owned by Company and its Subsidiaries,
and to the knowledge of Company, all the plants, structures and equipment leased
by Company, except such as may be under construction, are in good operating
condition and repair, in all material respects.
2.16 Taxes.
(a) Definition of Taxes. For the purposes of this Agreement, "TAX" or
"TAXES" refers to any and all federal, state, local and foreign taxes,
assessments and other governmental charges, duties, impositions and liabilities
relating to taxes, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed with
respect to such amounts and any obligations under any agreements or arrangements
with any other person with respect to such amounts and including any liability
for taxes of a predecessor entity.
(b) Tax Returns and Audits. Except as set forth in Section 2.16(b) of the
Company Schedule:
(i) Company and each of its Subsidiaries have timely filed all
federal, state, local and foreign returns, estimates, information
statements and reports ("RETURNS") relating to Taxes required to be filed
by Company and each of its Subsidiaries with any Tax authority prior to the
date hereof, except such Returns which are not material to Company. Company
and each of its Subsidiaries have paid all Taxes shown to be due on such
Returns.
(ii) Company and each of its Subsidiaries as of the Effective Time
will have withheld with respect to its employees all federal and state
income Taxes, Taxes pursuant to the Federal Insurance Contribution Act,
Taxes pursuant to the Federal Unemployment Tax Act and other Taxes required
to be withheld, except such Taxes which are not material to Company.
(iii) Neither Company nor any of its Subsidiaries has been delinquent
in the payment of any material Tax nor is there any material Tax deficiency
outstanding, proposed or assessed against Company or any of its
Subsidiaries, nor has Company or any of its Subsidiaries executed any
unexpired waiver of any statute of limitations on or extending the period
for the assessment or collection of any Tax.
(iv) No audit or other examination of any Return of Company or any of
its Subsidiaries by any Tax authority is presently in progress, nor has
Company or any of its Subsidiaries been notified in writing of any request
for such an audit or other examination.
(v) No adjustment relating to any Returns filed by Company or any of
its Subsidiaries has been proposed in writing, formally or informally, by
any Tax authority to the Company or any of its Subsidiaries or any
representative thereof.
(vi) Neither the Company nor any of its Subsidiaries has any liability
for any material unpaid Taxes which has not been accrued for or reserved on
Company balance sheet included in Company's report on Form 10-Q filed on
August 13, 1999, whether asserted or unasserted, contingent or otherwise,
which is material to Company, other than any liability for unpaid Taxes
that may have accrued since June 30, 1999 in connection with the operation
of the business of Company and its Subsidiaries in the ordinary course.
(vii) There is no contract, agreement, plan or arrangement to which
Company or any of its Subsidiaries is a party as of the date of this
Agreement, including but not limited to the provisions of this Agreement,
covering any employee or former employee of Company or any of its
Subsidiaries that, individually or collectively, would reasonably be
expected to give rise to the payment of any amount that would not be
deductible pursuant to Sections 280G, 404 or 162(m) of the Code. There is
no contract,
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agreement, plan or arrangement to which Company or any of its Subsidiaries
is a party or by which it is bound to compensate any individual for excise
taxes paid pursuant to Section 4999 of the Code.
(viii) Neither Company nor any of its Subsidiaries has filed any
consent agreement under Section 341(f) of the Code or agreed to have
Section 341(f)(2) of the Code apply to any disposition of a subsection (f)
asset (as defined in Section 341(f)(4) of the Code) owned by Company or any
of its Subsidiaries.
(ix) Neither Company nor any of its Subsidiaries is party to or has
any obligation under any tax-sharing, tax indemnity or tax allocation
agreement or arrangement other than between Company and its Subsidiaries.
(x) None of Company's or its Subsidiaries' assets is tax exempt use
property within the meaning of Section 168(h) of the Code.
(xi) Neither Company nor any of its Subsidiaries has distributed the
stock of any corporation in a transaction satisfying the requirements of
Section 355 of the Code since April 16, 1997. The stock of neither Company
nor any of its Subsidiaries has been distributed in a transaction
satisfying the requirements of Section 355 of the Code since April 16,
1997.
2.17 Environmental Matters.
(a) Hazardous Material. Except as would not result in material liability to
Company or any of its Subsidiaries, no underground storage tanks and no amount
of any substance that has been designated by any Governmental Entity 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, petroleum, urea-formaldehyde and all substances listed as
hazardous substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a hazardous
waste pursuant to the United States Resource Conservation and Recovery Act of
1976, as amended, and the regulations promulgated pursuant to said laws, but
excluding office and janitorial supplies, (a "HAZARDOUS MATERIAL") are present,
as a result of the actions of Company or any of its Subsidiaries or any
affiliate of Company, or, to Company's knowledge, as a result of any actions of
any third party or otherwise, in, on or under any property, including the land
and the improvements, ground water and surface water thereof, that Company or
any of its Subsidiaries has at any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Except as would not result in a
Material Adverse Effect to Company (in any individual case or in the aggregate)
(i) neither Company nor any of its Subsidiaries has transported, stored, used,
manufactured, disposed of, released or exposed its employees or others to
Hazardous Materials in violation of any law in effect on or before the Effective
Time, and (ii) neither Company nor any of its Subsidiaries has disposed of,
transported, sold, used, released, exposed its employees or others to or
manufactured any product containing a Hazardous Material (collectively
"HAZARDOUS MATERIALS ACTIVITIES") in violation of any rule, regulation, treaty
or statute promulgated by any Governmental Entity in effect prior to or as of
the date hereof to prohibit, regulate or control Hazardous Materials or any
Hazardous Material Activity.
(c) Permits. Company and its Subsidiaries currently hold all environmental
approvals, permits, licenses, clearances and consents (the "COMPANY
ENVIRONMENTAL PERMITS") necessary for the conduct of Company's and its
Subsidiaries' Hazardous Material Activities and other businesses of the Company
and its Subsidiaries as such activities and businesses are currently being
conducted, except any Company Environmental Permits the failure of which to
obtain or renew would not result in a Material Adverse Effect on Company and its
Subsidiaries taken as a whole.
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ or injunction is pending, and to Company's
knowledge, no action, proceeding, revocation proceeding, amendment procedure,
writ or injunction has been threatened by any Governmental Entity against
Company or any of its Subsidiaries in a writing delivered to Company or any of
its Subsidiaries concerning any Company Environmental Permit, Hazardous Material
or any Hazardous Materials Activity of Company or any of its
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Subsidiaries. To Company's knowledge, there is not any fact or circumstance
which could involve Company or any of its Subsidiaries in any environmental
litigation or impose upon Company any material environmental liability.
2.18 Brokers. Except as set forth in Section 2.18 of the Company
Schedules, Company has not incurred, nor will it incur, directly or indirectly,
any liability for brokerage or finders fees or agent's commissions or any
similar charges in connection with this Agreement or any transaction
contemplated hereby.
2.19 Intellectual Property. For the purposes of this Agreement, the
following terms have the following definitions:
"INTELLECTUAL PROPERTY" shall mean any or all of the following and all
worldwide common law and statutory rights in, arising out of, or associated
therewith: (i) patents and applications therefor and all reissues,
divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof ("PATENTS"); (ii) inventions (whether
patentable or not), invention disclosures, improvements, trade secrets,
proprietary information, know-how, technology, technical data and customer
lists, and all documentation relating to any of the foregoing; (iii)
copyrights, copyrights registrations and applications therefor, and all
other rights corresponding thereto throughout the world; (iv) domain names,
uniform resource locators ("URLS") and other names and locators associated
with the Internet ("DOMAIN NAMES"); (v) industrial designs and any
registrations and applications therefor; (vi) trade names, logos, common
law trademarks and service marks, trademark and service mark registrations
and applications therefor; (vii) all databases and data collections and all
rights therein; (viii) all moral and economic rights of authors and
inventors, however denominated; and (ix) any similar or equivalent rights
to any of the foregoing (as applicable).
"COMPANY INTELLECTUAL PROPERTY" shall mean any Intellectual Property that
is owned by, or exclusively licensed to, Company and its Subsidiaries.
"REGISTERED INTELLECTUAL PROPERTY" means all Intellectual Property that is
the subject of an application, certificate, filing, registration or other
document issued, filed with, or recorded by any private, state, government
or other legal authority.
"COMPANY REGISTERED INTELLECTUAL PROPERTY" means all of the Registered
Intellectual Property owned by, or filed in the name of, Company or any of
its Subsidiaries.
(a) Section 2.19(a) of the Company Schedule is a complete and accurate
list of all Company Registered Intellectual Property and specifies, where
applicable, the jurisdictions in which each such item of Company Registered
Intellectual Property has been issued or registered and lists any
proceedings or actions before any court or tribunal (including the United
States Patent and Trademark Office (the "PTO") or equivalent authority
anywhere in the world) related to any of the Company Registered
Intellectual Property.
(b) Section 2.19(b) of the Company Schedule is a complete and accurate
list (by name and version number) of all current versions of current
products or service offerings of Company or any of its Subsidiaries
("COMPANY PRODUCTS").
(c) No Company Intellectual Property or Company Product is subject to
any material proceeding or outstanding decree, order, judgment, contract,
license, agreement, or stipulation restricting in any manner the use,
transfer, or licensing thereof by Company or any of its Subsidiaries, or
which may affect the validity, use or enforceability of such Company
Intellectual Property or Company Product.
(d) Company owns and has good and exclusive title to, each material
item of Company Intellectual Property owned by it free and clear of any
lien or encumbrance (excluding non-exclusive licenses and related
restrictions granted in the ordinary course). Without limiting the
foregoing, (i) Company owns exclusively, and has good title to, all
copyrighted works that are Company Products or which Company or any of its
Subsidiaries otherwise purports to own and (ii) except as would not have a
Material Adverse
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Effect, to the extent that any Patents would be infringed by any Company
Products, Company is the exclusive owner of such Patents.
(e) To the extent that any material technology, material software or
material Intellectual Property has been developed or created independently
or jointly by a third party for Company or any of its Subsidiaries or is
incorporated into any of Company Products, Company has a written agreement
with such third party with respect thereto and Company thereby either (i)
has obtained ownership of, and is the exclusive owner of, or (ii) has
obtained a perpetual, non-terminable license (sufficient for the conduct of
its business as currently conducted and as proposed to be conducted) to all
such third party's Intellectual Property in such work, material or
invention by operation of law or by valid assignment, to the fullest extent
it is legally possible to do so.
(f) Neither Company nor any of its Subsidiaries has transferred
ownership of, or granted any exclusive license with respect to, any
Intellectual Property that is material Company Intellectual Property, to
any third party, or knowingly permitted Company's rights in such material
Company Intellectual Property to lapse or enter the public domain.
(g) Section 2.19(g) of the Company Schedule lists all contracts,
licenses and agreements to which Company or any of its Subsidiaries is a
party: (i) with respect to Company Intellectual Property licensed or
transferred to any third party resulting in, or which may result in, annual
payments of $1,000,000 or more to Company and its Subsidiaries (other than
end-user licenses in the ordinary course in the period subsequent to
January 1, 1999); or (ii) pursuant to which a third party has licensed or
transferred any material Intellectual Property to Company resulting in, or
which may result in, annual payments of $500,000 or more by Company or any
of its Subsidiaries in the period subsequent to January 1, 1999.
(h) Each material contract, license and agreement listed in Section
2.19(h) of the Company Schedule is a legal and binding obligation of
Company or the Subsidiary of Company which is a party thereto, and, to the
knowledge of Company or the Subsidiary of Company, is a legal and binding
obligation on any other party thereto, in each case enforceable against
Company, the Subsidiary of Company or such other party in accordance with
their respective terms, except as may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles, and, to
the knowledge of Company, there has not occurred any material default by
any party thereto which remains unremedied as of the date hereof.
(i) The operation of the business of Company and its Subsidiaries as
such business currently is conducted, including (i) Company's and its
Subsidiaries' design, development, manufacture, distribution, reproduction,
marketing or sale of the products or services of Company and its
Subsidiaries (including Company Products) and (ii) Company's use of any
product, device or process, to its knowledge and except as would not have a
Material Adverse Effect, has not and does not and will not infringe or
misappropriate the Intellectual Property of any third party or constitute
unfair competition or trade practices under the laws of any jurisdiction.
(j) Neither Company nor any of its Subsidiaries has received written
notice from any third party that the operation of the business of Company
or any of its Subsidiaries or any act, product or service of Company or any
of its Subsidiaries, infringes or misappropriates the Intellectual Property
of any third party or constitutes unfair competition or trade practices
under the laws of any jurisdiction.
(k) To the knowledge of Company, no person has infringed or is
infringing or misappropriating any material Company Intellectual Property.
(l) Company and each of its Subsidiaries has taken commercially
reasonable steps to protect Company's and its Subsidiaries' rights in
Company's confidential information and trade secrets that it wishes to
protect or any trade secrets or confidential information of third parties
provided to Company or any of its Subsidiaries, and, without limiting the
foregoing, each of Company and its Subsidiaries has and uses its best
commercially reasonable efforts to enforce a policy requiring each employee
and contractor to execute a proprietary information/confidentiality
agreement substantially in the form provided to Parent and all current and
former employees and contractors of Company and any of its Subsidiaries
have
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executed such an agreement, except where the failure to do so would not
have a Material Adverse Effect on Company or its Subsidiaries taken as a
whole.
(m) The Company Products will be fully compatible in normal operation
with changes to outputs, data or other information in relation to dates
arising in the year 2000 and beyond, without a material loss of performance
or a material loss of use, affected by hardware or third party software
(including but not limited to operating systems) or unauthorized
modifications made to Company Products. To Company's knowledge, all of
Company's and its Subsidiaries' Information Technology (as defined below)
is Year 2000 Compliant, and will not cause an interruption in the ongoing
operations of Company's or any of its Subsidiaries' business on or after
January 1, 2000 except such interruptions as would not have a Material
Adverse Effect on Company and its Subsidiaries taken as a whole. For
purposes of the foregoing, the term "INFORMATION TECHNOLOGY" shall mean and
include all material software, hardware, firmware, telecommunications
systems, network systems, embedded systems and other systems, components
and/or services (other than general utility services including gas,
electric, telephone and postal) that are owned or used by Company or any of
its Subsidiaries in the conduct of their business, or purchased by Company
or any of its Subsidiaries from third-party suppliers.
2.20 Agreements, Contracts and Commitments. Except as contemplated by this
Agreement, including the Schedules hereto, neither Company nor any of its
Subsidiaries is a party to or is bound by:
(a) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement;
(b) any material agreement of indemnification or any guaranty other
than any agreement of indemnification entered into in connection with the
sale or license of software products in the ordinary course of business;
(c) any material agreement, contract or commitment containing any
covenant limiting in any respect the right of Company or any of its
Subsidiaries to engage in any line of business or to compete with any
person or granting any exclusive distribution rights;
(d) any agreement, contract or commitment currently in force relating
to the disposition or acquisition by Company or any of its Subsidiaries
after the date of this Agreement of a material amount of assets not in the
ordinary course of business or pursuant to which Company or any of its
Subsidiaries has any material ownership interest in any corporation,
partnership, joint venture or other business enterprise other than
Company's Subsidiaries;
(e) any dealer, distributor, joint marketing or development agreement
currently in force under which Company or any of its Subsidiaries have
continuing material obligations to jointly market any product, technology
or service and which may not be canceled without penalty upon notice of
ninety (90) days or less, or any material agreement pursuant to which
Company or any of its Subsidiaries have continuing material obligations to
jointly develop any intellectual property that will not be owned, in whole
or in part, by Company or any of its Subsidiaries and which may not be
canceled without penalty upon notice of ninety (90) days or less;
(f) except as set forth in Section 2.20(f) of the Company Schedule,
any other agreement, contract or commitment that provides for individual or
aggregate payments by Company in the period subsequent to January 1, 1998
in excess of $500,000, or to Company in excess of $1,000,000 in the period
subsequent to January 1, 1998.
Except as set forth in Section 2.20 of the Company Schedule, neither
Company nor any of its Subsidiaries, nor to Company's knowledge any other party
to a Company Contract (as defined below), is in breach, violation or default
under, and neither Company nor any of its Subsidiaries has received written
notice that it has breached, violated or defaulted under, any of the material
terms or conditions of any of the
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agreements, contracts or commitments to which Company or any of its Subsidiaries
is a party or by which it is bound that are required to be disclosed in the
Company Schedule (any such agreement, contract or commitment, a "COMPANY
CONTRACT") in such a manner as would permit any other party to cancel or
terminate any such Company Contract, or would permit any other party to seek
material damages or other remedies (for any or all of such breaches, violations
or defaults, in the aggregate).
2.21 Insurance. Company maintains insurance policies and fidelity bonds
covering the assets, business, equipment, properties, operations, employees,
officers and directors of Company and its Subsidiaries (collectively, the
"INSURANCE POLICIES") which are of the type and in amounts customarily carried
by persons conducting businesses similar to those of Company and its
Subsidiaries. Except as set forth in Section 2.21 of the Company Schedule, there
is no material claim by Company or any of its Subsidiaries pending under any of
the material Insurance Policies as to which coverage has been questioned, denied
or disputed by the underwriters of such policies or bonds.
2.22 Opinion of Financial Advisor. Company has been advised in writing by
its financial advisor, BancBoston Robertson Stephens Inc. that in its written
opinion, as of the date of this Agreement, the Exchange Ratio is fair to the
shareholders of Company from a financial point of view.
2.23 Board Approval. The Board of Directors of Company has, as of the date
of this Agreement, unanimously (i) approved, subject to shareholder approval,
this Agreement, the Stock Option Agreement and the transactions contemplated
hereby and thereby, (ii) determined that the Merger is in the best interests of
the shareholders of Company and is on terms that are fair to such shareholders
and (iii) recommended that the shareholders of Company approve this Agreement
and the Merger.
2.24 Vote Required. The affirmative vote of a majority of the votes that
holders of the outstanding shares of Company Common Stock are entitled to vote
with respect to the Merger is the only vote of the holders of any class or
series of Company's capital stock necessary to approve this Agreement and the
transactions contemplated hereby pursuant to California Law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub jointly and severally represent and warrant to
Company, subject to such exceptions as are specifically disclosed in writing in
the disclosure letter and referencing a specific representation supplied by
Parent to Company dated as of the date hereof and certified by a duly authorized
officer of Parent (the "PARENT SCHEDULE"), as follows:
3.1 Organization and Qualification; Subsidiaries. Each of Parent and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing, to the extent applicable, under the laws of the jurisdiction of its
incorporation and has the requisite corporate power and authority to own, lease
and operate its assets and properties and to carry on its business as it is now
being conducted, except where the failure to do so would not, individually or in
the aggregate, have a Material Adverse Effect on Parent. Each of Parent and its
Subsidiaries is in possession of all Approvals necessary to own, lease and
operate the properties it purports to own, operate or lease and to carry on its
business as it is now being conducted, except where the failure to have such
Approvals would not, individually or in the aggregate, have a Material Adverse
Effect on Parent. Except as set forth in Section 3.1 of the Parent Schedule,
each of Parent and its Subsidiaries is duly qualified or licensed as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of the properties owned, leased or operated by it or the nature of
its activities makes such qualification or licensing necessary, except for such
failures to be so duly qualified or licensed and in good standing that would
not, either individually or in the aggregate, have a Material Adverse Effect on
Parent.
3.2 Articles of Incorporation and Bylaws. Parent has previously furnished
to Company complete and correct copies of its Articles of Incorporation and
Bylaws as amended to date. Such Articles of Incorporation and Bylaws and
equivalent organizational documents of each of its Subsidiaries are in full
force and effect.
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Parent is not in violation of any of the provisions of the Company Charter
Documents, and no subsidiary of Company is in violation of any of its equivalent
organizational documents.
3.3 Capitalization. The authorized capital stock of Parent consists of (i)
150,000,000 shares of Parent Common Stock, par value $0.001 per share, and (ii)
5,000,000 shares of Preferred Stock, par value $0.001 per share ("PARENT
PREFERRED STOCK"). As of October 19, 1999, (i) 43,299,259 shares of Parent
Common Stock were issued and outstanding, (ii) no shares of Parent Common Stock
were held in treasury by Parent or by Subsidiaries of Parent, (iii) 600,000
shares of Parent Common Stock were reserved for future issuance pursuant to
Parent's employee stock purchase plan, (iv) 13,450,862 shares of Parent Common
Stock were reserved for issuance upon the exercise of outstanding options to
purchase Parent Common Stock and 532,247 and 34,226 options to purchase Parent
Common Stock are outstanding under the 1996 Amplitude Stock Option Plan and the
1998 dotOne Stock Option Plan, respectively, but no shares of Parent Common
Stock were reserved for issuance upon their exercise (all options to purchase
Parent Common Stock referred to collectively hereinafter as "PARENT OPTIONS").
As of the date hereof, no shares of Parent Preferred Stock were issued or
outstanding. The authorized capital stock of Merger Sub consists of 1,000 shares
of common stock, par value $0.001 per share, all of which, as of the date
hereof, are issued and outstanding. All of the outstanding shares of Parent's
and Merger Sub's respective capital stock have been duly authorized and validly
issued and are fully paid and nonassessable. All shares of Parent Common Stock
subject to issuance as aforesaid, upon issuance on the terms and conditions
specified in the instruments pursuant to which they are issuable, shall, and the
shares of Parent Common Stock to be issued pursuant to the Merger will be, duly
authorized, validly issued, fully paid and nonassessable. All of the outstanding
shares of capital stock (other than directors' qualifying shares) of each of
Parent's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and all such shares (other than directors' qualifying shares) are
owned by Parent or another Subsidiary of Parent free and clear of all security
interests, liens, claims, pledges, agreements, limitations in Parent's voting
rights, charges or other encumbrances of any nature whatsoever.
3.4 Authority Relative to this Agreement. Each of Parent and Merger Sub
has all necessary corporate power and authority to execute and deliver this
Agreement, the Agreement of Merger and the Stock Option Agreement, and to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby (including the Merger). The
execution and delivery of this Agreement, the Agreement of Merger and the Stock
Option Agreement by Parent and Merger Sub and the consummation by Parent and
Merger Sub of the transactions contemplated hereby and thereby (including the
Merger) have been duly and validly authorized by all necessary corporate action
on the part of Parent and Merger Sub, and no other corporate proceedings on the
part of Parent or Merger Sub are necessary to authorize this Agreement, the
Agreement of Merger and the Stock Option Agreement, or to consummate the
transactions so contemplated (including the Merger). This Agreement, the
Agreement of Merger and the Stock Option Agreement have been duly and validly
executed and delivered by Parent and Merger Sub and, assuming the due
authorization, execution and delivery thereof by Company, constitute legal and
binding obligations of Parent and Merger Sub, enforceable against Parent and
Merger Sub in accordance with their respective terms.
3.5 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Parent and Merger Sub
and the Stock Option Agreement by Parent do not, and the performance of this
Agreement by Parent and Merger Sub and the Stock Option Agreement by Parent
shall not, (i) conflict with or violate the Articles of Incorporation, Bylaws or
equivalent organizational documents of Parent or any of its Subsidiaries, (ii)
subject to compliance with the requirements set forth in Section 3.5(b) below,
conflict with or violate any law, rule, regulation, order, judgment or decree
applicable to Parent or any of its Subsidiaries or by which it or their
respective properties are bound or affected, or (iii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or impair Parent's or any such Subsidiary's
rights or alter the rights or obligations of any third party under, or give to
others any rights of termination, amendment, acceleration or cancellation of, or
result in the creation of a lien or encumbrance on any of the properties or
assets of Parent or any of its Subsidiaries pursuant to, any material note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Parent or any of its
Subsidiaries is a party or by which Parent or any of its Subsidiaries or its or
any of their respective properties
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are bound or affected, except, with respect to clauses (ii) or (iii), for any
such conflicts, violations, breaches, defaults or other occurrences that would
not in the case of clauses (ii) or (iii), individually or in the aggregate, have
a Material Adverse Effect on Parent.
(b) The execution and delivery of this Agreement and the Agreement of
Merger by Parent and Merger Sub and the Stock Option Agreement and the Agreement
of Merger by Parent do not, and the performance of this Agreement by Parent and
Merger Sub will not, require any consent, approval, authorization or permit of,
or filing with or notification to, any Governmental Entity except (i) for
applicable requirements, if any, of the Securities Act, the Exchange Act, Blue
Sky Laws, the pre-merger notification requirements of the HSR Act and of foreign
governmental entities and the rules and regulations thereunder, the rules and
regulations of Nasdaq, and the filing and recordation of the Merger Documents as
required by California Law and (ii) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications,
(x) would not prevent consummation of the Merger or otherwise prevent Parent or
Merger Sub from performing their respective obligations under this Agreement or
(y) could not, individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect on Parent.
3.6 SEC Filings; Financial Statements.
(a) Parent has made available to Company a correct and complete copy of
each report, schedule, registration statement and definitive proxy statement
filed by Parent with the SEC on or after January 29, 1999 (the "PARENT SEC
REPORTS"), which are all the forms, reports and documents required to be filed
by Parent with the SEC since that date. The Parent SEC Reports (A) were prepared
in accordance with the requirements of the Securities Act or the Exchange Act,
as the case may be, and (B) did not at the time they were filed (or if amended
or superseded by a filing prior to the date of this Agreement, then on the date
of such filing) contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. None of Parent's Subsidiaries is required to file any reports or
other documents with the SEC.
(b) Each set of consolidated financial statements (including, in each case,
any related notes thereto) contained in the Parent SEC Reports was prepared in
accordance with GAAP applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case of
unaudited statements, do not contain footnotes as permitted by Form 10-Q of the
Exchange Act) and each fairly presents in all material respects the consolidated
financial position of Parent and its Subsidiaries at the respective dates
thereof and the consolidated results of its operations and cash flows for the
periods indicated, except that the unaudited interim financial statements were
or are subject to normal adjustments which were not or are not expected to be
material in amount.
(c) Since the date of the balance sheet included in Parent's report on Form
10-Q filed on August 16, 1999, and until the date hereof, there has not occurred
any Material Adverse Effect on Parent.
3.7 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by Parent for inclusion or incorporation by reference
in (i) the S-4 will, at the time the S-4 becomes effective under the Securities
Act, contains any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading; and (ii) the Proxy Statement/Prospectus will, at the date mailed to
the shareholders of Company and at the time of Company Shareholders' Meeting and
as of the Effective Time, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. The S-4 will comply as to form in all material
respects with the provisions of the Securities Act and the rules and regulations
promulgated by the SEC thereunder. Notwithstanding the foregoing, Parent makes
no representation or warranty with respect to any information supplied by
Company which is contained in any of the foregoing documents.
3.8 No Undisclosed Liabilities. Except as set forth in Section 3.8 of the
Parent Schedules, neither Parent nor any of its Subsidiaries has any liabilities
(absolute, accrued, contingent or otherwise) of a nature
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required to be disclosed on a balance sheet or in the related notes to the
consolidated financial statements prepared in accordance with GAAP which are,
individually or in the aggregate, material to the business, results of
operations or financial condition of Parent and its Subsidiaries taken as a
whole, except (i) liabilities provided for in Parent's balance sheet included in
Parent's report on Form 10-Q filed on August 16, 1999 or (ii) liabilities
incurred since June 30, 1999 in the ordinary course of business, none of which
is material to the business, results of operations or financial condition of
Parent and its Subsidiaries, taken as a whole.
3.9 Absence of Certain Changes or Events. Except as set forth in Section
3.9 of the Parent Schedules since June 30, 1999, there has not been: (i) any
Material Adverse Effect on Parent, (ii) any declaration, setting aside or
payment of any dividend on, or other distribution (whether in cash, stock or
property) in respect of, any of Parent's or any of its Subsidiaries' capital
stock, or any purchase, redemption or other acquisition by Parent of any of
Parent's capital stock or any other securities of Parent or its Subsidiaries or
any options, warrants, calls or rights to acquire any such shares or other
securities except for repurchases from employees following their termination
pursuant to the terms of their pre-existing stock option or purchase agreements,
(iii) any split, combination or reclassification of any of Parent's or any of
its Subsidiaries' capital stock, (iv) any granting by Parent or any of its
Subsidiaries of any increase in compensation or fringe benefits, except for
normal increases of cash compensation in the ordinary course of business
consistent with past practice, or any payment by Parent or any of its
Subsidiaries of any bonus, except for bonuses made in the ordinary course of
business consistent with past practice, or any granting by Parent or any of its
Subsidiaries of any increase in severance or termination pay or any entry by
Parent or any of its Subsidiaries into any currently effective employment,
severance, termination or indemnification agreement or any agreement the
benefits of which are contingent or the terms of which are materially altered
upon the occurrence of a transaction involving Parent of the nature contemplated
hereby, (v) entry by Parent or any of its Subsidiaries into any licensing or
other agreement with regard to the acquisition or disposition of any
Intellectual Property (as defined in Section 2.19) other than licenses in the
ordinary course of business consistent with past practice or any amendment or
consent with respect to any licensing agreement filed or required to be filed by
Parent with the SEC, (vi) any material change by Parent in its accounting
methods, principles or practices, except as required by concurrent changes in
GAAP, or (vii) any revaluation by Parent of any of its assets, including,
without limitation, writing down the value of capitalized inventory or writing
off notes or accounts receivable or any sale of assets of the Parent other than
in the ordinary course of business.
3.10 Absence of Litigation. Except as set forth in Section 3.10 of the
Parent Schedules, there are no claims, actions, suits or proceedings pending or,
to the knowledge of Parent, threatened (or, to the knowledge of Parent, any
governmental or regulatory investigation pending or threatened) against Parent
or any of its Subsidiaries or any properties or rights of Parent or any of its
Subsidiaries, before any court, arbitrator or administrative, governmental or
regulatory authority or body, domestic or foreign.
3.11 Employee Benefit Plans.
(a) All employee compensation, incentive, fringe or benefit plans,
programs, policies, commitments or other arrangements (whether or not set forth
in a written document and including, without limitation, all "employee benefit
plans" within the meaning of Section 3(3) of ERISA covering any active, former
employee, director or consultant of Parent, any Subsidiary of Parent or any
trade or business (whether or not incorporated) which is a member of a
controlled group or which is under common control with Parent within the meaning
of Section 414 of the Code (a "PARENT AFFILIATE"), or with respect to which
Parent has liability, are listed in Section 3.11(a) of the Parent Schedule
(collectively, the "PARENT PLANS"). Parent has provided to Company: (i) correct
and complete copies of all documents embodying each Plan including (without
limitation) all amendments thereto, all related trust documents, and all
material written agreements and contracts relating to each such Plan; (ii) the
three (3) most recent annual reports (Form Series 5500 and all schedules and
financial statements attached thereto), if any, required under ERISA or the Code
in connection with each Plan; (iii) the most recent summary plan description
together with the summary(ies) of material modifications thereto, if any,
required under ERISA with respect to each Plan; (iv) all IRS or DOL
determination, opinion, notification and advisory letters; (v) all material
correspondence to or from any governmental agency relating to any Plan; (vi)
samples of all COBRA forms and related notices; (vii) all discrimination tests
for each Plan for the most recent three (3) plan years; (viii) the most recent
annual
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actuarial valuations, if any, prepared for each Plan; (xi) if the Plan is
funded, the most recent annual and periodic accounting of Plan assets; (x) all
material written agreements and contracts relating to each Plan, including, but
not limited to, administrative service agreements, group annuity contracts and
group insurance contracts; (xi) all material communications to employees or
former employees relating to any amendments, terminations, establishments,
increases or decreases in benefits, acceleration of payments or vesting
schedules or other events which would result in any material liability under any
Plan or proposed Plan; (xii) all policies pertaining to fiduciary liability
insurance covering the fiduciaries for each Plan; and (xiii) all registration
statements, annual reports (Form 11-K and all attachments thereto) and
prospectuses prepared in connection with any Plan.
(b) Each Plan has been maintained and administered in all material respects
in compliance with its terms and with the requirements prescribed by any and all
statutes, orders, rules and regulations, including but not limited to ERISA and
the Code, which are applicable to such Parent Plans. No suit, action or other
litigation (excluding claims for benefits incurred in the ordinary course of
Plan activities) has been brought, or to the knowledge of Parent is threatened,
against or with respect to any such Plan. There are no audits, inquiries or
proceedings pending or, to the knowledge of Parent, threatened by the IRS or DOL
with respect to any Parent Plans. All contributions, reserves or premium
payments required to be made or accrued as of the date hereof to the Parent
Plans have been timely made or accrued. Any Plan intended to be qualified under
Section 401(a) of the Code and each trust intended to qualify under Section
501(a) of the Code (i) has either obtained a favorable determination,
notification, advisory and/or opinion letter, as applicable, as to its qualified
status from the IRS or still has a remaining period of time under applicable
Treasury Regulations or IRS pronouncements in which to apply for such letter and
to make any amendments necessary to obtain a favorable determination, and (ii)
incorporates or has been amended to incorporate all provisions required to
comply with the Tax Reform Act of 1986 and subsequent legislation to the extent
such amendment or incorporation is required as of the Closing Date. Parent does
not have any plan or commitment to establish any new Plan, to modify any Plan
(except to the extent required by law or to conform any such Plan to the
requirements of any applicable law, in each case as previously disclosed to
Company in writing, or as required by this Agreement), or to enter into any new
Plan. Each Plan can be amended, terminated or otherwise discontinued after the
Effective Time in accordance with its terms, without liability to Company,
Parent or any of its Parent Affiliates (other than ordinary administration
expenses and expenses for benefits accrued but not yet paid).
(c) Neither Parent, any of its Subsidiaries, nor any of their Parent
Affiliates has at any time ever maintained, established, sponsored, participated
in, or contributed to any plan subject to Title IV of ERISA or Section 412 of
the Code and at no time has Parent or any of its Subsidiaries contributed to or
been requested to contribute to any "multiemployer plan," as such term is
defined in ERISA or to any plan described in Section 413(c) of the Code. Neither
Parent, any of its Subsidiaries, nor any officer or director of Parent or any of
its Subsidiaries is subject to any liability or penalty under Section 4975
through 4980B of the Code or Title I of ERISA. No "prohibited transaction,"
within the meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA,
and not otherwise exempt under Section 408 of ERISA, has occurred with respect
to any Plan which could subject Parent or its Subsidiaries to material
liabilities.
(d) Neither Parent, any of its Subsidiaries, nor any of their Parent
Affiliates has, prior to the Effective Time and in any material respect,
violated any of the health continuation requirements of COBRA, the requirements
of the Family Medical Leave Act of 1993, as amended, the requirements of the
Women's Health and Cancer Rights Act, as amended, the requirements of the
Newborns' and Mothers' Health Protection Act of 1996, as amended, or any similar
provisions of state law applicable to employees of the Parent or any of its
Subsidiaries. None of the Parent Plans promises or provides retiree medical or
other retiree welfare benefits to any person except as required by applicable
law, and neither Parent nor any of its Subsidiaries has represented, promised or
contracted (whether in oral or written form) to provide such retiree benefits to
any employee, former employee, director, consultant or other person, except to
the extent required by statute.
(e) Neither Parent nor any of its Subsidiaries is bound by or subject to
(and none of its respective assets or properties is bound by or subject to) any
arrangement with any labor union. No employee of Parent or any of its
Subsidiaries is represented by any labor union or covered by any collective
bargaining agreement and, to
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the knowledge of Parent, no campaign to establish such representation is in
progress. There is no pending or, to the knowledge of Parent, threatened labor
dispute involving Parent or any of its Subsidiaries and any group of its
employees nor has Parent or any of its Subsidiaries experienced any labor
interruptions over the past three (3) years, and Parent and its Subsidiaries
consider their relationships with their employees to be good. The Parent and its
Subsidiaries are in compliance in all material respects with all applicable
material foreign, federal, state and local laws, rules and regulations
respecting employment, employment practices, terms and conditions of employment
and wages and hours.
(f) Except as disclosed on Schedule 3.11(f) of the Parent Schedule, neither
the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including
severance, unemployment compensation, golden parachute, bonus or otherwise)
becoming due to any shareholder, director or employee of Parent or any of its
Subsidiaries under any Plan or otherwise, (ii) materially increase any benefits
otherwise payable under any Plan, or (iii) result in the acceleration of the
time of payment or vesting of any such benefits.
(g) Each International Employee Plan (as defined below) has been
established, maintained and administered in compliance with its terms and
conditions and with the requirements prescribed by any and all statutory or
regulatory laws that are applicable to such International Employee Plan.
Furthermore, no International Employee Plan has unfunded liabilities that, as of
the Effective Time, will not be offset by insurance or fully accrued. Except as
required by law, no condition exists that would prevent the Parent from
terminating or amending any International Employee Plan at any time for any
reason. For purposes of this Section "INTERNATIONAL EMPLOYEE PLAN" shall mean
each Plan that has been adopted or maintained by the Parent or any of its
Subsidiaries, whether informally or formally, for the benefit of current or
former employees of the Parent or any of its Subsidiaries outside the United
States.
3.12 Tax Returns and Audits. Except as set forth in Section 3.12 of the
Parent Schedules:
(a) Parent and each of its Subsidiaries have timely filed all Returns
relating to Taxes required to be filed by the Parent and each of its
Subsidiaries with any Tax authority prior to the date hereof, except such
Returns which are not material to the Parent. The Parent and each of its
Subsidiaries have paid all Taxes shown to be due on such Returns.
(b) The Parent and each of its Subsidiaries as of the Effective Time
will have withheld with respect to its employees all federal and state
income Taxes, Taxes pursuant to the Federal Insurance Contribution Act,
Taxes pursuant to the Federal Unemployment Tax Act and other Taxes required
to be withheld, except such Taxes which are not material to the Parent.
(c) Neither the Parent nor any of its Subsidiaries has been delinquent
in the payment of any material Tax nor is there any material Tax deficiency
outstanding, proposed or assessed against the Parent or any of its
Subsidiaries, nor has the Parent or any of its Subsidiaries executed any
unexpired waiver of any statute of limitations on or extending the period
for the assessment or collection of any Tax.
(d) No audit or other examination of any Return of the Parent or any
of its Subsidiaries by any Tax authority is presently in progress, nor has
the Parent or any of its Subsidiaries been notified in writing of any
request for such an audit or other examination.
(e) No adjustment relating to any Returns filed by the Parent or any
of its Subsidiaries has been proposed in writing, formally or informally,
by any Tax authority to the Parent or any of its Subsidiaries or any
representative thereof.
(f) Neither the Parent nor any of its Subsidiaries has any liability
for any material unpaid Taxes which has not been accrued for or reserved on
the Parent balance sheet included in the Parent's report on Form 10-Q filed
on August 16, 1999, whether asserted or unasserted, contingent or
otherwise, which is material to the Parent, other than any liability for
unpaid Taxes that may have accrued since June 30, 1999 in connection with
the operation of the business of the Parent and its Subsidiaries in the
ordinary course.
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(g) There is no contract, agreement, plan or arrangement to which the
Parent or any of its Subsidiaries is a party as of the date of this
Agreement, including but not limited to the provisions of this Agreement,
covering any employee or former employee of the Parent or any of its
Subsidiaries that, individually or collectively, would reasonably be
expected to give rise to the payment of any amount that would not be
deductible pursuant to Sections 280G, 404 or 162(m) of the Code. There is
no contract, agreement, plan or arrangement to which the Parent or any of
its Subsidiaries is a party or by which it is bound to compensate any
individual for excise taxes paid pursuant to Section 4999 of the Code.
(h) Neither the Parent nor any of its Subsidiaries has filed any
consent agreement under Section 341(f) of the Code or agreed to have
Section 341(f)(2) of the Code apply to any disposition of a subsection (f)
asset (as defined in Section 341(f)(4) of the Code) owned by the Parent or
any of its Subsidiaries.
(i) Neither the Parent nor any of its Subsidiaries is party to or has
any obligation under any tax-sharing, tax indemnity or tax allocation
agreement or arrangement other than between the Company and its
Subsidiaries.
(j) None of the Parent's or its Subsidiaries' assets is tax exempt use
property within the meaning of Section 168(h) of the Code.
(k) Neither the Parent nor any of its Subsidiaries has distributed the
stock of any corporation in a transaction satisfying the requirements of
Section 355 of the Code since April 16, 1997. The stock of neither the
Parent nor any of its Subsidiaries has been distributed in a transaction
satisfying the requirements of Section 355 of the Code since April 16,
1997.
3.13 Environmental Matters.
(a) Hazardous Material. Except as would not result in material liability to
the Parent or any of its Subsidiaries, no underground storage tanks and no
amount of a Hazardous Material are present, as a result of the actions of the
Parent or any of its Subsidiaries or any Parent Affiliates, or, to the Parent's
knowledge, as a result of any actions of any third party or otherwise, in, on or
under any property, including the land and the improvements, ground water and
surface water thereof, that the Parent or any of its Subsidiaries has at any
time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Except as would not result in a
Material Adverse Effect to the Parent (in any individual case or in the
aggregate) (i) neither the Parent nor any of its Subsidiaries has transported,
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials in violation of any law in effect on or before the
Closing Date, and (ii) neither the Parent nor any of its Subsidiaries has
engaged in Hazardous Materials Activities in violation of any rule, regulation,
treaty or statute promulgated by any Governmental Entity in effect prior to or
as of the date hereof to prohibit, regulate or control Hazardous Materials or
any Hazardous Material Activity.
(c) Permits. The Parent and its Subsidiaries currently hold all
environmental approvals, permits, licenses, clearances and consents (the "PARENT
ENVIRONMENTAL PERMITS") necessary for the conduct of the Parent's and its
Subsidiaries' Hazardous Material Activities and other businesses of the Parent
and its Subsidiaries as such activities and businesses are currently being
conducted except any Parent Environmental Permits the failure of which to obtain
or renew would not result in a Material Adverse Effect on Parent.
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ or injunction is pending, and to the
Parent's knowledge, no action, proceeding, revocation proceeding, amendment
procedure, writ or injunction has been threatened by any Governmental Entity
against the Parent or any of its Subsidiaries in a writing delivered to the
Parent or any of its Subsidiaries concerning any Parent Environmental Permit,
Hazardous Material or any Hazardous Materials Activity of the Parent or any of
its Subsidiaries. To Parent's knowledge, there is no fact or circumstance which
could involve the Parent or any of its Subsidiaries in any environmental
litigation or impose upon the Parent any material environmental liability.
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3.14 Intellectual Property. For the purposes of this Agreement, the
following terms have the following definitions:
"PARENT INTELLECTUAL PROPERTY" shall mean any Intellectual Property that is
owned by, or exclusively licensed to, Parent and it Subsidiaries.
"REGISTERED INTELLECTUAL PROPERTY" means all Intellectual Property that is
the subject of an application, certificate, filing, registration or other
document issued, filed with, or recorded by any private, state, government
or other legal authority.
"PARENT REGISTERED INTELLECTUAL PROPERTY" means all of the Registered
Intellectual Property owned by, or filed in the name of, the Parent or any
of its Subsidiaries.
(a) Section 3.14(a) of the Parent Schedule is a complete and accurate
list of all Parent Registered Intellectual Property and specifies, where
applicable, the jurisdictions in which each such item of Parent Registered
Intellectual Property has been issued or registered and lists any
proceedings or actions before any court or tribunal (including the PTO) or
equivalent authority anywhere in the world) related to any of the Parent
Registered Intellectual Property.
(b) Section 3.14(b) of the Parent Schedule is a complete and accurate
list (by name and version number) of all current versions of current
products or service offerings of the Parent or any of its Subsidiaries
("PARENT PRODUCTS").
(c) No Parent Intellectual Property or Parent Product is subject to
any proceeding or outstanding decree, order, judgment, contract, license,
agreement, or stipulation restricting in any manner the use, transfer, or
licensing thereof by Parent or any of its Subsidiaries, or which may affect
the validity, use or enforceability of such Parent Intellectual Property or
Parent Product.
(d) Parent owns and has good and exclusive title to, each material
item of Parent Intellectual Property owned by it free and clear of any lien
or encumbrance (excluding non-exclusive licenses and related restrictions
granted in the ordinary course). Without limiting the foregoing: (i) Parent
owns exclusively, and has good title to, all copyrighted works that are
Parent Products or which Parent or any of its Subsidiaries otherwise
purports to own; and (ii) except as would not have a Material Adverse
Effect, to the extent that any Patents would be infringed by any Parent
Products, Parent is the exclusive owner of such Patents.
(e) Except as set forth in Section 3.14(e) of the Parent Schedules, to
the extent that any material technology, material software or material
Intellectual Property has been developed or created independently or
jointly by a third party for Parent or any of its Subsidiaries or is
incorporated into any of the Parent Products, Parent has a written
agreement with such third party with respect thereto and Parent thereby
either (i) has obtained ownership of, and is the exclusive owner of, or
(ii) has obtained a perpetual, non-terminable license (sufficient for the
conduct of its business as currently conducted and as proposed to be
conducted) to all such third party's Intellectual Property in such work,
material or invention by operation of law or by valid assignment, to the
fullest extent it is legally possible to do so.
(f) Neither Parent nor any of its Subsidiaries has transferred
ownership of, or granted any exclusive license with respect to, any
Intellectual Property that is material Parent Intellectual Property, to any
third party, or knowingly permitted Parent's rights in such material Parent
Intellectual Property to lapse or enter the public domain.
(g) Section 3.14(g) of the Parent Schedule lists all contracts,
licenses and agreements to which Parent or any of its Subsidiaries is a
party: (i) with respect to Parent Intellectual Property licensed or
transferred to any third party resulting in, or which may result in, annual
payments of $1,000,000 or more to the Parent or any Subsidiary of Parent
(other than end-user licenses in the ordinary course) in the period
subsequent to January 1, 1999; or (ii) pursuant to which a third party has
licensed or transferred any material Intellectual Property to Parent
resulting in, or which may result in, annual payments of $500,000 or more
by Parent or any Subsidiary of Parent in the period subsequent to January
1, 1999.
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(h) Each material contract, license and agreement listed in Section
3.14(h) of the Parent Schedule is a legal and binding obligation of Parent
or any of its Subsidiaries which is a party thereto, and, to the knowledge
of the Parent and any of its Subsidiaries, is a legal and binding
obligation on any other party thereto, in each case enforceable against the
Parent, Parent's Subsidiary or such other party in accordance with their
respective terms, except as may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles, and, to
the knowledge of Parent, there has not occurred any material default by any
party thereto which remains unremedied as of the date hereof.
(i) Except as set forth in Section 3.14(i) of the Parent Schedules,
the operation of the business of the Parent and its Subsidiaries as such
business currently is conducted, including (i) Parent's and its
Subsidiaries' design, development, manufacture, distribution, reproduction,
marketing or sale of the products or services of Parent and its
Subsidiaries (including Parent Products ) and (ii) the Parent's use of any
product, device or process, to its knowledge and except as would not have a
Material Adverse Effect, has not, does not and will not infringe or
misappropriate the Intellectual Property of any third party or constitute
unfair competition or trade practices under the laws of any jurisdiction.
(j) Except as set forth in Section 3.14(j) of the Parent Schedules,
neither Parent nor any of its Subsidiaries has received written notice from
any third party that the operation of the business of Parent or any of its
Subsidiaries or any act, product or service of Parent or any of its
Subsidiaries, infringes or misappropriates the Intellectual Property of any
third party or constitutes unfair competition or trade practices under the
laws of any jurisdiction.
(k) To the knowledge of Parent, no Person has infringed or is
infringing or misappropriating any material Parent Intellectual Property.
(l) Parent and each of its Subsidiaries has taken commercially
reasonable steps to protect Parent's and its Subsidiaries' rights in
Parent's confidential information and trade secrets that it wishes to
protect or any trade secrets or confidential information of third parties
provided to Parent or any of its Subsidiaries, and, without limiting the
foregoing, each of Parent and its Subsidiaries has and uses commercially
reasonable efforts to enforce a policy requiring each employee and
contractor to execute a proprietary information/confidentiality agreement
substantially in the form provided to Company and all current and former
employees and contractors of Parent and any of its Subsidiaries have
executed such an agreement, except where the failure to do so would not
have a Material Adverse Effect on Company or any of its Subsidiaries.
(m) Except as set forth in Section 3.14(m) of the Parent Schedules,
the Parent Products will be fully compatible in normal operation with
changes to outputs, data or other information in relation to dates arising
in the year 2000 and beyond, without a material loss of performance or a
material loss of use, affected by hardware or third party software
(including but not limited to operating systems) or unauthorized
modifications made to the Parent Products. Except as set forth in Section
3.14(m) of the Parent Schedules, to the Parent's knowledge, all of Parent's
and its Subsidiaries' Information Technology (as defined below) is Year
2000 Compliant, and will not cause an interruption in the ongoing
operations of Company's or any of its Subsidiaries' business on or after
January 1, 2000 except such interruptions as would not have a Material
Adverse Effect on Parent or its Subsidiaries. For purposes of the
foregoing, the term "INFORMATION TECHNOLOGY" shall mean and include all
material software, hardware, firmware, telecommunications systems, network
systems, embedded systems and other systems, components and/or services
(other than general utility services including gas, electric, telephone and
postal) that are owned or used by the Parent or any of its Subsidiaries in
the conduct of their business, or purchased by the Parent or any of its
Subsidiaries from third-party suppliers.
3.15 Board Approval. The Board of Directors of Parent has, as of the date
of this Agreement unanimously (i) approved, subject to shareholder approval,
this Agreement, the Stock Option Agreement and the transactions contemplated
hereby and thereby, (ii) determined that the Merger is in the best interests of
the shareholders of Parent and is on terms that are fair to such shareholders
and (iii) recommended that the shareholders of Parent approve this Agreement and
the Merger.
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ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business by Company. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement pursuant to its terms or the Effective Time, Company and each of its
Subsidiaries shall, except to the extent that Parent shall otherwise consent in
writing, carry on its business, in the usual, regular and ordinary course
consistent with past practices, in substantially the same manner as heretofore
conducted and in compliance with all applicable laws and regulations (except
where noncompliance would not have a Material Adverse Effect), pay its debts and
taxes when due subject to good faith disputes over such debts or taxes, pay or
perform other material obligations when due, and use its commercially reasonable
efforts consistent with past practices and policies to (i) preserve
substantially intact its present business organization, (ii) keep available the
services of its present officers and employees and (iii) preserve its
relationships with customers, suppliers, distributors, licensors, licensees, and
others with which it has significant business dealings.
In addition, except as permitted by the terms of this Agreement, without
the prior written consent of Parent, during the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms or the Effective Time, Company shall not do any of the
following and shall not permit its Subsidiaries to do any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant, director or other stock plans or
authorize cash payments in exchange for any options granted under any of
such plans;
(b) Grant any severance or termination pay to any officer or employee
in excess of $10,000, except pursuant to applicable law, written agreements
outstanding, or policies existing, on the date hereof and as previously
disclosed in writing or made available to Parent, or adopt any new
severance plan, or amend or modify or alter in any manner any severance
plan, agreement or arrangement existing on the date hereof;
(c) Transfer or license to any person or otherwise extend, amend or
modify any material rights to Company Intellectual Property, or enter into
grants to transfer or license to any person future patent rights, other
than in the ordinary course of business consistent with past practices,
provided that in no event shall Company license on an exclusive basis or
sell any Company Intellectual Property;
(d) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in
respect of any capital stock or split, combine or reclassify any capital
stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for any capital stock;
(e) Except as set forth in Section 4.1(e) of the Company Schedule,
purchase, redeem or otherwise acquire, directly or indirectly, any shares
of capital stock of Company or its Subsidiaries, except repurchases of
unvested shares at cost in connection with the termination of the
employment relationship with any employee pursuant to stock option or
purchase agreements in effect on the date hereof;
(f) Issue, deliver, sell, authorize, pledge or otherwise encumber or
agree to any of the foregoing with respect to any shares of capital stock
or any securities convertible into shares of capital stock, or
subscriptions, rights, warrants or options to acquire any shares of capital
stock or any securities convertible into shares of capital stock, or enter
into other agreements or commitments of any character obligating it to
issue any such shares or convertible securities, other than (x) the
issuance delivery and/or sale of (i) shares of Company Common Stock
pursuant to the exercise of stock options outstanding as of the date of
this Agreement, and (ii) shares of Company Common Stock issuable to
participants in the ESPP consistent with the terms thereof and (y) the
granting of stock options (and the issuance of Company Common Stock upon
exercise thereof), in the ordinary course of business and consistent with
past practices, in an amount not to exceed options to purchase (and the
issuance of Company Common Stock upon exercise thereof) 300,000 shares in
the aggregate (provided that none of these options to
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purchase 300,000 shares may be granted to officers or directors of Company,
and the vesting of these options to purchase 300,000 shares shall not
accelerate upon the Closing);
(g) Amend Company Charter Documents (or similar governing instruments
of any of its Subsidiaries);
(h) Except as disclosed in Section 4.1(h) of the Company Schedule,
acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or
agree to enter into any joint ventures, strategic partnerships or alliances
that provide for exclusivity of territory or otherwise restrict Company or
its Subsidiaries' ability to compete;
(i) Sell, lease, license, encumber or otherwise dispose of any
properties or assets, except sales of inventory in the ordinary course of
business consistent with past practice and, except for the sale, lease or
disposition (other than through licensing) of property or assets which are
not material, individually or in the aggregate, to the business of Company
and its Subsidiaries;
(j) Except as disclosed in Section 4.1(j) of the Company Schedule,
incur any indebtedness for borrowed money in excess of $250,000 in the
aggregate or guarantee any such indebtedness of another person (other than
any of its Subsidiaries), issue or sell any debt securities or options,
warrants, calls or other rights to acquire any debt securities of Company,
enter into any "keep well" or other agreement to maintain any financial
statement condition or enter into any arrangement having the economic
effect of any of the foregoing, other than in connection with the financing
of ordinary course trade payables/receivables consistent with past
practice;
(k) Except as disclosed in Section 4.1(k) of the Company Schedule,
adopt or amend any employee benefit plan, policy or arrangement, any
employee stock purchase or employee stock option plan, or enter into any
employment contract or collective bargaining agreement (other than offer
letters and letter agreements entered into in the ordinary course of
business consistent with past practice with employees who are terminable
"at will"), pay any special bonus or special remuneration to any director
or employee, or increase the salaries or wage rates or fringe benefits
(including rights to severance or indemnification) of its directors,
officers, employees or consultants, except in the ordinary course of
business consistent with past practices;
(l) Except as disclosed in Schedule 4.1(1) of the Company Schedule,
(i) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), or litigation (whether or not commenced prior to the date of
this Agreement) other than the payment, discharge, settlement or
satisfaction, in the ordinary course of business consistent with past
practices or in accordance with their terms, or liabilities recognized or
disclosed in the most recent consolidated financial statements (or the
notes thereto) of Company included in Company SEC Reports or incurred since
the date of such financial statements, or (ii) waive the benefits of, agree
to modify in any manner, terminate, release any person from or knowingly
fail to enforce any confidentiality or similar agreement to which Company
or any of its Subsidiaries is a party or of which Company or any of its
Subsidiaries is a beneficiary;
(m) Except in the ordinary course of business consistent with past
practices, modify, amend or terminate any material contract or material
agreement to which Company or any Subsidiary thereof is a party or waive,
delay the exercise of, release or assign any material rights or claims
thereunder;
(n) Except as required by GAAP, revalue any of its assets or make any
change in accounting methods, principles or practices;
(o) Except as set forth in Section 4.1(o) of the Company Schedule,
incur or enter into any agreement, contract or commitment requiring Company
or any of its Subsidiaries to pay in excess of $500,000 in any 12 month
period;
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(p) Engage in any action that could reasonably be expected to cause
the Merger to fail to qualify as a "reorganization" under Section 368(a) of
the Code;
(q) Except as set forth in Section 4.1(s) of the Company Schedule,
settle any litigation;
(r) Make any tax election that, individually or in the aggregate, is
reasonably likely to adversely affect in any material respect the tax
liability or tax attributes of Company or any of its Subsidiaries or settle
or compromise any material income tax liability;
(s) Agree in writing or otherwise to take any of the actions described
in Section 4.1(a) through (r) above.
4.2 Conduct of Business by Parent. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms or the Effective Time, Parent and each of its Subsidiaries
shall, except to the extent that Company shall otherwise consent in writing,
carry on its business, in the usual, regular and ordinary course consistent with
past practices, in substantially the same manner as heretofore conducted and in
compliance with all applicable laws and regulations (except where noncompliance
would not have a Material Adverse Effect), pay its debts and taxes when due
subject to good faith disputes over such debts or taxes, pay or perform other
material obligations when due, and use its commercially reasonable efforts
consistent with past practices and policies to (i) preserve substantially intact
its present business organization, (ii) keep available the services of its
present officers and employees and (iii) preserve its relationships with
customers, suppliers, distributors, licensors, licensees, and others with which
it has significant business dealings.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings;
Board Recommendations.
(a) As promptly as practicable after the execution of this Agreement,
Company and Parent will prepare, and file with the SEC, the Proxy
Statement/Prospectus, and Parent will prepare and file with the SEC the S-4 in
which the Proxy Statement/Prospectus will be included as a prospectus. Each of
Parent and Company shall provide promptly to the other such information
concerning its business and financial statements and affairs as, in the
reasonable judgment of the providing party or its counsel, may be required or
appropriate for inclusion in the Proxy Statement/Prospectus and the S-4, or in
any amendments or supplements thereto, and to cause its counsel and auditors to
cooperate with the other's counsel and auditors in the preparation of the Proxy
Statement/Prospectus and the S-4. Each of Company and Parent will respond to any
comments of the SEC, and will use its respective commercially reasonable efforts
to have the S-4 declared effective under the Securities Act as promptly as
practicable after such filing, and Company will cause the Proxy
Statement/Prospectus to be mailed to its shareholders at the earliest
practicable time after the S-4 is declared effective by the SEC. As promptly as
practicable after the date of this Agreement, each of Company and Parent will
prepare and file any other filings required to be filed by it under the Exchange
Act, the Securities Act or any other Federal, foreign or Blue Sky or related
securities laws in order to consummate the Merger and the transactions
contemplated by this Agreement (the "OTHER FILINGS"). Each of Company and Parent
will notify the other promptly upon the receipt of any comments from the SEC or
its staff and of any request by the SEC or its staff for amendments or
supplements to the S-4, the Proxy Statement/Prospectus and will supply the other
with copies of all correspondence between such party or any of its
representatives, on the one hand, and the SEC or its staff, on the other hand,
with respect to the S-4, the Proxy Statement/Prospectus or the Merger. Each of
Company and Parent will cause all documents that it is responsible for filing
with the SEC under this Section 5.1(a) to comply in all material respects with
all applicable requirements of law and the rules and regulations promulgated
thereunder. Whenever any event occurs which is required to be set forth in an
amendment or supplement to the Proxy Statement/Prospectus or the S-4, Company or
Parent, as the case may be, will promptly inform the other of such occurrence
and cooperate in filing with the SEC or its staff, and/or mailing to
shareholders of Company, such amendment or supplement.
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(b) Subject to Section 5.2(c) below, the Proxy Statement/Prospectus will
include the recommendation of the Board of Directors of Company in favor of
approval of this Agreement, the Agreement of Merger and approval of the Merger.
5.2 Meeting of Company Shareholders.
(a) Promptly after the date hereof, Company will take all action reasonably
necessary in accordance with California Law and Company Charter Documents to
convene Company Shareholders' Meeting to be held as promptly as practicable, and
in any event (to the extent permissible under applicable law) within 45 days
after the declaration of effectiveness of the S-4, for the purpose of voting
upon this Agreement, the Agreement of Merger and the Merger. Company will use
its commercially reasonable efforts to solicit from its shareholders proxies in
favor of the approval of this Agreement, the Agreement of Merger and the
approval of the Merger and will take all other action necessary or advisable to
secure the vote or consent of its shareholders required by the rules of Nasdaq
or California Law to obtain such approvals. Notwithstanding anything to the
contrary contained in this Agreement, Company may adjourn or postpone Company
Shareholders' Meeting to the extent necessary to ensure that any necessary
supplement or amendment to the Prospectus/Proxy Statement is provided to
Company's shareholders in advance of a vote on the Merger and this Agreement or,
if as of the time for which Company Shareholders' Meeting is originally
scheduled (as set forth in the Prospectus/Proxy Statement) there are
insufficient shares of Company Common Stock represented (either in person or by
proxy) to constitute a quorum necessary to conduct the business of Company
Shareholders' Meeting. Company shall ensure that Company Shareholders' Meeting
is called, noticed, convened, held and conducted, and that all proxies solicited
by Company in connection with Company Shareholders' Meeting are solicited, in
compliance with California Law, Company Charter Documents, the rules of Nasdaq
and all other applicable legal requirements. Company's obligation to call, give
notice of, convene and hold Company Shareholders' Meeting in accordance with
this Section 5.2(a) shall not be limited to or otherwise affected by the
commencement, disclosure, announcement or submission to Company of any
Acquisition Proposal.
(b) Subject to Section 5.2(c), (i) the Board of Directors of Company shall
recommend that Company's shareholders vote in favor of and approve this
Agreement, the Agreement of Merger and the Merger at Company Shareholders'
Meeting; (ii) the Prospectus/Proxy Statement shall include a statement to the
effect that the Board of Directors of Company has recommended that Company's
shareholders vote in favor of and approve this Agreement, the Agreement of
Merger and the Merger at Company Shareholders' Meeting; and (iii) neither the
Board of Directors of Company nor any committee thereof shall withdraw, amend or
modify, or propose or resolve to withdraw, amend or modify in a manner adverse
to Parent, the recommendation of the Board of Directors of Company that
Company's shareholders vote in favor of and approve this Agreement, the
Agreement of Merger and the Merger.
(c) Nothing in this Agreement shall prevent the Board of Directors of
Company from withholding, withdrawing, amending or modifying its recommendation
in favor of the Merger or taking any other action which is prohibited by Section
5.2(b) if (i) a Superior Offer (as defined below) is made to Company and is not
withdrawn, (ii) neither Company nor any of its representatives shall have
violated any of the restrictions set forth in Section 5.4, and (iii) the Board
of Directors of Company concludes in good faith, after consultation with its
outside counsel, that, in light of such Superior Offer, the withholding,
withdrawal, amendment or modification of such recommendation is required in
order for the Board of Directors of Company to comply with its fiduciary
obligations to Company and Company's shareholders under applicable law. Nothing
contained in this Section 5.2 shall limit Company's obligation to hold and
convene the Company Shareholders' Meeting (regardless of whether the
recommendation of the Board of Directors of the Company shall have been
withdrawn, amended or modified). For purposes of this Agreement, "Superior
Offer" shall mean an unsolicited, bona fide written offer made by a third party
to consummate any of the following transactions: (i) a merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving Company pursuant to which the shareholders of Company
immediately preceding such transaction hold less than 51% of the equity interest
in the surviving or resulting entity of such transaction; (ii) a sale or other
disposition by Company of assets (excluding inventory and used equipment sold in
the ordinary course of business) representing in excess of 50% of the fair
market value of Company's
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business immediately prior to such sale, or (iii) the acquisition by any person
or group (including by way of a tender offer or an exchange offer or issuance by
Company), directly or indirectly, of beneficial ownership or a right to acquire
beneficial ownership of shares representing in excess of 50% of the voting power
of the then outstanding shares of capital stock of Company, in each case on
terms that the Board of Directors of Company determines, in its reasonable
judgment (based on a written opinion of an investment bank of nationally
recognized reputation) to be more favorable to Company shareholders from a
financial point of view than the terms of the Merger and the consideration of
which reasonably likely exceeds the value of the consideration in the Merger
(after taking into account all relevant factors, including any conditions to the
Superior Offer, the timing of the consummation of the transaction pursuant to
the Superior Offer, the risk of nonconsummation thereof and the need for any
required governmental or other consents, filings and approvals); provided,
however, that any such offer shall not be deemed to be a "Superior Offer" if any
financing required to consummate the transaction contemplated by such offer is
not committed and is not likely in the judgment of Company's Board of Directors
to be obtained by such third party on a timely basis.
5.3 Confidentiality; Access to Information.
(a) The parties acknowledge that Company and Parent have previously
executed a Confidentiality Agreement, dated as of October 4, 1999 (the
"CONFIDENTIALITY AGREEMENT"), which Confidentiality Agreement will continue in
full force and effect in accordance with its terms.
(b) Access to Information.
(i) Company will afford Parent and its accountants, counsel and other
representatives reasonable access during normal business hours, upon
reasonable notice, to the properties, books, records and personnel of
Company during the period prior to the Effective Time to obtain all
information concerning the business, including the status of product
development efforts, properties, results of operations and personnel of
Company, as Parent may reasonably request. No information or knowledge
obtained by Parent in any investigation pursuant to this Section 5.3 will
affect or be deemed to modify any representation or warranty contained
herein or the conditions to the obligations of the parties to consummate
the Merger.
(ii) Parent will afford Company and its accountants, counsel and other
representatives reasonable access during normal business hours, upon
reasonable notice, to the properties, books, records and personnel of
Parent during the period prior to the Effective Time to obtain all
information concerning the business, including the status of product
development efforts, properties, results of operations and personnel of
Parent, as Company may reasonably request. No information or knowledge
obtained by Company in any investigation pursuant to this Section 5.3 will
affect or be deemed to modify any representation or warranty contained
herein or the conditions to the obligations of the parties to consummate
the Merger.
5.4 No Solicitation.
(a) From and after the date of this Agreement until the Effective Time or
termination of this Agreement pursuant to Article VII, Company and its
Subsidiaries will not, nor will they authorize or permit any of their respective
officers, directors, affiliates or employees or any investment banker, attorney
or other advisor or representative retained by any of them to, directly or
indirectly (i) solicit, initiate, encourage or induce the making, submission or
announcement of any Acquisition Proposal (as defined below), (ii) participate in
any discussions or negotiations regarding, or furnish to any person any
non-public information with respect to, or take any other action to facilitate
any inquiries or the making of any proposal that constitutes or may reasonably
be expected to lead to, any Acquisition Proposal, (iii) engage in discussions
with any person with respect to any Acquisition Proposal, (iv) subject to
Section 5.2(c), approve or recommend any Acquisition Proposal or (v) enter into
any letter of intent or similar document or any contract, agreement or
commitment providing for any Acquisition Transaction (as defined below) or
accepting any Acquisition Proposal; provided, however, that this Section 5.4(a)
shall not prohibit Company from furnishing nonpublic information regarding
Company and its Subsidiaries to, entering into a confidentiality agreement with
or entering into negotiations or discussions with, any person or group in
response to a Superior Offer submitted by such person or group (and
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not withdrawn) if (1) neither Company nor any representative of Company and its
Subsidiaries shall have violated any of the restrictions set forth in this
Section 5.4, (2) the Board of Directors of Company concludes in good faith,
after consultation with its outside legal counsel, that such action is required
in order for the Board of Directors of Company to comply with its fiduciary
obligations to Company and Company's shareholders under applicable law, (3)(x)
at least forty-eight (48) hours prior to furnishing any such nonpublic
information to, or entering into discussions or negotiations with, such person
or group, Company gives Parent written notice of the identity of such person or
group and of Company's intention to furnish nonpublic information to, or enter
into discussions or negotiations with, such person or group and (y) Company
receives from such person or group an executed confidentiality agreement
containing customary limitations on the use and disclosure of all nonpublic
written and oral information furnished to such person or group by or on behalf
of Company, and (4) contemporaneously with furnishing any such nonpublic
information to such person or group, Company furnishes such nonpublic
information to Parent (to the extent such nonpublic information has not been
previously furnished by Company to Parent). Company and its Subsidiaries will
immediately cease any and all existing activities, discussions or negotiations
with any parties conducted heretofore with respect to any Acquisition Proposal.
Without limiting the foregoing, it is understood that any violation of the
restrictions set forth in the preceding two sentences by any officer or director
of Company or any of its Subsidiaries or any investment banker, attorney or
other advisor or representative of Company or any of its Subsidiaries shall be
deemed to be a breach of this Section 5.4 by Company. In addition to the
foregoing, Company shall (i) provide Parent with at least twenty-four (24) hours
prior notice (or such lesser prior notice as provided to the members of
Company's Board of Directors but in no event less than eight hours) of any
meeting of Company's Board of Directors at which Company's Board of Directors is
reasonably expected to consider a Superior Offer, (ii) provide Parent with at
least five (5) business days prior written notice of a meeting of Company's
Board of Directors at which Company's Board of Directors is reasonably expected
to recommend a Superior Offer to its shareholders and together with such notice
a copy of the definitive documentation relating to such Superior Offer and (iii)
provide Parent with reasonable notice of the material terms of the Superior
Offer and reasonable opportunity to make a counter-offer prior to any commitment
by Company with respect to the Superior Offer.
For purposes of this Agreement, "ACQUISITION PROPOSAL" shall mean any offer
or proposal (other than an offer or proposal by Parent, Merger Sub or any
affiliate thereof) relating to any Acquisition Transaction. For the purposes of
this Agreement, "ACQUISITION TRANSACTION" shall mean any transaction or series
of related transactions other than the transactions contemplated by this
Agreement involving: (A) any acquisition or purchase from Company by any person
or "group" (as defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) of more than a 30% interest in the total outstanding
voting securities of Company or any of its Subsidiaries or any tender offer or
exchange offer that if consummated would result in any person or "group" (as
defined under Section 13(d) of the Exchange Act and the rules and regulations
thereunder) beneficially owning 30% or more of the total outstanding voting
securities of Company or any of its Subsidiaries; (B) any merger, consolidation,
business combination or similar transaction involving Company or any of its
Subsidiaries; (C) any sale, lease, exchange, transfer, license, acquisition or
disposition of more than 50% of the assets of Company; or (D) any liquidation or
dissolution of Company.
(b) In addition to the obligations of Company set forth in paragraph (a) of
this Section 5.4, Company as promptly as practicable shall advise Parent orally
and in writing of any request received by Company for non-public information
which Company reasonably believes would lead to an Acquisition Proposal or of
any Acquisition Proposal, or any inquiry received by Company with respect to or
which Company reasonably believes would lead to any Acquisition Proposal, the
material terms and conditions of such request, Acquisition Proposal or inquiry,
and the identity of the person or group making any such request, Acquisition
Proposal or inquiry. Company will keep Parent informed in all material respects
of the status and details (including material amendments or proposed amendments)
of any such request, Acquisition Proposal or inquiry.
(c) Nothing contained in this Section 5.4 shall prevent the Board of
Directors of the Company from complying with Rule 14d-9 and Rule 14e-2
promulgated under the Exchange Act with regard to a tender or exchange offer by
a third party or from making such disclosure as may be required by applicable
law.
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5.5 Public Disclosure. Parent and Company will consult with each other and
agree before issuing any press release or otherwise making any public statement
with respect to the Merger, this Agreement or an Acquisition Proposal and will
not issue any such press release or make any such public statement prior to such
consultation, except as may be required by law or NASD requirements for
companies whose securities are traded on Nasdaq.
5.6 Reasonable Efforts; Notification.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use its commercially reasonable efforts
to take, or cause to be taken, all actions, and to do, or cause to be done, and
to assist and cooperate with the other parties in doing, all things necessary,
proper or advisable to consummate and make effective, in the most expeditious
manner practicable, the Merger and the other transactions contemplated by this
Agreement, including using commercially reasonable efforts to accomplish the
following: (i) the taking of all reasonable acts necessary to cause the
conditions precedent set forth in Article VI to be satisfied, (ii) the obtaining
of all necessary actions or nonactions, waivers, consents, approvals, orders and
authorizations from Governmental Entities and the making of all necessary
registrations, declarations and filings (including registrations, declarations
and filings with Governmental Entities, if any) and the taking of all reasonable
steps as may be necessary to avoid any suit, claim, action, investigation or
proceeding by any Governmental Entity, (iii) the obtaining of all consents,
approvals or waivers from third parties required as a result of the transactions
contemplated in this Agreement, (iv) the defending of any suits, claims,
actions, investigations or proceedings, whether judicial or administrative,
challenging this Agreement or the consummation of the transactions contemplated
hereby, including seeking to have any stay or temporary restraining order
entered by any court or other Governmental Entity vacated or reversed and (v)
the execution or delivery of any additional instruments reasonably necessary to
consummate the transactions contemplated by, and to fully carry out the purposes
of, this Agreement. In connection with and without limiting the foregoing,
Company and its Board of Directors shall, if any state takeover statute or
similar statute or regulation is or becomes applicable to the Merger, this
Agreement or any of the transactions contemplated by this Agreement, use its
commercially reasonable efforts to enable the Merger and the other transactions
contemplated by this Agreement to be consummated as promptly as practicable on
the terms contemplated by this Agreement. Notwithstanding anything herein to the
contrary, nothing in this Agreement shall be deemed to require Parent or Company
or any Subsidiary or affiliate thereof to agree to any divestiture by itself or
any of its affiliates of shares of capital stock or of any business, assets or
property, or the imposition of any material limitation on the ability of any of
them to conduct their business or to own or exercise control of such assets,
properties and stock.
(b) Company shall give prompt notice to Parent upon becoming aware that any
representation or warranty made by it contained in this Agreement has become
untrue or inaccurate, or of any failure of Company to comply with or satisfy in
any material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement, in each case, such that the conditions set
forth in Section 6.3(a) or 6.3(b) would not be satisfied; provided, however,
that no such notification shall affect the representations, warranties,
covenants or agreements of the parties or the conditions to the obligations of
the parties under this Agreement.
(c) Parent shall give prompt notice to Company upon becoming aware that any
representation or warranty made by it or Merger Sub contained in this Agreement
has become untrue or inaccurate, or of any failure of Parent or Merger Sub to
comply with or satisfy in any material respect any covenant, condition or
agreement to be complied with or satisfied by it under this Agreement, in each
case, such that the conditions set forth in Section 6.2(a) or 6.2(b) would not
be satisfied; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement.
5.7 Stock Options, Warrants and Employee Benefits.
(a) Stock Options. At the Effective Time, each outstanding option to
purchase shares of Company Common Stock (each, a "COMPANY STOCK OPTION") under
Company Option Plans, whether or not vested, shall by virtue of the Merger be
assumed by Parent. Each Company Stock Option so assumed by Parent under
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this Agreement will continue to have, and be subject to, the same terms and
conditions of such options immediately prior to the Effective Time (including,
without limitation, any repurchase rights or vesting provisions and provisions
regarding the acceleration of vesting on certain transactions, other than the
transactions contemplated by this Agreement), except that (i) each Company Stock
Option will be exercisable (or will become exercisable in accordance with its
terms) for that number of whole shares of Parent Common Stock equal to the
product of the number of shares of Company Common Stock that were issuable upon
exercise of such Company Stock Option immediately prior to the Effective Time
multiplied by the Exchange Ratio, rounded down to the nearest whole number of
shares of Parent Common Stock and (ii) the per share exercise price for the
shares of Parent Common Stock issuable upon exercise of such assumed Company
Stock Option will be equal to the quotient determined by dividing the exercise
price per share of Company Common Stock at which such Company Stock Option was
exercisable immediately prior to the Effective Time by the Exchange Ratio,
rounded up to the nearest whole cent.
(b) ESPP. Prior to the Effective Time, outstanding purchase rights under
Company's ESPP shall be exercised in accordance with the terms of the ESPP as
described in Section 18(b) of the ESPP and each share of Company Common Stock
purchased pursuant to such exercise shall by virtue of the Merger, and without
any action on the part of the holder thereof, be converted into the right to
receive a number of shares of Parent Common Stock equal to the Exchange Ratio
without issuance of certificates representing issued and outstanding shares of
Company Common Stock to ESPP participants. The Company agrees that it shall
terminate the ESPP immediately following the aforesaid purchase of shares of
Company Common Stock thereunder. Parent shall provide for the participation of
the employees of the Surviving Corporation in the employee stock purchase plan
of Parent no later than two weeks after the Closing Date. Service with Company
shall constitute service for the purpose of eligibility to participate in the
Parent's employee stock purchase plan.
5.8 Form S-8. Parent agrees to file, if available for use by Parent, a
registration statement on Form S-8 for the shares of Parent Common Stock
issuable with respect to assumed Company Stock Options within 30 days after the
Effective Time.
5.9 Indemnification. From and after the Effective Time, Parent will cause
the Surviving Corporation to fulfill and honor in all respects the obligations
of Company pursuant to any indemnification agreements between Company and its
directors and officers in effect immediately prior to the Effective Time (the
"INDEMNIFIED PARTIES") and any indemnification provisions under Company Charter
Documents as in effect on the date hereof. The Articles of Incorporation and
Bylaws of the Surviving Corporation will contain provisions with respect to
exculpation and indemnification that are at least as favorable to the
Indemnified Parties as those contained in Company Charter Documents as in effect
on the date hereof, which provisions will not be amended, repealed or otherwise
modified for a period of six (6) years from the Effective Time in any manner
that would adversely affect the rights thereunder of individuals who,
immediately prior to the Effective Time, were directors, officers, employees or
agents of Company, unless such modification is required by law. Parent will
cause the Surviving Corporation to maintain Director and Officer insurance on
the same terms as the current policies with respect to the Indemnified Parties
for the three (3) years following the Effective Time.
5.10 Nasdaq Listing. Parent agrees to cause the listing on Nasdaq the
shares of Parent Common Stock issuable, and those required to be reserved for
issuance, in connection with the Merger, subject to official notice of issuance.
5.11 Regulatory Filings; Reasonable Efforts. As soon as may be reasonably
practicable, Company and Parent each shall file with the United States Federal
Trade Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice ("DOJ") Notification and Report Forms relating to the
transactions contemplated herein as required by the HSR Act, as well as
comparable pre-merger notification forms required by the merger notification or
control laws and regulations of any applicable jurisdiction, as agreed to by the
parties. Company and Parent each shall promptly (a) supply the other with any
information which may be required in order to effectuate such filings and (b)
supply any additional information which reasonably may be required by the FTC,
the DOJ or the competition or merger control authorities of any other
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jurisdiction and which the parties may reasonably deem appropriate; provided,
however, that Parent shall not be required to agree to any divestiture by Parent
or Company or any of Parent's Subsidiaries or affiliates of shares of capital
stock or of any business, assets or property of Parent or its Subsidiaries or
affiliates or of Company, its affiliates, or the imposition of any material
limitation on the ability of any of them to conduct their businesses or to own
or exercise control of such assets, properties and stock.
5.12 401(k) Plan. Company shall cause its 401(k) plan to terminate
effective as of the day immediately preceding the Closing Date. From and after
the Closing Date, Parent shall provide for the participation by employees of the
Surviving Corporation in a 401(k) plan that is substantially similar to the
401(k) plan in which employees of Parent participate. Parent shall recognize
service with Company for the purpose of eligibility to participate and vesting
under such 401(k) plan.
5.13 Treatment as a Reorganization. Neither Parent nor Merger Sub shall
take any action prior to or following the Merger that could reasonably be
expected to cause the Merger to fail to qualify as a "reorganization" within the
meaning of Section 368(a) of the Code.
5.14 Certain Subsidiaries. In connection with its ISOCOR Switzerland AG
and ISOCOR Italia S.P.A. subisidiaries, Company will cooperate with Parent and
will use its reasonable efforts to obtain, prior to the Effective Time,
agreements necessary to extend for an additional year the obligations of such
subsidiaries to purchase all shares thereof held by such subsidiaries'
shareholders.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions:
(a) Company Shareholder Approval. This Agreement and the Agreement of
Merger shall have been approved and the Merger shall have been duly
approved, by the requisite vote under California law, by the shareholders
of Company.
(b) Registration Statement Effective; Proxy Statement. The SEC shall
have declared the S-4 effective. No stop order suspending the effectiveness
of the S-4 or any part thereof shall have been issued and no proceeding for
that purpose, and no similar proceeding in respect of the Proxy
Statement/Prospectus, shall have been initiated or threatened in writing by
the SEC.
(c) No Order; HSR Act. No Governmental Entity shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and which has the effect of
making the Merger illegal or otherwise prohibiting consummation of the
Merger, substantially on the terms contemplated by this Agreement. All
waiting periods, if any, under the HSR Act relating to the transactions
contemplated hereby will have expired or terminated early and all material
foreign antitrust approvals required to be obtained prior to the Merger in
connection with the transactions contemplated hereby shall have been
obtained.
(d) Tax Opinions. Parent and Company shall each have received written
opinions from their respective tax counsel (Wilson Sonsini Goodrich &
Rosati, Professional Corporation, and Orrick, Herrington & Sutcliffe LLP,
respectively), in form and substance reasonably satisfactory to them, to
the effect that the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code and such opinions shall not have been
withdrawn; provided, however, that if the counsel to either Parent or
Company does not render such opinion, this condition shall nonetheless be
deemed to be satisfied with respect to such party if counsel to the other
party renders such opinion to such party. The parties to this Agreement
agree to make such reasonable representations as requested by such counsel
for the purpose of rendering such opinions.
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(e) Nasdaq Listing. The shares of Parent Common Stock issuable to the
shareholders of Company pursuant to this Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall
have been authorized for listing on Nasdaq upon official notice of
issuance.
6.2 Additional Conditions to Obligations of Company. The obligation of
Company to consummate and effect the Merger shall be subject to the satisfaction
at or prior to the Closing Date of each of the following conditions, any of
which may be waived, in writing, exclusively by Company:
(a) Representations and Warranties. Each representation and warranty
of Parent and Merger Sub contained in this Agreement (i) shall have been
true and correct as of the date of this Agreement and (ii) shall be true
and correct on and as of the Closing Date with the same force and effect as
if made on the Closing Date except (A) in each case, or in the aggregate,
as does not constitute a Material Adverse Effect on Parent and Merger Sub,
(B) for changes contemplated by this Agreement and (C) for those
representations and warranties which address matters only as of a
particular date (which representations shall have been true and correct
(subject to the qualifications as set forth in the preceding clause A) as
of such particular date) (it being understood that, for purposes of
determining the accuracy of such representations and warranties, (i) all
"Material Adverse Effect" qualifications and other qualifications based on
the word "material" or similar phrases contained in such representations
and warranties shall be disregarded and (ii) any update of or modification
to the Parent Schedule made or purported to have been made after the date
of this Agreement shall be disregarded). Company shall have received a
certificate with respect to the foregoing signed on behalf of Parent by an
authorized officer of Parent.
(b) Agreements and Covenants. Parent and Merger Sub shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by
them on or prior to the Closing Date, and Company shall have received a
certificate to such effect signed on behalf of Parent by an authorized
officer of Parent.
(c) Material Adverse Effect. No Material Adverse Effect with respect
to Parent and its Subsidiaries, taken as a whole, shall have occurred since
the date of this Agreement.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate and effect the Merger shall
be subject to the satisfaction at or prior to the Closing Date of each of the
following conditions, any of which may be waived, in writing, exclusively by
Parent:
(a) Representations and Warranties. Each representation and warranty
of Company contained in this Agreement (i) shall have been true and correct
as of the date of this Agreement and (ii) shall be true and correct on and
as of the Closing Date with the same force and effect as if made on and as
of the Closing Date except (A) in each case, or in the aggregate, as does
not constitute a Material Adverse Effect on Company provided, however, such
Material Adverse Effect qualifier shall be inapplicable with respect to
representations and warranties contained in Section 2.3, (B) for changes
contemplated by this Agreement and (C) for those representations and
warranties which address matters only as of a particular date (which
representations shall have been true and correct (subject to the
qualifications as set forth in the preceding clause (A) as of such
particular date) (it being understood that, for purposes of determining the
accuracy of such representations and warranties, (i) all "Material Adverse
Effect" qualifications and other qualifications based on the word
"material" or similar phrases contained in such representations and
warranties shall be disregarded and (ii) any update of or modification to
the Company Schedule made or purported to have been made after the date of
this Agreement shall be disregarded). Parent shall have received a
certificate with respect to the foregoing signed on behalf of Company by an
authorized officer of Company.
(b) Agreements and Covenants. Company shall have performed or complied
in all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it at or prior to the Closing
Date, and Parent shall have received a certificate to such effect signed on
behalf of Company by the Chief Executive Officer and the Chief Financial
Officer of Company.
(c) Material Adverse Effect. No Material Adverse Effect with respect
to Company and its Subsidiaries, taken as a whole, shall have occurred
since the date of this Agreement.
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(d) Consents. Company shall have obtained all consents, waivers and
approvals required in connection with the consummation of the transactions
contemplated hereby in connection with the agreements, contracts, licenses
or leases set forth on Schedule 6.3(d).
(e) Acceptance of Offer Letters. Mr. Paul Gigg and at least eight (8)
of the other individuals listed on Exhibit C hereto shall not have revoked
their acceptance of offers of employment with Parent and each of those
individuals will be employed by Parent as of the Closing Date and each of
those individuals, other than as indicated on Exhibit C, shall have entered
into a Covenant Not to Compete or Solicit.
(f) Dissenting Shares. The aggregate number of Dissenting Shares shall
be less than 5% of the outstanding shares of Company Common Stock.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after the requisite approval of the
shareholders of Company:
(a) by mutual written consent duly authorized by the Boards of
Directors of Parent and Company;
(b) by either Company or Parent if the Merger shall not have been
consummated by June 30, 2000 for any reason; provided, however, that the
right to terminate this Agreement under this Section 7.1(b) shall not be
available to any party whose action or failure to act has been a principal
cause of or resulted in the failure of the Merger to occur on or before
such date and such action or failure to act constitutes a breach of this
Agreement;
(c) by either Company or Parent if a Governmental Entity shall have
issued an order, decree or ruling or taken any other action, in any case
having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger, which order, decree, ruling or other action is
final and nonappealable;
(d) by either Company or Parent if the required approval of the
shareholders of Company contemplated by this Agreement shall not have been
obtained by reason of the failure to obtain the required vote at a meeting
of Company shareholders duly convened therefor or at any adjournment
thereof;
(e) by Company, upon a breach of any representation, warranty,
covenant or agreement on the part of Parent set forth in this Agreement, or
if any representation or warranty of Parent shall have become untrue, in
either case such that the conditions set forth in Section 6.2(a) or Section
6.2(b) would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall have become untrue, provided,
that if such inaccuracy in Parent's representations and warranties or
breach by Parent is curable by Parent through the exercise of its
commercially reasonable efforts, then Company may not terminate this
Agreement under this Section 7.1(e) for thirty (30) days after delivery of
written notice from Company to Parent of such breach, provided Parent
continues to exercise commercially reasonable efforts to cure such breach
(it being understood that Company may not terminate this Agreement pursuant
to this Section 7.1(e) if it shall have materially breached this Agreement
or if such breach by Parent is cured during such thirty (30)-day period);
(f) by Parent, upon a breach of any representation, warranty, covenant
or agreement on the part of Company set forth in this Agreement, or if any
representation or warranty of Company shall have become untrue, in either
case such that the conditions set forth in Section 6.3(a) or Section 6.3(b)
would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided, that if such
inaccuracy in Company's representations and warranties or breach by Company
is curable by Company through the exercise of its commercially reasonable
efforts, then Parent may not terminate this Agreement under this Section
7.1(f) for thirty (30) days after delivery of written notice from Parent to
Company of such breach, provided Company continues to exercise commercially
reasonable efforts to cure such breach (it being understood that Parent may
not terminate this
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Agreement pursuant to this Section 7.1(f) if it shall have materially
breached this Agreement or if such breach by Company is cured during such
thirty (30)-day period);
(g) by Parent, upon a breach of the provisions of Section 5.4 of this
Agreement;
(h) by Parent if a Triggering Event (as defined below) shall have
occurred.
For the purposes of this Agreement, a "Triggering Event" shall be deemed to
have occurred if: (i) the Board of Directors of Company or any committee thereof
shall for any reason have withdrawn or shall have amended or modified in a
manner adverse to Parent its recommendation in favor of, the approval of the
Agreement or the approval of the Merger; (ii) Company shall have failed to
include in the Proxy Statement/Prospectus the recommendation of the Board of
Directors of Company in favor of the approval of the Agreement and the approval
of the Merger; (iii) Board of Directors of Company fails to reaffirm its
recommendation in favor of the approval of the Agreement and the approval of the
Merger within five (5) business days after Parent requests in writing that such
recommendation be reaffirmed at any time following the making, announcement or
submission of an Acquisition Proposal; (iv) the Board of Directors of Company or
any committee thereof shall have approved or recommended any Acquisition
Proposal; or (v) a tender or exchange offer relating to securities of Company
shall have been commenced by a person unaffiliated with Parent and Company shall
not have sent to its securityholders pursuant to Rule 14e-2 promulgated under
the Securities Act, within ten (10) business days after such tender or exchange
offer is first published sent or given, a statement disclosing that Company
recommends rejection of such tender or exchange offer.
7.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon (or, if the
termination is pursuant to Section 7.1(f) or Section 7.1(g) and the proviso
therein is applicable, thirty (30) days after) the delivery of written notice of
the terminating party to the other parties hereto. In the event of the
termination of this Agreement as provided in Section 7.1, this Agreement shall
be of no further force or effect and the Merger shall be abandoned, except (i)
as set forth in this Section 7.2, Section 7.3 and Article 8 (General
Provisions), each of which shall survive the termination of this Agreement, and
(ii) nothing herein shall relieve any party from liability for any intentional
or willful breach of this Agreement. No termination of this Agreement shall
affect the obligations of the parties contained in the Confidentiality
Agreement, all of which obligations shall survive termination of this Agreement
and the abandonment of the Merger in accordance with their terms.
7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses whether or not the
Merger is consummated; provided, however, (i) that Parent and Company shall
share equally all fees and expenses, other than attorneys' and accountants fees
and expenses, incurred in relation to the printing and filing (with the SEC) of
the Proxy Statement/Prospectus (including any preliminary materials related
thereto) and the S-4 (including financial statements and exhibits) and any
amendments or supplements thereto and (ii) that Company shall reimburse Parent
for reasonable expenses incurred by Parent in connection with this Agreement and
the transactions contemplated hereby in an amount equal to up to $2,000,000 in
the event that a Termination Fee (as defined below) shall become due and payable
and as of the date that the Termination Fee becomes due and payable.
(b) Company Payments.
(i) Company shall pay to Parent in immediately available funds, within
one (1) business day after demand by Parent, an amount equal to $11,484,800
(the "Termination Fee") if this Agreement is terminated by Parent pursuant
to Section 7.1(g).
(ii) Company shall pay to Parent in immediately available funds,
within one (1) business day after demand by Parent, an amount equal to the
Termination Fee if this Agreement is terminated by Parent pursuant to
Section 7.1(h); provided, however, that no Termination Fee shall be payable
pursuant to this Section 7.3(b)(ii) in the event that a Triggering Event
occurs pursuant to Section 7.1(h) in response to
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an unsolicited tender offer made by a third party pursuant to Regulation
14(d) of the Exchange Act and no Acquisition Transaction is consummated
within twelve (12) months of the Triggering Event.
(iii) Company shall pay Parent in immediately available funds, within
one (1) business day after demand by Parent, an amount equal to the
Termination Fee, if (A) this Agreement is terminated by Parent or Company,
as applicable, pursuant to Section 7.1(b) or (d) and (B) within 12 months
of termination of this Agreement, Company shall enter into an agreement for
an Acquisition Transaction or shall consummate an Acquisition Transaction.
(iv) The Company acknowledges that the agreements contained in this
Section 7.3(b) are an integral part of the transactions contemplated by
this Agreement, and that, without these agreements, Parent would not enter
into this Agreement; accordingly, if Company fails to pay in a timely
manner the amounts due pursuant to this Section 7.3(b) and, in order to
obtain such payment, Parent makes a claim that results in a judgment
against Company for the amounts set forth in this Section 7.3(b), Company
shall pay to Parent its reasonable costs and expenses (including reasonable
attorneys' fees and expenses) in connection with such suit, together with
interest on the amounts set forth in this Section 7.3(b) at the prime rate
of The Chase Manhattan Bank in effect on the date such payment was required
to be made. Payment of the fees described in this Section 7.3(b) shall not
be in lieu of damages incurred in the event of breach of this Agreement.
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of Parent and Company.
7.5 Extension; Waiver. At any time prior to the Effective Time, any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. Delay in exercising any right under this
Agreement shall not constitute a waiver of such right.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. The representations
and warranties of Company, Parent and Merger Sub contained in this Agreement
shall terminate at the Effective Time, and only the covenants that by their
terms survive the Effective Time shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at the
following addresses or telecopy numbers (or at such other address or telecopy
numbers for a party as shall be specified by like notice):
(a) if to Parent or Merger Sub, to:
Critical Path, Inc.
320 First Street
San Francisco, California 94105
Attention: Doug Hickey, President & CEO
Telephone No.:(415) 808-8800
Telecopy No.:(415) 808-8777
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with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Alan K. Austin
Mark L. Reinstra
Telephone No.: (650) 493-9300
Telecopy No.: (650) 493-6811
(b) if to Company, to:
ISOCOR
3420 Ocean Park Blvd.
Santa Monica, California 90405
Attention: Paul Gigg, President & CEO
Telephone No.: (310) 581-8100
Telecopy No.: (310) 581-8111
with a copy to:
Venture Law Group
A Professional Corporation
2800 Sand Hill Road
Menlo Park, California 94025
Attention: Elias Blawie
Telephone No.: (650) 854-4488
Telecopy No.: (650) 854-1121
8.3 Interpretation; Knowledge.
(a) When a reference is made in this Agreement to Exhibits, such reference
shall be to an Exhibit to this Agreement unless otherwise indicated. When a
reference is made in this Agreement to Sections, such reference shall be to a
Section of this Agreement. Unless otherwise indicated the words "include,"
"includes" and "including" when used herein shall be deemed in each case to be
followed by the words "without limitation." The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. When reference is
made herein to "the business of" an entity, such reference shall be deemed to
include the business of all direct and indirect Subsidiaries of such entity.
Reference to the Subsidiaries of an entity shall be deemed to include all direct
and indirect Subsidiaries of such entity.
(b) For purposes of this Agreement, the term "KNOWLEDGE" means with respect
to a party hereto, with respect to any matter in question, that any of the
executive officers of such party (as defined in the rules and regulations of the
Securities and Exchange Commission) has actual knowledge of such matter.
(c) For purposes of this Agreement, the term "MATERIAL ADVERSE EFFECT" when
used in connection with an entity means any change, event, violation,
inaccuracy, circumstance or effect, individually or when aggregated with other
changes, events, violations, inaccuracies, circumstances or effects, that is
materially adverse to the business, assets (including intangible assets),
capitalization, financial condition or results of operations of such entity and
its Subsidiaries taken as a whole (it being understood that neither of the
following alone shall be deemed, in and of itself, to constitute a Material
Adverse Effect: (a) a change in the market price or trading volume of the
entity's Common Stock, (b) a loss of suppliers or customers as a result of the
public announcement or pendency of the transactions contemplated hereby) or (c)
changes in general economic conditions or changes affecting the industry
generally in which such entity operates.
(d) For purposes of this Agreement, the term "PERSON" shall mean any
individual, corporation (including any non-profit corporation), general
partnership, limited partnership, limited liability partnership,
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joint venture, estate, trust, company (including any limited liability company
or joint stock company), firm or other enterprise, association, organization,
entity or Governmental Entity.
(e) For purposes of this Agreement, the term "SUBSIDIARY" means with
respect to Company, the Surviving Corporation, Parent or any other person, any
corporation, partnership, joint venture, limited liability company or other
legal entity of which (i) Company, the Surviving Corporation, Parent or such
other person, as the case may be, (either alone or through or together with any
other subsidiary) owns, directly or indirectly, more than 25% of the stock or
other equity interests the holders of which are generally entitled to vote for
the election of the board of directors or other governing body of such
corporation or other legal entity or (ii) which constitutes a "SIGNIFICANT
SUBSIDIARY" of such entity within the meaning of Rule 12b-2 of the Exchange Act.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including the Company Disclosure Schedule
and the Parent Disclosure Schedule (a) constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof, it being understood that the
Confidentiality Agreement shall continue in full force and effect until the
Closing and shall survive any termination of this Agreement; and (b) are not
intended to confer upon any other person any rights or remedies hereunder,
except as specifically provided in Section 5.9.
8.6 Severability. In the event that any provision of this Agreement, or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other parties. Subject to the preceding sentence, this Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
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8.11 WAIVER OF JURY TRIAL. EACH OF PARENT, COMPANY AND MERGER SUB HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, COMPANY OR MERGER SUB IN
THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
*****
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
CRITICAL PATH, INC.
By: /s/ DAVID THATCHER
----------------------------------------
Name: David Thatcher
Title: Executive Vice President and Chief
Financial Officer
INITIALIZE ACQUISITION CORP.
By: /s/ DAVID THATCHER
----------------------------------------
Name: David Thatcher
Title: Executive Vice President and Chief
Financial Officer
ISOCOR
By: /s/ PAUL GIGG
----------------------------------------
Name: Paul Gigg
Title: President & CEO
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EXHIBIT D
AGREEMENT OF MERGER
This Agreement of Merger, dated as of , 2000 (the "Merger
Agreement"), between Initialize Acquisition Corp., a California corporation
("Merger Sub"), and ISOCOR, a California corporation ("Target") (collectively,
the "Constituent Corporations").
The parties hereto hereby agree as follows:
1. Merger. Upon the terms and subject to the conditions of this Merger
Agreement and an Agreement and Plan of Reorganization among the Constituent
Corporations and Critical Path, Inc. ("Parent"), Merger Sub shall be merged with
and into Target, and Target shall be the surviving corporation of the merger
(the "Merger").
2. Effective Time of Merger. The Merger shall become effective at such time
(the "Effective Time") as this Merger Agreement and the officers' certificate of
Target is filed with the Secretary of State of the State of California pursuant
to Section 1103 of the California General Corporation Law ("GCL").
3. Effect of Merger. At the Effective Time of the Merger, the separate
existence of Merger Sub shall cease, and Target ("Surviving Corporation") shall
succeed, without other transfer, to all of the rights and properties of each
Constituent Corporation and shall be subject to all the debts and liabilities of
each Constituent Corporation in the same manner as if Surviving Corporation had
itself incurred them. All rights of creditors and all liens upon the property of
each Constituent Corporation shall be preserved unimpaired, provided that such
liens upon property of Merger Sub shall be limited to the property affected
thereby immediately prior to the Effective Time of the Merger.
4. Articles of Incorporation; Bylaws. (a) At the Effective Time, the
Articles of Incorporation of the Surviving Corporation shall be amended and
restated to read in their entirety as set forth in Exhibit A hereto.
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be, at the Effective Time, the Bylaws of the Surviving
Corporation until thereafter amended.
5. Directors and Officers. The initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or appointed
and qualified. The initial officers of the Surviving Corporation shall be the
officers of Merger Sub immediately prior to the Effective Time.
6. Effect on Capital Stock. (a) At the Effective Time of the Merger (i) all
shares of Target Common Stock that are owned directly or indirectly by Target,
Merger Sub or any other subsidiary of Parent shall be cancelled without any
conversion thereof, and no securities of Merger Sub or other consideration shall
be delivered in exchange therefor, (ii) each of the other issued and outstanding
shares of Target Common Stock (other than shares, if any, held by persons who
have not voted such shares for approval of the Merger and with respect to which
such persons shall become entitled to exercise dissenters' rights in accordance
with Chapter 13 of the GCL, referred to hereinafter as "Dissenting Shares")
shall be converted automatically into and exchanged for 0.4707 shares of Common
Stock of Parent ("Parent Common Stock") (the "Exchange Ratio"). Those shares of
Parent Common Stock to be issued as a result of the Merger are referred to
herein as the "Parent Shares".
(b) Any Dissenting Shares shall not be converted into Parent Common Stock
but shall be converted into the right to receive such consideration as may be
determined to be due with respect to such Dissenting Shares pursuant to the GCL.
If after the Effective Time any Dissenting Shares shall lose their status as
Dissenting Shares, then as of the occurrence of the event which causes the loss
of such status, such shares shall be converted into Parent Common Stock in
accordance with Section 7(a) above.
(c) Each share of Common Stock, no par value per share, of Merger Sub (the
"Merger Sub Common Stock") issued and outstanding immediately prior to the
Effective Time shall be converted into one validly issued, fully paid and
nonassessable share of Common Stock, no par value per share, of the Surviving
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Corporation. Each certificate evidencing ownership of shares of Merger Sub
Common Stock shall evidence ownership of such shares of capital stock of the
Surviving Corporation.
(d) No fraction of a share of Parent Common Stock will be issued by virtue
of the Merger, but in lieu thereof each holder of shares of Company Common Stock
who would otherwise be entitled to a fraction of a share of Parent Common Stock
(after aggregating all fractional shares of Parent Common Stock that otherwise
would be received by such holder) shall, upon surrender of such holder's
certificates(s) representing shares of Target Common Stock, receive from Parent
an amount of cash (rounded to the nearest whole cent), without interest, equal
to the product of (i) such fraction, multiplied by (ii) the average closing
price of one share of Parent Common Stock for the ten (10) most recent days that
Parent Common Stock has traded ending on the trading day immediately prior to
the Effective Time, as reported on the Nasdaq National Market System.
(e) The conversion of Target Common Stock into Parent Common Stock shall
occur automatically at the Effective Time of the Merger without action by the
holders thereof. Each holder of Target Common Stock shall thereupon be entitled
to receive shares of Parent Common Stock in accordance with the Agreement and
Plan of Reorganization.
7. Termination. (a) Notwithstanding the approval of this Merger Agreement
by the stockholders of Target, this Merger Agreement shall terminate forthwith
in the event that the Agreement and Plan of Reorganization shall be terminated
as therein provided.
(b) In the event of the termination of this Merger Agreement as provided
above, this Merger Agreement shall forthwith become void and there shall be no
liability on the part of Target, Merger Sub or Parent or their respective
officers or directors, except as otherwise provided in the Agreement and Plan of
Reorganization.
(c) This Merger Agreement may be signed in one or more counterparts, each
of which shall be deemed an original and all of which shall constitute one
agreement.
(d) This Merger Agreement may be amended by the parties hereto any time
before or after approval hereof by the stockholders of Target, but, after such
approval, no amendments shall be made which by law require the further approval
of such stockholders without obtaining such approval. This Merger Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.
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IN WITNESS WHEREOF, the parties have executed this Agreement of Merger as
of the date first written above.
INITIALIZE ACQUISITION CORP.:
By:
------------------------------------
[Name],
[Title]
By:
------------------------------------
[Name],
[Title]
ISOCOR:
By:
------------------------------------
Paul Gigg
President and Chief Executive
Officer
By:
------------------------------------
Elias J. Blawie
Secretary
[SIGNATURE PAGE TO AGREEMENT OF MERGER]
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<PAGE> 296
EXHIBIT A TO AGREEMENT OF MERGER
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
ISOCOR
ARTICLE I
The name of the Corporation is ISOCOR (the "Corporation").
ARTICLE II
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
This Corporation is authorized to issue one class of shares to be
designated Common Stock, par value $0.001 per share. The total number of shares
of Common Stock this Corporation is authorized to issue is one thousand (1,000).
ARTICLE IV
1. Limitation of Directors' Liability. The liability of the directors of
this corporation for monetary damages shall be eliminated to the fullest extent
permissible under California law.
2. Indemnification of Directors and Officers. This corporation is
authorized to indemnify the directors and officers of the corporation to the
fullest extent permissible under California law.
3. Repeal or Modification. Any repeal or modification of the foregoing
provisions of this Article V shall not adversely affect any right of
indemnification or limitation of liability of a director or officer of this
corporation relating to acts or omissions occurring prior to such repeal or
modification.
ARTICLE V
Meetings of stockholders may be held within or without the State of
California, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
California at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE VI
Elections of directors need not be by written ballot unless the Bylaws of
the Corporation shall so provide.
ARTICLE VII
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
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OFFICERS' CERTIFICATE
OF
ISOCOR
Paul Gigg, President and Chief Executive Officer, and Elias Blawie,
Secretary, of ISOCOR, a corporation duly organized and existing under the laws
of the State of California (the "Company"), do hereby certify:
1. That they are the duly elected, acting and qualified President and Chief
Executive Officer and the Secretary, respectively, of the Company.
2. There are two authorized classes of shares, consisting of 50,000,000
shares of Common Stock and 2,000,000 shares of Preferred Stock. There were
shares of Common Stock outstanding and entitled to vote on the Agreement of
Merger in the form attached.
3. The Agreement of Merger in the form attached were duly approved by the
Board of Directors of the Company in accordance with the California General
Corporation Law.
4. Approval of the Agreement of Merger by the holders of at least a
majority of the outstanding shares of Common Stock (voting as a single class)
was required. The percentage of the outstanding shares of the Company's Common
Stock entitled to vote on the Agreement of Merger which voted to approve the
Agreement of Merger equaled or exceeded the vote required.
Each of the undersigned declares under penalty of perjury that the
statements contained in the foregoing certificate are true of their own
knowledge. Executed in , California on , 2000.
By:
------------------------------------
Paul Gigg,
President and Chief Executive
Officer
By:
------------------------------------
Elias J. Blawie,
Secretary
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<PAGE> 298
ANNEX B
[CONFORMED COPY]
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") is made and entered into as
of October 20, 1999, among Critical Path, Inc., a California corporation
("Parent"), and ISOCOR, a California corporation (the "Company"). Capitalized
terms used but not otherwise defined herein will have the meanings ascribed to
them in the Reorganization Agreement (as defined below).
RECITALS
A. The Company, Merger Sub (as defined below) and Parent have entered into
an Agreement and Plan of Reorganization (the "Reorganization Agreement") which
provides for the merger (the "Merger") of a wholly-owned subsidiary of Parent
("Merger Sub") with and into the Company. Pursuant to the Merger, all
outstanding capital stock of the Company will be converted into the right to
receive Common Stock of Parent as provided by the Reorganization Agreement.
B. As a condition to Parent's willingness to enter into the Reorganization
Agreement, Parent has requested that Company agree, and Company has so agreed,
to grant to Parent an option to acquire shares of the Company's Common Stock, no
par value (the "Company Shares"), upon the terms and subject to the conditions
set forth herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Reorganization Agreement
and for other good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the parties hereto agree as follows:
1. Grant of Option. The Company hereby grants to Parent an irrevocable
option (the "Option") to purchase from the Company up to a number of Company
Shares equal to 19.9% of the issued and outstanding Company Shares (the "Option
Shares") as of the first date, if any, upon which an Exercise Event (as defined
in Section 2(a) below) occurs, in the manner set forth below by paying cash to
the Company at a price of $23.54 per Company Share (the "Exercise Price"). In no
event shall the aggregate number of Option Shares exceed 19.9% of the Company
Shares issued and outstanding at the time of exercise of the Option.
2. Exercise of Option.
(a) The Option may be exercised by Parent, in whole or in part, at any time
or from time to time if the Reorganization Agreement is terminated pursuant to
Section 7.1(b), 7.1(d), 7.1(g), or 7.1(h) thereof and an event causing the
Termination Fee to become payable pursuant to Section 7.3(b) of the
Reorganization Agreement occurs (any of the events being referred to herein as
an "Exercise Event"). In the event Parent wishes to exercise the Option, Parent
will deliver to the Company a written notice (each an "Exercise Notice")
specifying the total number of Option Shares it wishes to acquire. Each closing
of a purchase of Option Shares (a "Closing") will occur on a date and at a time
prior to the termination of the Option designated by Parent in an Exercise
Notice delivered at least two (2) business days prior to the date of such
Closing, which Closing will be held at the principal offices of the Company.
(b) The Option and this Agreement will terminate upon the earliest of (i)
the Effective Time, (ii) twelve (12) months following the date on which the
Reorganization Agreement is terminated pursuant to Section 7.1(g) or 7.1(h)
thereof, other than a termination pursuant to Section 7.1(h) as a result of
which no Termination Fee becomes payable pursuant to the proviso in Section
7.3(b)(ii), and (iii) in the event the Reorganization Agreement has been
terminated pursuant to Section 7.1(b) or 7.1(d) thereof and the Termination Fee
became payable pursuant to Section 7.3(b)(iii) thereof, six (6) months after
payment of the Termination Fee; provided, however, that if the Option cannot be
exercised by reason of any applicable government order or because the waiting
period related to the issuance of the Option Shares under the HSR Act will not
have expired or been terminated, then the Option will not terminate until the
tenth business day after such impediment to exercise will have been removed or
will have become final and not subject to
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appeal. In the event that the Option and this Agreement terminate as provided
herein, this Agreement shall be of no further force or effect.
3. Conditions to Closing. The obligation of the Company to issue Option
Shares to Parent hereunder is subject to the conditions that (A) any waiting
period under the HSR Act applicable to the issuance of the Option Shares
hereunder will have expired or been terminated; (B) all material consents,
approvals, orders or authorizations of, or registrations, declarations or
filings with, any Federal, state or local administrative agency or commission or
other Federal state or local governmental authority or instrumentality, if any,
required in connection with the issuance of the Option Shares hereunder will
have been obtained or made, as the case may be; and (C) no preliminary or
permanent injunction or other order by any court of competent jurisdiction or
other Governmental Entity prohibiting or otherwise restraining such issuance
will be in effect. It is understood and agreed that at any time during which the
Option is exercisable, the parties will use their respective commercially
reasonable efforts to satisfy all conditions to Closing, so that a Closing may
take place as promptly as practicable.
4. Closing. At any Closing, (A) the Company will deliver to Parent a single
certificate in definitive form representing the number of Company Shares
designated by Parent in its Exercise Notice, such certificate to be registered
in the name of Parent and to bear the restrictive legend set forth in Section 9
hereof, against delivery of (B) payment by Parent to the Company of the
aggregate purchase price for the Company Shares so designated and being
purchased by wire transfer of immediately available funds to an account
designated by the Company.
5. Representations and Warranties of the Company. Company represents and
warrants to Parent that (A) Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of California and has
the corporate power and authority to enter into this Agreement and to carry out
its obligations hereunder; (B) the execution and delivery of this Agreement by
the Company and consummation by the Company of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of the Company and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or any of the transactions contemplated
hereby; (C) this Agreement has been duly executed and delivered by the Company
and constitutes a legal, valid and binding obligation of the Company and,
assuming this Agreement constitutes a legal, valid and binding obligation of
Parent, is enforceable against the Company in accordance with its terms, except
as may be limited by bankruptcy, insolvency, reorganization or other similar
laws affecting the enforcement of creditors' rights generally and by general
equitable principles; (D) except for any filings required under the HSR Act, the
Company has taken all necessary corporate and other action to authorize and
reserve for issuance and to permit it to issue upon exercise of the Option, and
at all times from the date hereof until the termination of the Option will have
reserved for issuance, a sufficient number of unissued Company Shares for Parent
to exercise the Option in full and will take all necessary corporate or other
action to authorize and reserve for issuance all additional Company Shares or
other securities which may be issuable pursuant to Section 8(a) upon exercise of
the Option, all of which, upon their issuance and delivery in accordance with
the terms of this Agreement, will be validly issued, fully paid and
nonassessable; (E) upon delivery of the Company Shares and any other securities
to Parent upon exercise of the Option, Parent will acquire such Company Shares
or other securities free and clear of all material claims, liens, charges,
encumbrances and security interests of any kind or nature whatsoever, excluding
those imposed by Parent; (F) the execution and delivery of this Agreement by the
Company do not, and the performance of this Agreement by the Company will not,
(i) conflict with or violate the Articles of Incorporation or Bylaws of the
Company, (ii) conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to the Company or by which its properties is bound
or affected or (iii) result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or impair the Company's rights or alter the rights or obligations of any third
party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of the Company pursuant to, any
material note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the Company is a
party or by which the Company or its respective properties are bound or
affected, except, with respect to clauses (ii) and (iii), for any such
conflicts, violations, breaches, defaults or
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other occurrences that would not, individually and in the aggregate, have a
Material Adverse Effect; and (G) the execution and delivery of this Agreement by
the Company does not, and the performance of this Agreement by the Company will
not, require any consent, approval, authorization or permit of, or filing with,
or notification to, any Governmental Entity except pursuant to the HSR Act or
except as provided in clauses (A) or (B) of Section 2.5(b) of the Reorganization
Agreement.
6. Certain Rights.
(a) Parent Put. At the request of and upon notice by Parent (the "Put
Notice"), at any time during the period during which the Option is exercisable
pursuant to Section 2 (the "Purchase Period"), the Company (or any successor
entity thereof) will purchase from Parent the Option, to the extent not
previously exercised, at the price set forth in subparagraph (i) below (as
limited by subparagraph (iii) below), and the Option Shares, if any, acquired by
Parent pursuant thereto, at the price set forth in subparagraph (ii) below (as
limited by subparagraph (iii) below):
(i) The difference between the "Market/Tender Offer Price" for the
Company Shares as of the date Parent gives notice of its intent to exercise
its rights under this Section 6(a) (which "Market/Tender Offer Price" shall
mean the higher of (A) the highest price per share offered as of such date
pursuant to any Acquisition Proposal which was made prior to such date and
(B) the average closing sale price of Company Shares as reported on Nasdaq
during the twenty (20) consecutive trading days ending on the trading day
immediately preceding such date) and the Exercise Price, multiplied by the
number of Company Shares purchasable pursuant to the Option, but only if
the Market/Tender Offer Price is greater than the Exercise Price. For
purposes of determining the highest price offered pursuant to any
Acquisition Proposal which involves consideration other than cash, the
value of such consideration will be equal to the higher of (x) if
securities of the same class of the proponent of such Acquisition Proposal
as such consideration are traded on any national securities exchange or by
any registered securities association, a value based on the closing sale
price or closing asked price for such securities on their principal trading
market on such date and (y) the value ascribed to such consideration by the
proponent of such Acquisition Proposal, or if no such value is ascribed, a
value determined in good faith by the Board of Directors of the Company.
(ii) The Exercise Price paid by Parent for Company Shares acquired
pursuant to the Option plus the difference between the Market/Tender Offer
Price and such Exercise Price (but only if the Market/ Tender Offer Price
is greater than the Exercise Price) multiplied by the number of Company
Shares so purchased (provided that Parent then has beneficial ownership of
such Company Shares).
(iii) Notwithstanding subparagraphs (i) and (ii) above, with respect
to payments pursuant to this Section 6(a), Company will not be required to
pay Parent in excess of an aggregate of $2,871,000.
(b) Payment and Redelivery of Option or Shares. In the event Parent
exercises its rights under Section 6(a), the Company will, within five (5)
business days after Parent delivers a Put Notice pursuant to Section 6(a), pay
the required amount to Parent in immediately available funds and Parent will
surrender to the Company the certificates evidencing the Company Shares
purchased by Parent pursuant thereto and the Option shall be terminated.
7. Registration Rights.
(a) Following the termination of the Reorganization Agreement, Parent
(sometimes referred to herein as the "Holder") may by written notice (a
"Registration Notice") to the Company (the "Registrant") request the Registrant
to register under the Securities Act all or any part of the Option Shares
acquired by the Holder pursuant to this Agreement (such shares requested to be
registered, the "Registrable Securities") in order to permit the sale or other
disposition of any or all shares of the Registrable Securities that have been
acquired by or are issuable to Holder upon exercise of the Option in accordance
with the intended method of sale or other disposition stated by Holder,
including a "shelf " registration statement under Rule 415 under the Securities
Act or any successor provision. Holder agrees to cause, and to cause any
underwriters of any sale or other disposition to cause, any sale or other
disposition pursuant to such registration statement to be effected on a widely
distributed basis so that upon consummation thereof no purchaser or transferee
will, to the knowledge
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of Holder (after reasonable inquiry), own beneficially more than 2.5% of the
then-outstanding voting power of Registrant. Upon a request for registration,
the Registrant will have the option exercisable by written notice delivered to
the Holder within ten business days after the receipt of the Registration
Notice, irrevocably to agree to purchase all or any part of the Registrable
Securities for cash at a price (the "Option Price") equal to the product of (i)
the number of Registrable Securities so purchased and (ii) the per share average
of the closing sale prices of the Registrant's Common Stock on Nasdaq for the
ten trading days immediately preceding the date of the Registration Notice. Any
such purchase of Registrable Securities by the Registrant hereunder will take
place at a closing to be held at the principle executive offices of the
Registrant or its counsel at any reasonable date and time designated by the
Registrant in such notice within ten business days after delivery of such
notice. The payment for the shares to be purchased will be made by delivery at
the time of such closing of the Option Price in immediately available funds.
(b) If the Registrant does not elect to exercise its option to purchase
pursuant to Section 7(a) with respect to all Registrable Securities, the
Registrant will use all reasonable efforts to effect, as promptly as
practicable, the registration under the Securities Act of the unpurchased
Registrable Securities requested to be registered in the Registration Notice and
to keep such registration statement effective for such period not in excess of
120 calendar days from the day such registration statement first becomes
effective as may be reasonably necessary to effect such sale or other
disposition; provided, however, that the Holder will not be entitled to more
than an aggregate of two effective registration statements hereunder. The
obligations of Registrant hereunder to file a registration statement and to
maintain its effectiveness may be suspended for up to 120 calendar days in the
aggregate if the Board of Directors of Registrant shall have determined that the
filing of such registration statement or the maintenance of its effectiveness
would require premature disclosure of material nonpublic information that would
materially and adversely affect Registrant or otherwise interfere with or
adversely affect any pending or proposed offering of securities of Registrant or
any other material transaction involving Registrant. If consummation of the sale
of any Registrable Securities pursuant to a registration hereunder does not
occur within 120 days after the filing with the SEC of the initial registration
statement therefor, the provisions of this Section 7 will again be applicable to
any proposed registration (subject to the proviso in the first sentence of this
Section 7(b)). The Registrant will use all commercially reasonable efforts to
cause any Registrable Securities registered pursuant to this Section 7 to be
qualified for sale under the securities or blue sky laws of such jurisdictions
as the Holder may reasonably request and will continue such registration or
qualification in effect in such jurisdictions; provided, however, that the
Registrant will not be required to qualify to do business in, or consent to
general service of process in, any jurisdiction by reason of this provision. If
Registrant effects a registration under the Securities Act of Company Common
Stock for its own account or for any other stockholders of Registrant (other
than on Form S-4 or Form S-8, or any successor form), it will allow Holder the
right to participate in such registration by selling its Registrable Securities,
and such participation will not affect the obligation of Registrant to effect
demand registration statements for Holder under this Section 7; provided that,
if the managing underwriters of such offering advise Registrant in writing that
in their opinion the number of shares of Company Common Stock requested to be
included in such registration exceeds the number which can be sold in such
offering, Registrant will include the shares requested to be included therein by
Holder pro rata with the shares intended to be included therein by Registrant.
(c) The registration rights set forth in this Section 7 are subject to the
condition that the Holder will provide the Registrant with such information with
respect to the Holder's Registrable Securities, the plan for distribution
thereof, and such other information with respect to the Holder as, in the
reasonable judgment of counsel for the Registrant, is necessary to enable the
Registrant to include in a registration statement all facts required to be
disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 7 will be effected at the
Registrant's expense, except for underwriting discounts and commissions and the
fees and expenses of counsel to the Holder, and the Registrant will use
commercially reasonable efforts to provide to the underwriters such
documentation (including certificates, opinions of counsel and "comfort" letters
from auditors) as are customary in connection with underwritten public offerings
and as such underwriters may reasonably require. In connection with any
registration, the Holder and the Registrant agree to enter into an underwriting
agreement reasonably
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acceptable to each such party, in form and substance customary for transactions
of this type with the underwriters participating in such offering.
(e) Indemnification.
(i) The Registrant will indemnify the Holder, each of its directors
and officers and each person who controls the Holder within the meaning of
Section 15 of the Securities Act, and each underwriter of the Registrant's
securities, with respect to any registration, qualification or compliance
which has been effected pursuant to this Agreement, against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof),
including any of the foregoing incurred in settlement of any litigation,
commenced or threatened, arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or
any amendment or supplement thereto, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission)
to state therein a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances in which they
were made, not misleading, or any violation by the Registrant of any rule
or regulation promulgated under the Securities Act applicable to the
Registrant in connection with any such registration, qualification or
compliance, and the Registrant will reimburse the Holder and, each of its
directors and officers and each person who controls the Holder within the
meaning of Section 15 of the Securities Act, and each underwriter for any
legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage,
liability or action; provided, that the Registrant will not be liable in
any such case to the extent that any such claim, loss, damage, liability or
expense arises out of or is based on any untrue statement or omission or
alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to the Registrant by such
Holder or director or officer or controlling person or underwriter seeking
indemnification; provided, however, that the indemnification provided for
in this paragraph (i) of this Section 7(e) shall not apply to amounts paid
in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Registrant.
(ii) The Holder will indemnify the Registrant, each of its directors
and officers and each underwriter of the Registrant's securities covered by
such registration statement and each person who controls the Registrant
within the meaning of Section 15 of the Securities Act, against all
expenses, claims, losses, damages and liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Holder of any rule or
regulation promulgated under the Securities Act applicable to the Holder in
connection with any such registration, qualification or compliance, and
will reimburse the Registrant, such directors, officers or control persons
or underwriters for any legal or any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Registrant by the
Holder for use therein; provided, that in no event will any indemnity under
this Section 7(e) exceed the net proceeds of the offering received by the
Holder, and provided further, that the indemnification provided for in this
paragraph (ii) of this Section 7(e) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder.
(iii) Each party entitled to indemnification under this Section 7(e)
(the "Indemnified Party") will give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be
sought, and will permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided, that counsel
for the Indemnifying Party, who will conduct the defense of such claim
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or litigation, will be approved by the Indemnified Party (whose approval
will not unreasonably be withheld), and the Indemnified Party may
participate in such defense at such party's expense; provided, however,
that the Indemnifying Party will pay such expense if representation of the
Indemnified Party by counsel retained by the Indemnifying Party would be
inappropriate due to actual or potential differing interests between the
Indemnified Party and any other party represented by such counsel in such
proceeding, and provided further, however, that the failure of any
Indemnified Party to give notice as provided herein will not relieve the
Indemnifying Party of its obligations under this Section 7(e) unless the
failure to give such notice is materially prejudicial to an Indemnifying
Party's ability to defend such action. No Indemnifying Party, in the
defense of any such claim or litigation will, except with the consent of
each Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release
from all liability in respect to such claim or litigation. No Indemnifying
Party will be required to indemnify any Indemnified Party with respect to
any settlement entered into without such Indemnifying Party's prior consent
(which will not be unreasonably withheld).
8. Adjustment Upon Changes in Capitalization; Rights Plans.
(a) In the event of any change in the Company Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the Merger),
recapitalizations, combinations, exchanges of shares and the like, the type and
number of shares or securities subject to the Option, the Exercise Price will be
adjusted appropriately, and proper provision will be made in the agreements
governing such transaction so that Parent will receive, upon exercise of the
Option, the number and class of shares or other securities or property that
Parent would have received in respect of the Company Shares if the Option had
been exercised immediately prior to such event or the record date therefor, as
applicable.
(b) At any time during which the Option is exercisable, and at any time
after the Option is exercised (in whole or in part, if at all), the Company will
not amend (nor permit the amendment of ) any current shareholder rights plan of
the Company or its subsidiaries nor adopt (nor permit the adoption of ) a new
stockholders rights plan that contains provisions for the distribution or
exercise of rights thereunder as a result of Parent or any affiliate being the
beneficial owner of shares of the Company by virtue of the Option being
exercisable or having been exercised (or as a result of beneficially owning
shares issuable in respect of any Option Shares).
9. Restrictive Legends. Each certificate representing Option Shares issued
to Parent hereunder will include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF OCTOBER 20,
1999, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER.
It is understood and agreed that (i) the reference to restrictions arising
under the Securities Act in the above legend will be removed by delivery of
substitute certificate(s) without such reference if such Option Shares have been
registered pursuant to the Securities Act, such Option Shares have been sold in
reliance on and in accordance with Rule 144 under the Securities Act or Holder
has delivered to Registrant a copy of a letter from the staff of the SEC, or an
opinion of counsel in form and substance reasonably satisfactory to Registrant
and its counsel, to the effect that such legend is not required for purposes of
the Securities Act and (ii) the reference to restrictions pursuant to this
Agreement in the above legend will be removed by delivery of substitute
certificate(s) without such reference if the Option Shares evidenced by
certificate(s) containing such reference have been sold or transferred in
compliance with the provisions of this Agreement under circumstances that do not
require the retention of such reference.
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10. Listing and HSR Filing. The Company, upon the request of Parent, will
promptly file an application to list the Company Shares to be acquired upon
exercise of the Option for quotation on Nasdaq and will use its best efforts to
obtain approval of such listing as soon as practicable. Promptly after the date
hereof, each of the parties hereto will promptly file with the Federal Trade
Commission and the Antitrust Division of the United States Department of Justice
all required premerger notification and report forms and other documents and
exhibits required to be filed under the HSR Act to permit the acquisition of the
Company Shares subject to the Option at the earliest possible date.
11. Binding Effect. This Agreement will be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. Nothing contained in this Agreement, express or implied, is intended to
confer upon any person other than the parties hereto and their respective
successors and permitted assigns any rights or remedies of any nature whatsoever
by reason of this Agreement. Any shares sold by a party in compliance with the
provisions of Section 7 will, upon consummation of such sale, be free of the
restrictions imposed with respect to such shares by this Agreement and any
transferee of such shares will not be entitled to the rights of such party.
Certificates representing shares sold in a registered public offering pursuant
to Section 7 will not be required to bear the legend set forth in Section 9.
12. Specific Performance. The parties hereto recognize and agree that if
for any reason any of the provisions of this Agreement are not performed in
accordance with their specific terms or are otherwise breached, immediate and
irreparable harm or injury would be caused for which money damages would not be
an adequate remedy. Accordingly, each party hereto agrees that in addition to
other remedies available, the other party hereto will be entitled to an
injunction restraining any violation or threatened violation of the provisions
of this Agreement or the right to enforce any of the covenants or agreements set
forth herein by specific performance. In the event that any action will be
brought in equity to enforce the provisions of this Agreement, neither party
hereto will allege, and each party hereto hereby waives the defense, that there
is an adequate remedy at law.
13. Entire Agreement. This Agreement and the Reorganization Agreement
(including the exhibits thereto) constitute the entire agreement between the
parties hereto with respect to the subject matter hereof and supersede all other
prior agreements and understandings, both written and oral, between the parties
hereto with respect to the subject matter hereof.
14. Further Assurances. Each party hereto will execute and deliver all such
further documents and instruments and take all such further action as may be
necessary in order to consummate the transactions contemplated hereby.
15. Validity. The invalidity or unenforceability of any provision of this
Agreement will not affect the validity or enforceability of the other provisions
of this Agreement, which will remain in full force and effect. In the event any
Governmental Entity of competent jurisdiction holds any provision of this
Agreement to be null, void or unenforceable, the parties hereto will negotiate
in good faith and will execute and deliver an amendment to this Agreement in
order, as nearly as possible, to effectuate, to the extent permitted by law, the
intent of the parties hereto with respect to such provision.
16. Notices. All notices and other communications hereunder will be in
writing and will be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at the
following addresses or telecopy numbers (or at such other address or telecopy
numbers for a party as will be specified by like notice):
if to Parent, to:
Critical Path, Inc.
320 First Street
San Francisco, CA 94105
Attention: Doug Hickey, President & CEO
Telephone No.: (415) 808-8800
Telecopy No.: (415) 808-8777
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with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Alan K. Austin
Telephone No.: (650) 493-9300
Telecopy No.: (650) 493-6811
if to Company, to:
ISOCOR
3420 Ocean Park Blvd.
Santa Monica, CA 90405
Attention: Paul Gigg, President & CEO
Telephone No.: (310) 581-8100
Telecopy No.: (310) 581-8111
with a copy to:
Venture Law Group
A Professional Corporation
2800 Sand Hill Road
Menlo Park, California 94025
Attention: Elias Blawie
Telephone No.: (650) 854-4488
Telecopy No.: (650) 854-1121
17. Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of California applicable to agreements
made and to be performed entirely within such State.
18. Expenses. Except as otherwise expressly provided herein or in the
Reorganization Agreement, all costs and expenses incurred in connection with the
transactions contemplated by this Agreement will be paid by the party incurring
such expenses.
19. Amendments; Waiver. This Agreement may be amended by the parties hereto
and the terms and conditions hereof may be waived only by an instrument in
writing signed on behalf of each of the parties hereto, or, in the case of a
waiver, by an instrument signed on behalf of the party waiving compliance.
20. Assignment. Neither of the parties hereto may sell, transfer, assign or
otherwise dispose of any of its rights or obligations under this Agreement or
the Option created hereunder to any other person, without the express prior
written consent of the other party, except that the rights and obligations
hereunder will inure to the benefit of and be binding upon any successor of a
party hereto.
21. Counterparts. This Agreement may be executed in counterparts, each of
which will be deemed to be an original, but both of which, taken together, will
constitute one and the same instrument.
22. Descriptive Headings. The section headings are for convenience only and
shall not affect the construction or interpretation of this Agreement.
23. Defined Terms. Capitalized terms not defined herein shall have the
meanings ascribed to them in the Reorganization Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
CRITICAL PATH, INC.
By: /s/ DAVID THATCHER
--------------------------------------
Name: David Thatcher
Title: Executive Vice President and
Chief Financial Officer
ISOCOR
By: /s/ PAUL GIGG
--------------------------------------
Name: Paul Gigg
Title: President & CEO
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ANNEX C
October 20, 1999
Board of Directors
ISOCOR
3420 Ocean Park Boulevard
Santa Monica, CA 90405
Members of the Board:
We understand that ISOCOR (the "Company"), Critical Path, Inc. ("Acquiror")
and Initialize Acquisition Corp. (a wholly owned subsidiary of Acquiror, "Merger
Sub") are proposing to enter into an Agreement and Plan of Reorganization (the
"Agreement") which will provide, among other things, for the merger (the
"Merger") of Merger Sub with and into the Company. Upon consummation of the
Merger, the Company will become a wholly owned subsidiary of Acquiror. Under the
terms set forth in a draft of the Agreement dated October 20, 1999 (the "Draft
Agreement"), at the effective time of the Merger (the "Effective Time"), each
share of common stock of the Company, no par value ("Company Common Stock"),
issued and outstanding immediately prior to the Effective Time, other than
certain shares to be canceled pursuant to the Agreement and shares held by
stockholders who properly exercise dissenters' rights ("Dissenting Shares"),
will be converted into the right to receive 0.4707 (the "Exchange Ratio") shares
of the common stock of Acquiror ("Acquiror Common Stock"). The terms and
conditions of the Merger are set out more fully in the Agreement.
You have asked us whether, in our opinion, the Exchange Ratio is fair from
a financial point of view and as of the date hereof to the "Holders of Company
Common Stock". The "Holders of Company Common Stock" shall be defined as all
holders of Company Common Stock other than Acquiror, Merger Sub, any affiliates
of Acquiror or Merger Sub or any holders of Dissenting Shares.
For purposes of this opinion we have, among other things:
(i) reviewed certain publicly available financial statements and other
business and financial information of the Company and Acquiror,
respectively;
(ii) reviewed with the Company and Acquiror certain publicly available
estimates of research analysts relating to the Company and Acquiror;
(iii) held discussions with the respective managements of the Company
and Acquiror concerning the businesses, past and current operations,
financial condition and future prospects of both the Company and Acquiror,
independently and combined, including discussions with the managements of
the Company and Acquiror concerning cost savings and other synergies that
are expected to result from the Merger as well as their views regarding the
strategic rationale for the Merger;
(iv) reviewed the financial terms and conditions set forth in the
Draft Agreement;
(v) reviewed the stock price and trading history of the Company common
stock and Acquiror common stock;
(vi) compared the financial performance of the Company and Acquiror
and the prices and trading activity of Company Common Stock and Acquiror
Common Stock with that of certain other publicly traded companies
comparable with the Company and Acquiror, respectively;
(vii) compared the financial terms of the Merger with the financial
terms, to the extent publicly available, of other transactions that we
deemed relevant;
(viii) reviewed the pro forma impact of the Merger on Acquiror's
revenue and earnings per share;
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(ix) prepared an analysis of the relative contributions of the Company
and Acquiror to the combined company;
(x) participated in discussions and negotiations among representatives
of the Company and Acquiror and their financial and legal advisors; and
(xi) made such other studies and inquiries, and reviewed such other
data, as we deemed relevant.
In our review and analysis, and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us (including information furnished to us orally or
otherwise discussed with us by the managements of the Company and Acquiror) or
publicly available and have neither attempted to verify, nor assumed
responsibility for verifying, any of such information. We have relied upon the
assurances of the managements of the Company and Acquiror that they are not
aware of any facts that would make such information inaccurate or misleading.
Furthermore, we did not obtain or make, or assume any responsibility for
obtaining or making, any independent evaluation or appraisal of the properties,
assets or liabilities (contingent or otherwise) of the Company or Acquiror, nor
were we furnished with any such evaluation or appraisal. With respect to the
financial forecasts and projections (and the assumptions and bases therefor) for
each of the Company and Acquiror that we have reviewed, upon the advice of the
managements of the Company and Acquiror, we have assumed that such forecasts and
projections have been reasonably prepared in good faith on the basis of
reasonable assumptions and reflect the best currently available estimates and
judgments as to the future financial condition and performance of the Company
and Acquiror, respectively, and we have further assumed that such projections
and forecasts will be realized in the amounts and in the time periods currently
estimated. In this regard, we note that each of the Company and Acquiror face
exposure to the Year 2000 problem. We have not undertaken any independent
analysis to evaluate the reliability or accuracy of the assumptions made with
respect to the potential effect that the Year 2000 problem might have on the
Company's and Acquiror's respective forecasts. We have assumed that the Merger
will be consummated upon the terms set forth in the Draft Agreement without
material alteration thereof, including, among other things, that the Merger will
be accounted for as a "purchase method" business combination in accordance with
U.S. generally accepted accounting principles ("GAAP") and that the Merger will
be treated as a tax-free reorganization pursuant to the Internal Revenue Code of
1986, as amended. In addition, we have assumed that the historical financial
statements of each of the Company and Acquiror reviewed by us have been prepared
and fairly presented in accordance with U.S. GAAP consistently applied. We have
relied as to all legal matters relevant to rendering our opinion on the advice
of counsel.
This opinion is necessarily based upon market, economic and other
conditions as in effect on, and information made available to us as of, the date
hereof. It should be understood that subsequent developments may affect the
conclusion expressed in this opinion and that we disclaim any undertaking or
obligation to advise any person of any change in any matter affecting this
opinion which may come or be brought to our attention after the date of this
opinion. Our opinion is limited to the fairness, from a financial point of view
and as to the date hereof, of the Exchange Ratio to the Holders of Company
Common Stock. We do not express any opinion as to (i) the value of any employee
agreement or other arrangement entered into in connection with the Merger, (ii)
any tax or other consequences that might result from the Merger or (iii) what
the value of Acquiror Common Stock will be when issued to the Company's
stockholders pursuant to the Merger or the price at which the shares of Acquiror
Common Stock that are issued pursuant to the Merger may be traded in the future.
Our opinion does not address the relative merits of the Merger and the other
business strategies that the Company's Board of Directors has considered or may
be considering, nor does it address the decision of the Company's Board of
Directors to proceed with the Merger.
In connection with the preparation of our opinion, we were not authorized
to solicit, and did not solicit, third-parties regarding alternatives to the
Merger.
We are acting as financial advisor to the Company in connection with the
Merger and will receive (i) a fee contingent upon the delivery of this opinion
and (ii) an additional fee contingent upon the consummation of the Merger. In
addition, the Company has agreed to indemnify us for certain liabilities that
may arise out of our engagement. In the past, we have provided certain
investment banking services to the Acquiror for which
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we have been paid fees, including lead managing the Acquiror's initial public
offering and follow-on offering. We maintain a market in the shares of Acquiror
Common Stock. In the ordinary course of business, we may trade in the Company's
securities and Acquiror's securities for our own account and the account of our
customers and, accordingly, may at any time hold a long or short position in the
Company's securities or Acquiror's securities.
Our opinion expressed herein is provided for the information of the Board
of Directors of the Company in connection with its evaluation of the Merger. Our
opinion is not intended to be and does not constitute a recommendation to any
stockholder of the Company as to how such stockholder should vote, or take any
other action, with respect to the Merger. This opinion may not be summarized,
described or referred to or furnished to any party except with our express prior
written consent.
Based upon and subject to the foregoing considerations, it is our opinion
that, as of the date hereof, the Exchange Ratio is fair to the Holders of
Company Common Stock from a financial point of view.
Very truly yours,
BancBoston Robertson Stephens Inc.
/s/ BancBoston Robertson Stephens Inc.
--------------------------------------
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ANNEX D
DISSENTERS' RIGHTS UNDER
THE CALIFORNIA CORPORATIONS CODE
Set forth below is an excerpt from the California Corporations Code
regarding dissenters' rights.
CALIFORNIA GENERAL CORPORATION LAW
CORPORATIONS CODE
TITLE 1. CORPORATIONS
DIVISION 1. GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
sec. 1300. Reorganization or short-form merger; dissenting shares;
corporate purchase at fair market value; definitions
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
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sec. 1301. Notice to holders of dissenting shares in reorganizations;
demand for purchase; time; contents
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
sec. 1302. Submission of share certificates for endorsement; uncertificated
securities
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
sec. 1303. Payment of agreed price with interest; agreement fixing fair
market value; filing; time of payment
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
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sec. 1304. Action to determine whether shares are dissenting shares or fair
market value; limitation; joinder; consolidation; determination of issues;
appointment of appraisers
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
sec. 1305. Report of appraisers; confirmation; determination by court;
judgment; payment; appeal; costs
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
sec. 1306. Prevention of immediate payment; status as creditors; interest
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
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sec. 1307. Dividends on dissenting shares
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
sec. 1308. Rights of dissenting shareholders pending valuation; withdrawal
of demand for payment
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
sec. 1309. Termination of dissenting share and shareholder status
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending action
as provided in Section 1304, within six months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
sec. 1310. Suspension of right to compensation or valuation proceedings;
litigation of shareholders' approval
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
sec. 1311. Exempt shares
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
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sec. 1312. Right of dissenting shareholder to attack, set aside or rescind
merger or reorganization; restraining order or injunction; conditions
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California Corporations Code provides for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article V, Section B of our
articles of incorporation (Exhibit 3.1 hereto) provides for indemnification of
our directors, officers, employees and other agents to the extent and under the
circumstances permitted by the California Corporations Code. We have also
entered into agreements with our directors and officers that will require us,
among other things, to indemnify them against certain liabilities that may arise
by reason of their status or service as directors or officers to the fullest
extent permitted by law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
See exhibits listed on the Exhibit Index following the signature page of
the Form S-4, 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.
(c) Opinion of BancBoston Robertson Stephens, Inc., attached as Annex C to
the proxy statement/prospectus which is part of this registration statement.
ITEM 22. UNDERTAKINGS
(a)(1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (a)(1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and is
used in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described in Item 20 above, 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 Securities Act of 1933 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
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-1
<PAGE> 316
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE> 317
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco, State of
California, on the day of December, 1999.
CRITICAL PATH, INC.
By: /s/ DAVID A. THATCHER
David A. Thatcher
Executive Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each such person whose signature
appears below constitutes and appoints, jointly and severally, Douglas T. Hickey
and David A. Thatcher, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Registration Statement on Form S-4 (including post-effective
amendments), and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
or her substitute or substitutes, may do or cause to be done by virtue hereof.
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>
/s/ DOUGLAS T. HICKEY President, Chief Executive December , 1999
- ------------------------------------------------ Officer and Director (Principal
Douglas T. Hickey Executive Officer)
/s/ DAVID A. THATCHER Executive Vice President, Chief December , 1999
- ------------------------------------------------ Financial Officer (Principal
David A. Thatcher Financial Officer) and
Accounting Officer
/s/ DAVID C. HAYDEN Chairman of the Board December , 1999
- ------------------------------------------------
David C. Hayden
Director December , 1999
- ------------------------------------------------
Christos M. Cotsakos
Director December , 1999
- ------------------------------------------------
Lisa Gansky
/s/ KEVIN R. HARVEY Director December , 1999
- ------------------------------------------------
Kevin R. Harvey
/s/ JAMES A. SMITH Director December , 1999
- ------------------------------------------------
James A. Smith
/s/ GEORGE ZACHARY Director December , 1999
- ------------------------------------------------
George Zachary
</TABLE>
II-3
<PAGE> 318
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
2.1 Agreement and Plan of Reorganization, dated as of October
20, 1999, among the Registrant, Initialize Acquisition Corp.
and ISOCOR (the schedules to such agreement are not filed
herewith and are listed on the last page of Exhibit 2.1)
2.2 Stock Option Agreement, dated as of October 20, 1999, among
the Registrant, Initialize Acquisition Corp. and ISOCOR
2.3 Form of Company Voting Agreement, dated as of October 20,
1999, between the Registrant and certain affiliates of
ISOCOR
2.4 Company Voting Agreement, dated as of October 20, 1999,
between the Registrant and Brentwood Associates
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, Professional
Corporation
8.1 Tax opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, together with consent
8.2 Tax opinion of Orrick, Herrington & Sutcliffe LLP, together
with consent
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))
</TABLE>
<PAGE> 319
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
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))
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 TX, 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))
</TABLE>
<PAGE> 320
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
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 Arthur Andersen LLP
23.4 Consent of KPMG Peat Marwick LLP
23.5 Consent of Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-3)
99.1 Form of Proxy of ISOCOR
99.2 Opinion of BancBoston Robertson Stephens, Inc. (included as
Annex C to the joint proxy statement/prospectus filed as a
part of this Registration Statement and incorporated herein
by reference)
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
December , 1999
Critical Path, Inc.
320 1st Street
San Francisco, California 94105
RE: REGISTRATION STATEMENT ON FORM S-4
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4 to be filed by
you with the Securities and Exchange Commission on or about December __, 1999
(the "Registration Statement") in connection with the registration under the
Securities Act of 1933, as amended, of shares of your Common Stock
(the "Shares"). As your legal counsel in connection with this transaction, we
have examined the proceedings taken and are familiar with the proceedings
proposed to be taken by you in connection with the issuance of the Shares
pursuant to the acquisition transaction set forth and described in the
Registration Statement.
It is our opinion that, when issued in the manner described in the
Registration Statement, the Shares will be legally and validly 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 whenever appearing in the
Registration Statement and any amendments thereto.
Very truly yours,
/s/
--------------------------------
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
EXHIBIT 8.1
[Wilson Sonsini Goodrich & Rosati Letterhead]
December __, 1999
Critical Path, Inc.
320 First Street
San Francisco, CA 94105
Ladies and Gentlemen:
We have acted as counsel to Critical Path, Inc., a California
corporation ("Parent") in connection with the proposed merger (the "Merger")
among Parent, Initialize Acquisition Corp., a California corporation and
wholly-owned transitory merger subsidiary of Parent ("Merger Sub"), and ISOCOR,
a California corporation ("Company") pursuant to an Agreement and Plan of
Reorganization dated as of October 20, 1999, (the "Merger Agreement"). The
Merger and certain proposed transactions incident thereto are described in the
Registration Statement on Form S-4 of Parent (the "Registration Statement"),
which includes the Proxy Statement/Prospectus of the Company (the "Proxy
Statement/Prospectus"). This opinion is being rendered pursuant to the
requirements of Item 21(a) of Form S-4 under the Securities Act of 1933, as
amended. Unless otherwise indicated, any capitalized terms used herein and not
otherwise defined have the meaning ascribed to them in the Proxy
Statement/Prospectus.
In connection with this opinion, we have examined and are familiar with
the Merger Agreement, the Registration Statement, and such other presently
existing documents, records and matters of law as we have deemed necessary or
appropriate for purposes of our opinion. In addition, we have assumed (i) that
the Merger will be consummated in the manner contemplated by the Proxy
Statement/Prospectus and in accordance with the provisions of the Merger
Agreement, (ii) the truth and accuracy of the representations and warranties
made by Parent, Merger Sub and the Company in the Merger Agreement, and (iii)
the truth and accuracy of the certificates of representations to be provided to
us by Company, Parent and Merger Sub.
Based upon and subject to the foregoing, in our opinion, the discussion
contained in the Registration Statement under the caption "Material United
States Federal Income Tax Consequences of the Merger," subject to the
limitations and qualifications described therein, sets forth the material United
States Federal income tax considerations generally
<PAGE> 2
Critical Path, Inc.
December __, 1999
Page 2
applicable to the Merger. Because this opinion is being delivered prior to the
Effective Time of the Merger, it must be considered prospective and dependent on
future events. There can be no assurance that changes in the law will not take
place which could affect the United States Federal income tax consequences of
the Merger or that contrary positions may not be taken by the Internal Revenue
Service.
This opinion is furnished to you solely for use in connection with the
Registration Statement. We hereby consent to the filing of this opinion as
Exhibit 8.1 to the Registration Statement. We also consent to the reference to
our firm name wherever appearing in the Registration Statement with respect to
the discussion of the material federal income tax consequences of the Merger,
including the Proxy Statement/Prospectus constituting a part thereof, and any
amendment thereto. In giving this consent, we do not thereby admit that we are
in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder, nor do we thereby admit that we
are experts with respect to any part of such Registration Statement within the
meaning of the term "experts" as used in the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
EXHIBIT 8.2
FORM OF TAX OPINION OF ORRICK, HERRINGTON & SUTCLIFFE LLP
December __, 1999
ISOCOR
3420 Ocean Park Boulevard
Santa Monica, CA 90405
Attention: Board of Directors
Ladies and Gentlemen:
We have acted as counsel to ISOCOR ("ISOCOR"), a California
corporation, in connection with the contemplated merger (the "Merger") of
Initialize Acquisition Corp. ("Merger Sub"), a California corporation and a
wholly-owned subsidiary of Critical Path, Inc. ("Critical Path"), with and into
ISOCOR, pursuant to an Agreement and Plan of Merger dated as of October 20, 1999
(the "Merger Agreement") by and among ISOCOR, Merger Sub and Critical Path. You
have requested our opinion as to certain federal income tax matters relating to
the Merger. This opinion is being delivered to you pursuant to Section 6.1(d) of
the Merger Agreement. All capitalized terms used herein, unless otherwise
specified, have the meanings assigned to them in the Merger Agreement.
In rendering our opinion, we have examined and relied upon the
accuracy and completeness of the facts, information, covenants and
representations contained in the registration statement relating to the Merger
on Form S-4 in the form filed with the Securities and Exchange Commission (the
"Registration Statement"), the Merger Agreement and such other documents and
corporate records as we have deemed necessary or appropriate for purposes of
this opinion. In addition, we have relied upon certain statements,
representations and agreements made by ISOCOR and Critical Path, including
representations set forth in the Officer's Certificates of ISOCOR and Critical
Path that were provided to us (the "Officers' Certificates"). Our opinion is
conditioned on, among other things, the initial and continuing accuracy of the
facts, information, covenants and representations set forth in the documents
referred to above and the statements, representations and agreements made by
ISOCOR, Critical Path, and others, including those set forth in the Officers'
Certificates. We have no reason to believe that such facts, information,
covenants and representations are not true, but have not attempted to verify
them independently and expressly disclaim an opinion as to their validity and
accuracy.
In our examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such documents. We also have assumed that the
transactions related to the Merger or contemplated by the Merger Agreement will
be consummated in accordance with such agreements and that all covenants
contained in the
<PAGE> 2
Board of Directors
ISOCOR
December __, 1999
Page 2
Merger Agreement (including exhibits thereto) and the Officers' Certificates
will be performed without waiver or breach of any material provision thereof.
Moreover, we have assumed that any representation or statement made "to the best
of knowledge" or similarly qualified is correct without such qualification.
Furthermore, we have assumed that the Merger qualifies as a statutory merger
under the laws of the State of California.
The opinion expressed in this letter is based on the provisions
of the Internal Revenue Code of 1986, as amended, final, temporary and proposed
Treasury regulations promulgated thereunder and administrative and judicial
interpretations thereof, all as in effect as of the date hereof and all of which
are subject to change (possibly on a retroactive basis). No ruling from the
Internal Revenue Service (the "IRS") has been or will be sought on any issues
related to the Merger, and there can be no assurance that the IRS will not take
a contrary view. Although our opinion expressed in this letter represents our
best judgment as to such matters, our opinion has no binding effect on the IRS
or the courts.
Based upon and subject to the foregoing, and subject to the
qualifications set forth herein, we are of the opinion that the discussion under
the heading "Material United States Federal Income Tax Consequences of the
Merger" contained in the Registration Statement, insofar as it relates to
statements of law and legal conclusions, is correct in all material respects.
Because this opinion is being delivered prior to the Effective Time of the
Merger, it must be considered prospective and dependent on future events. There
can be no assurance that changes in the law will not take place which could
affect the United States federal income tax consequences of the Merger or that
contrary positions may not be taken by the IRS.
Except as set forth above, we express no opinion to any party as
to the tax consequences, whether federal, state, local or foreign, of the Merger
or of any transactions related to the Merger or contemplated by the Merger
Agreement. We are furnishing this opinion to you solely in connection with
the Registration Statement. We consent to the use of our name wherever appearing
in the Registration Statement with respect to the discussion of the material
federal income tax consequences of the Merger and to the filing of this opinion
as an exhibit to the Registration Statement. In giving this consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder, nor do we
thereby admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "experts" as used in the Securities Act
of 1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder. We disclaim any obligation to update this opinion letter
for events occurring or coming to our attention after the date hereof.
<PAGE> 3
Board of Directors
ISOCOR
December __, 1999
Page 3
Very truly yours,
/s/
----------------------------------
Orrick, Herrington & Sutcliffe LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4
("Registration Statement") of our report dated January 28, 1999, except for Note
7, which is as of March 26, 1999, relating to the consolidated financial
statements of Critical Path Inc., of our report dated February 10, 1999,
relating to the consolidated financial statements of ISOCOR, of our report dated
August 19, 1999, relating to the financial statements of dotOne Corporation, of
our report dated March 24, 1999, except for Note 13, which is as of November 19,
1999, relating to the consolidated financial statements of FaxNet Corporation,
each of which appears in such Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Jose, California
December 3, 1999
D-6
<PAGE> 1
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 (Form S-4) and related Prospectus of Critical Path, Inc. for the
registration of shares of its common stock.
Ernst & Young LLP
Palo Alto, California
December 6, 1999
D-7
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
December 6, 1999.
Toronto, Canada.
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Critical Path, Inc.
We consent to the inclusion of our report dated March 5, 1999, except for
Note 9 which is as of August 31, 1999, relating to the balance sheets of
Amplitude Software Corporation, Inc. as of December 31, 1998 and 1997, and the
related statements of operations, shareholders' deficit, and cash flows for the
years then ended, which report appears in the Form S-4 of Critical Path, Inc.
dated December 6, 1999, and to the reference to our firm under the heading
"Experts" in the registration statement.
San Francisco, California
December 6, 1999
<PAGE> 1
DETACH HERE
PROXY
ISOCOR
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of ISOCOR, a California corporation, hereby
acknowledges receipt of the Notice of Special Meeting of Shareholders and Proxy
Statement, each dated December __, 1999, and hereby appoints __________________
and _________________, and each of them, proxies and attorneys-in-fact, with
full power to each of substitution and resubstitution, on behalf and in the name
of the undersigned, to represent the undersigned at the special meeting of
shareholders of ISOCOR to be held on Wednesday, January 19, 2000, at 10:00 a.m.,
local time, at ___________________________ California ________, and at any and
all continuation(s) or adjournment(s) thereof, and to vote all shares of Common
Stock which the undersigned would be entitled to vote, if then and there
personally present, on the matters set forth on the reverse side.
Both of such attorneys or substitutes as shall be present and shall act
at said meeting or any and all continuation(s) or adjournment(s) thereof (or if
only one shall be present and acting, then that one) and shall have and may
exercise all the powers of said attorneys-in-fact hereunder.
THIS PROXY WILL BE VOTED AS DIRECTED, OR IF NO CONTRARY DIRECTION IS INDICATED,
WILL BE VOTED FOR ADOPTION OF THE AGREEMENT AND PLAN OF REORGANIZATION, DATED AS
OF OCTOBER 20, 1999, BY AND AMONG CRITICAL PATH, INC. ("CRITICAL PATH"),
INITIALIZE ACQUISITION CORP., A WHOLLY-OWNED SUBSIDIARY OF CRITICAL PATH, AND
ISOCOR, AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTER(S) AS MAY
PROPERLY COME BEFORE THE MEETING.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
- ----------- -----------
SEE REVERSE SEE REVERSE
SIDE SIDE
- ----------- -----------
<PAGE> 2
ISOCOR
C/O [NAME AND ADDRESS
OF PROXY SOLICITOR]
DETACH HERE
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE FOR AGAINST ABSTAIN
1. Proposal to adopt the Agreement and Plan of [ ] [ ] [ ]
Reorganization, dated as of October 20,
1999, by and among Critical Path, Inc.
("Critical Path"), Initialize Acquisition
Corp., a wholly-owned subsidiary of Critical
Path, and ISOCOR
In their discretion, the proxies are authorized to vote upon such other
matter(s) which may properly come before the meeting or any and all
continuation(s) or adjournment(s) thereof.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
This Proxy should be marked, dated and signed by the shareholder(s)
exactly as his or her name appears hereon, and returned promptly in
the enclosed envelope. Persons signing in a fiduciary capacity
should so indicate. If a corporation, please sign in full corporate
name by an authorized officer. If a partnership, please sign in
partnership name by an authorized person. If shares are held by
joint tenants or as community property, both should sign.
Date:____________ Signature:____________________
Date:____________ Signature:____________________
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