<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
------------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
THE SECURITIES EXCHANGE ACT OF 1934
------------------------
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) MARCH 8, 2000
------------------------
CRITICAL PATH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
CALIFORNIA 000-25331 91-1788300
(STATE OR OTHER JURISDICTION (COMMISSION FILE (I.R.S. EMPLOYER
OF INCORPORATION) NUMBER) IDENTIFICATION NO.)
320 1ST STREET, SAN FRANCISCO, CALIFORNIA 94105
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415) 808-8800
------------------------
INAPPLICABLE
(FORMER NAME OR FORMER ADDRESS IF CHANGED SINCE LAST REPORT)
Exhibit Index located on page 60.
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<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On March 8, 2000, Critical Path, Inc. ("Registrant" or "Critical Path")
completed its acquisition of The docSpace Company, following a vote by the
shareholders of each company to approve the merger.
Pursuant to an Agreement and Plan of Reorganization dated November 3, 1999,
by and among Registrant, Compass Holding Corp., a Delaware corporation and
wholly-owned subsidiary of Registrant ("Registrant Sub"), Compass Acquisition
Corp., a Delaware corporation and wholly-owned subsidiary of Registrant Sub
("Holding"), 3034996 Nova Scotia Company, a Nova Scotia unlimited liability
company and a wholly-owned subsidiary of Holding ("Holding ULC") and 3034997
Nova Scotia Company, a Nova Scotia unlimited liability company and a
wholly-owned subsidiary of Holding ULC ("Amalgamation Sub"), merged with and
into The docSpace Company with The docSpace Company surviving as a wholly-owned
subsidiary of Registrant.
3,512,571 issued and outstanding Common Shares of The docSpace Company
owned by shareholders who are resident in the United States and shareholders who
are United States persons ("U.S. Shareholders of The docSpace Company") have
been converted into the right to receive $20,550,682 and 1,181,346 shares of
Common Stock of the Registrant. The docSpace Company shareholders who are not
United States residents or persons ("Canadian Shareholders of The docSpace
Company") elected to contribute all of their Common Shares of The docSpace
Company to a holding company. The docSpace Company formed a wholly-owned Nova
Scotia unlimited liability company and amalgamated with that company to form an
unlimited liability company ("East ULC"). East ULC amalgamated with Amalgamation
Sub to form Exchangeco and all of the issued and outstanding Common Shares of
The docSpace Company were converted into Class B non-voting preference shares
("Class B Shares") of Exchangeco. 6,487,424 outstanding Common Shares of The
docSpace Company owned by Canadian Shareholders of The docSpace Company have
been converted into the right to receive $9,449,318 and 2,910,934 shares of
Exchangeable Shares of Exchangeco, which are exchangeable into Common Stock of
the Registrant subject to certain terms and conditions.
The information that is set forth in the Registrant's Press Releases dated
March 9, 2000 is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Overview
Pro Forma Condensed Consolidated Balance Sheet as of December 31, 1999
Pro Forma Condensed Consolidated Statements of Operations for the Year
Ended
December 31, 1999
Notes to Pro Forma Condensed Consolidated Financial Information
(b)FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
ISOCOR Consolidated Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and December 31,
1999
Consolidated Statements of Operations for the Years Ended December 31,
1997, December 31,
1998 and December 31, 1999
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997,
December 31, 1998 and December 31, 1999
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, December 31,
1998 and December 31, 1999
Consolidated Statements of Comprehensive Loss for the Years Ended
December 31, 1997,
December 31, 1998 and December 31, 1999
Notes to Consolidated Financial Statements
2
<PAGE> 3
The docSpace Company Inc. Financial Statements
Auditors' Report
Balance Sheets as of July 31, 1998, July 31, 1999 and January 31, 2000
Statements of Operations for the Period from November 10, 1997
(Inception) to July 31, 1998,
Year Ended July 31, 1999 and the Six Months Ended January 31, 1999 and
January 31, 2000
Statements of Shareholders' Deficit
Statements of Cash Flows for the Period from November 10, 1997
(Inception) to July 31, 1998,
Year Ended July 31, 1999 and the Six Months Ended January 31, 1999 and
January 31, 2000
Notes to Financial Statements
RemarQ Communities Inc. Financial Statements
Report of Independent Accountants
Consolidated Balance Sheet as of December 31, 1998 and December 31, 1999
Consolidated Statement of Operations for the Years Ended December 31,
1997, December 31, 1998
and December 31, 1999
Consolidated Statement of Partners' and Stockholders' Equity for the
Years Ended December 31,
1997, December 31, 1998 and December 31, 1999
Consolidated Statement of Cash Flows for the Years Ended December 31,
1997, December 31, 1998
and December 31, 1999
Notes to Consolidated Financial Statements
(c)EXHIBITS
The following exhibits are filed herewith:
<TABLE>
<S> <C>
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2 Consent of Arthur Andersen LLP, Independent Accountants.
(Incorporated by reference to Exhibit 23.2 to the
Registrant's Current Report on Form 8-K (File No.
000-25331))
99.1 Text of Press release dated March 9, 2000, regarding the
completion of the acquisition of The docSpace Company.
(Incorporated by reference to Exhibit 99.1 to the
Registrant's Current Report on Form 8-K (File No.
000-25331))
</TABLE>
3
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CRITICAL PATH, INC.
By: /s/ MARK J. RUBASH
------------------------------------
Mark J. Rubash
Executive Vice President and
Chief Financial Officer
Dated: March 27, 2000
4
<PAGE> 5
CRITICAL PATH, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
Effective May 26, 1999, Critical Path, Inc., ("the 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 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 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, are 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 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, are
amortized over their estimated useful lives of two to four years. Goodwill is
being amortized over its estimated useful life of four years.
5
<PAGE> 6
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 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 an income
approach for the acquired existing technology, an income approach for the
customer 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, $152.4 million of the Company's Common Stock (2,845,282
shares), assumed unvested stock options with a fair value of $7.3 million,
assumed subordinated notes of $4.2 million and other liabilities of $7.5 million
and other acquisition related expenses of approximately $7.9 million consisting
of financial advisor and other professional fees. Of the total purchase price,
approximately $1.6 million was allocated to net tangible assets, and the
remainder was allocated to intangible assets, including existing technology
($6.1 million), customer base ($5.5 million), assembled workforce ($900,000) and
goodwill ($185.2 million). The acquired intangible assets, excluding goodwill,
are amortized over their estimated useful lives of three to eight years.
Goodwill is amortized over its estimated useful life of eight years.
On January 19, 2000, the Company acquired ISOCOR Corporation, ("ISOCOR"), a
leading supplier of Internet messaging, directory and directory software
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 an income approach
for the acquired existing and in-process technologies, an income approach for
the customer base and replacement cost approach for the value of the assembled
workforce.
The total purchase price of approximately $274.0 million consisted of
$225.7 million of the Company's Common Stock (5,029,964 shares), assumed stock
options with a fair value of $37.2 million, and other acquisition related
expenses of approximately $11.1 million, consisting primarily of payments for
financial advisor and other professional fees. Of the total purchase price,
$19.2 million was allocated to net tangible assets, and the remainder was
allocated to intangible assets, including in-process technology ($200,000),
existing technology ($18.3 million), customer base ($9.8 million), assembled
workforce ($3.4 million) and goodwill ($223.1 million). The acquired in-process
technology was expensed in the period the transaction was consummated. The other
acquired intangible assets, excluding goodwill, are amortized over their
estimated useful lives of three years. Goodwill is amortized over its estimated
useful life of three years.
On January 28, 2000, the Company signed a definitive agreement to acquire
RemarQ Communities Inc., ("RemarQ"), a provider of Internet collaboration
services for corporations, Web portals and Internet service providers. The
acquisition, which is subject to the approval of RemarQ's stockholders, 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 total estimated purchase price of approximately $267.5 million will
consist of approximately $267.0 million of the Company's Common Stock including
assumed stock options based upon the number of shares to be determined at
closing (estimated to be 3,982,930 shares including assumed stock options based
upon the terms of 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 ($67.0375), and other estimated acquisition related expenses of
approximately $500,000, consisting primarily of payments for legal and other
professional fees. Of the total estimated purchase price, approximately $8.7
million will be allocated to net tangible assets, and the remainder will be
allocated to intangible assets, including existing technology ($4.3 million),
assembled workforce ($3.2 million), customer base ($5.6 million), and goodwill
($245.7 million). The acquired intangible assets, excluding goodwill, will be
amortized over their estimated useful life of three years. Goodwill will be
amortized over its estimated useful life of three years.
6
<PAGE> 7
On March 9, 2000, the Company acquired The docSpace Company, ("docSpace"),
a leading provider of Web-based services for secure file delivery, storage and
collaboration. The acquisition is accounted for using the purchase method of
accounting and accordingly, the purchase price is 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, and replacement cost approach for the value of
the assembled workforce.
The total purchase price of approximately $300.4 million consists of $30.0
million of cash, approximately $234.0 million of the Company's Common Stock
(4,092,280 shares), assumed warrants with a fair value of $26.4 million and
other acquisition related expenses of approximately $10.0 million, consisting
primarily of payments for professional fees. Of the total purchase price,
approximately $5.4 million is allocated to net tangible liabilities, and the
remainder is allocated to intangible assets, including existing technology
($21.5 million), assembled workforce ($500,000) and goodwill ($283.8 million).
The acquired intangible assets, excluding goodwill, is amortized over their
estimated useful lives of three years. Goodwill is amortized over its estimated
useful life of three years. Management of Critical Path believes that the
pending acquisition of RemarQ is a probable acquisition.
The accompanying unaudited pro forma condensed consolidated balance sheet
gives effect to these consummated and probable acquisitions as if they had
occurred on December 31, 1999, by combining the balance sheet of ISOCOR,
docSpace and RemarQ with the balance sheet of the Company at December 31, 1999.
The acquisitions of Fabrik, dotOne, Amplitude, and FaxNet were consummated prior
to December 31, 1999; therefore, the Critical Path historical consolidated
balance sheet at December 31, 1999, includes the allocated purchase price for
these acquisitions.
The accompanying unaudited pro forma condensed consolidated statement of
operations gives effect to these consummated or probable acquisitions as if they
had occurred on January 1, 1999. The Company has consolidated the results of
operations of docSpace for the twelve months ended January 31, 2000 with the
results of operations of Company for the year ended December 31, 1999.
The unaudited pro forma condensed consolidated statement of operations is
not necessarily indicative of the operating results that would have been
achieved had the transactions been in effect as of beginning of the periods
presented and should not be construed as being representative of future
operating results.
The purchase price assumed for the RemarQ acquisition is an estimate and
could change (primarily as a result of the actual amount of Critical Path Common
Stock that is ultimately issued).
The purchase price allocations for the RemarQ acquisition are based upon a
preliminary valuation. This valuation could change when finalized upon closing
of this transaction, 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.
7
<PAGE> 8
CRITICAL PATH, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------------------------------------------
HISTORICAL ADJUSTMENTS
---------------------------------------------- -------------------
CRITICAL PATH ISOCOR DOCSPACE REMARQ (A) (B) PRO FORMA
------------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents........... $ 75,932 $ 10,320 $ 1,803 $ 13,040 $ -- $(48,160) $ 52,935
Restricted cash..................... 325 -- -- -- -- -- 325
Marketable Securities............... -- 9,036 -- 490 -- -- 9,526
Accounts receivable, net............ 10,147 11,455 83 733 -- -- 22,418
Other current assets................ 40,800 2,903 297 556 (5,000) -- 39,556
--------- -------- -------- -------- -------- -------- ----------
Total current assets............ 127,204 33,714 2,183 14,819 (5,000) (48,160) 124,760
Notes receivable from officers...... 669 -- -- -- -- -- 669
Intangibles, net.................... 474,297 -- -- -- -- 819,265 1,293,562
Furniture and equipment, net........ 52,517 2,092 483 6,531 -- -- 61,623
Investments......................... 18,426 -- -- -- -- -- 18,426
Other assets........................ 692 1,807 221 118 -- -- 2,838
--------- -------- -------- -------- -------- -------- ----------
$ 673,805 $ 37,613 $ 2,887 $ 21,468 $ (5,000) $771,105 $1,501,878
========= ======== ======== ======== ======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued
liabilities....................... $ 35,621 $ 1,144 $ 2,015 $ 2,137 $ -- $ -- $ 40,917
Accrued compensation and benefits... 7,120 6,268 4,666 972 -- -- 19,026
Other accrued liabilities........... -- 2,831 -- -- -- -- 2,831
Deferred revenue.................... 1,603 8,122 79 957 -- -- 10,761
Capital lease obligations,
current........................... 6,585 -- -- 1,694 -- -- 8,279
Borrowings.......................... -- -- -- 344 -- -- 344
Note payable, current............... -- -- 1,560 271 (1,560) -- 271
--------- -------- -------- -------- -------- -------- ----------
Total Current Liabilities....... 50,929 18,365 8,320 6,375 (1,560) -- 82,429
Deferred revenue.................... 215 -- -- -- -- -- 215
Capital lease obligations, long
term.............................. 5,669 -- -- 2,175 -- -- 7,844
Other long-term liabilities......... -- 79 -- 4,196 -- -- 4,275
--------- -------- -------- -------- -------- -------- ----------
56,813 18,444 8,320 12,746 (1,560) -- 94,763
--------- -------- -------- -------- -------- -------- ----------
SHAREHOLDERS' EQUITY:
Preferred Stock..................... -- -- -- 24,113 24,113 -- --
Common stock........................ 47 40,887 -- 6 (40,893) -- 47
Share subscriptions................. -- -- 7,399 -- (7,399) -- --
Additional paid-in capital.......... 864,652 -- 1,885 8,014 (9,899) 790,323 1,654,975
Notes receivable from
shareholders...................... (1,154) -- -- (575) 575 -- (1,154)
Unearned compensation............... (124,906) -- (1,210) (6,000) 7,210 -- 124,906
Accumulated deficit, including other
comprehensive income.............. (121,647) (21,718) (13,507) (16,836) 52,061 (200) (121,847)
--------- -------- -------- -------- -------- -------- ----------
Total Shareholders' Equity...... 616,992 19,169 (5,433) 8,722 (22,458) 790,123 1,407,115
--------- -------- -------- -------- -------- -------- ----------
$ 673,805 $ 37,613 $ 2,887 $ 21,468 $(24,018) $790,123 $1,501,878
========= ======== ======== ======== ======== ======== ==========
</TABLE>
Refer also to the accompanying Notes to Pro Forma Condensed Consolidated
Financial Information
8
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CRITICAL PATH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------
HISTORICAL
--------------------------------------------------------------------------
CRITICAL
PATH FABRIK DOTONE AMPLITUDE FAXNET ISOCOR DOCSPACE
--------- ------- ------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues................. $ 16,157 $ 4,506 $ 1,978 $ 5,109 $ 13,557 $ 35,521 $ 119
Cost of net revenues......... (21,557) (1,627) (1,288) (2,063) (10,674) (12,347) --
--------- ------- ------- ------- -------- -------- --------
(5,400) 2,879 690 3,046 2,883 23,174 119
--------- ------- ------- ------- -------- -------- --------
Operating Expenses:
Research and development... 7,682 527 154 1,615 2,579 5,461 893
Sales and marketing........ 13,811 1,625 374 4,752 8,234 14,908 2,423
General and
administrative........... 14,051 1,500 800 2,596 3,421 4,533 9,040
Acquisition bonus(c)....... 3,587 -- -- -- -- 594 --
Amortization of intangible
assets(d)................ 32,259 -- -- -- -- -- --
Stock-based expenses....... 46,460 -- 21 -- -- -- 322
--------- ------- ------- ------- -------- -------- --------
Total Operating
Expenses........... 117,850 3,652 1,349 8,963 14,234 25,496 12,678
--------- ------- ------- ------- -------- -------- --------
Loss from operations......... (123,250) (773) (659) (5,917) (11,351) (2,322) (12,559)
Interest and other income,
net........................ 7,061 (109) (238) 50 (581) 470 (114)
Interest Expense............. (752) -- -- -- -- -- --
Foreign exchange loss........ -- -- -- -- -- -- (50)
--------- ------- ------- ------- -------- -------- --------
Net loss..................... $(116,941) $ (882) $ (897) $(5,867) $(11,932) $ (1,852) $(12,723)
========= ======= ======= ======= ======== ======== ========
Pro forma net loss per
share(e)
Net loss per share -- basic
and diluted.............. $ (3.93)
=========
Weighted average shares --
basic and diluted........ 29,770 109 600 3,697 2,579 5,030 3,606
=========
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------
HISTORICAL
----------------------------------
REMARQ ADJUSTMENTS PRO FORMA
-------- ----------- ---------
<S> <C> <C> <C>
Net revenues................. $ 6,597 $ -- $ 83,544
Cost of net revenues......... (3,810) -- (53,366)
-------- --------- ---------
2,787 -- 30,178
-------- --------- ---------
Operating Expenses:
Research and development... 3,909 -- 22,820
Sales and marketing........ 5,996 -- 52,123
General and
administrative........... 4,403 -- 40,344
Acquisition bonus(c)....... -- 18,241 22,422
Amortization of intangible
assets(d)................ -- 351,732 383,991
Stock-based expenses....... 719 -- 47,522
-------- --------- ---------
Total Operating
Expenses........... 15,027 369,973 569,222
-------- --------- ---------
Loss from operations......... (12,240) (369,973) (539,044)
Interest and other income,
net........................ 635 -- 7,174
Interest Expense............. (809) -- (1,561)
Foreign exchange loss........ -- -- (50)
-------- --------- ---------
Net loss..................... $(12,414) $(369,973) $(533,481)
======== ========= =========
Pro forma net loss per
share(e)
Net loss per share -- basic
and diluted.............. $ (10.98)
=========
Weighted average shares --
basic and diluted........ 3,186 48,577
=========
</TABLE>
Refer also to the accompanying Notes to Pro Forma Condensed Consolidated
Financial Information.
9
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CRITICAL PATH, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
The following adjustments were applied to the Company's historical
financial statements and those of Fabrik, dotOne, Amplitude, FaxNet, ISOCOR,
docSpace and RemarQ to arrive at the pro forma condensed consolidated financial
information. The pro forma adjustments are preliminary and based upon
management's estimates and valuations of the intangible assets acquired.
(a) To eliminate intercompany balances in consolidation and certain
intangible assets that were not acquired by the Company.
(b) To allocate the purchase price, assuming the acquisitions occurred on
December 31, 1999.
<TABLE>
<CAPTION>
FABRIK DOTONE AMPLITUDE FAXNET ISOCOR DOCSPACE REMARQ TOTAL
------- ------- --------- -------- -------- -------- -------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <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 35,000 141,300 152,400 225,700 234,000 267,000 1,063,400
Value of options assumed.... -- 3,200 22,000 7,300 37,200 -- -- 69,700
Value of warrants assumed... -- -- -- -- -- 26,422 -- 26,422
Assumption of subordinated
notes***.................. -- -- -- 4,200 -- -- -- 4,200
Estimated acquisition
costs..................... 100 1,300 6,100 15,400 11,100 10,000 500 44,500
------- ------- -------- -------- -------- -------- -------- ----------
Total purchase
price*............ $20,100 $57,000 $214,400 $199,300 $274,000 $300,422 $267,500 $1,332,722
======= ======= ======== ======== ======== ======== ======== ==========
Net tangible
assets/(liabilities)...... $ 500 $(1,700) $ 4,400 $ 1,600 $ 19,169 $ (5,433) $ 8,721 $ 27,257
------- ------- -------- -------- -------- -------- -------- ----------
Intangible assets:
In-process technology**... -- -- -- -- 200 -- -- 200
Assembled workforce....... 400 1,500 3,800 900 3,400 500 3,200 13,700
Customer base............. 2,100 4,600 600 5,500 9,800 -- 5,600 28,200
Existing technology....... -- 600 4,100 6,200 18,300 21,500 4,300 55,000
Goodwill.................. 17,100 52,000 201,500 185,100 223,131 283,855 245,679 1,208,365
------- ------- -------- -------- -------- -------- -------- ----------
Total Intangible assets... 19,600 58,700 210,000 197,700 254,631 305,855 258,779 1,305,265
------- ------- -------- -------- -------- -------- -------- ----------
Total purchase price
allocation.............. $20,100 $57,000 $214,400 $199,300 $274,000 $300,422 $267,500 $1,332,722
======= ======= ======== ======== ======== ======== ======== ==========
</TABLE>
- ---------------
* The purchase price associated with the acquisitions of Fabrik,
dotOne, Amplitude and FaxNet are included in the historical
consolidated balance sheet components of Critical Path as of
December 31, 1999.
** In-process technology in the amount of $200,000 was expensed in
the period in which the acquisition was consummated. Accordingly,
the in-process technology is reflected in the Pro Forma Condensed
Consolidated Balance Sheet as an addition to Accumulated Deficit.
*** The Company assumed certain liabilities, including subordinated
notes issued by FaxNet in October 1999, for proceeds of $6.6
million. The notes matured upon consummation of the acquisition.
**** RemarQ's value of stock issued of $267.0 million includes the
estimated fair value of stock options assumed.
(c) Pursuant to the purchase agreements between Critical Path, dotOne,
Amplitude, FaxNet, ISOCOR, and RemarQ and docSpace, Critical Path is
obligated to establish retention bonuses in the amount of $1.5 million,
$10 million, $1.5 million, $741,000, $2.0 million and $5.0 million,
respectively, to provide incentives for certain employees of these
companies to remain employed with Critical Path for one year following
the date of acquisition (at which time the bonus will be paid). The
bonuses will be amortized over their respective vesting periods of
one-year. The Amplitude bonus pool has been reduced to $7.5 million due
to voluntary termination of certain employees included in the bonus
plan.
10
<PAGE> 11
CRITICAL PATH, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
(d) To record amortization of intangible assets associated with the
acquisitions of Fabrik, dotOne, Amplitude, FaxNet, ISOCOR, docSpace,
and RemarQ as follows: assembled workforce totaling $13.7 million over
the estimated period of benefit of two to three years, acquired
customer base totaling $28.2 million over the estimated period of
benefit of one to eight years, existing technology totaling $55.0
million over the estimated period of benefit of one to four years,
goodwill totaling $1,208.7 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, 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, 1999,
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, 1999. 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), 9.3% of the stock consideration to FaxNet
(approximately 266,099 shares), 11.86% of stock consideration to
docSpace (approximately 485,958 shares) and 20% of stock consideration
to RemarQ (approximately 796,586 shares) will be held in a time-
lapsing escrow account and have been excluded from the pro forma basic
and diluted net loss per share for the year ended December 31, 1999.
11
<PAGE> 12
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders of ISOCOR
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholders' equity, of cash
flows and of comprehensive loss present fairly, in all material respects, the
financial position of ISOCOR (the "Company") at December 31, 1999 and 1998, and
the results of their operations and their cash flows for the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States, 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
March 9, 2000
12
<PAGE> 13
ISOCOR
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 9,656 $ 10,320
Marketable securities..................................... 9,456 9,036
Trade accounts receivable, net............................ 8,900 11,455
Other current assets...................................... 1,805 2,903
-------- --------
Total current assets.............................. 29,817 33,714
Property and equipment, net................................. 2,380 2,092
Other assets................................................ 928 1,807
-------- --------
Total assets...................................... $ 33,125 $ 37,613
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,009 $ 1,144
Accrued expenses.......................................... 4,634 6,268
Deferred revenues......................................... 5,708 8,122
Other current liabilities................................. 1,863 2,831
-------- --------
Total current liabilities......................... 13,214 18,365
Other long-term liabilities................................. 146 79
-------- --------
Total liabilities................................. 13,360 18,444
-------- --------
Commitments and contingencies (Notes 6 and 7)
Shareholders' equity:
Preferred stock, undesignated, authorized 2,000,000
shares, none issued or outstanding
Common stock, authorized 50,000,000 shares, issued and
outstanding 9,888,038 and 10,608,336 shares in 1998 and
1999, respectively..................................... 39,773 40,887
Notes receivable from shareholders........................ (15) --
Accumulated deficit....................................... (19,749) (21,862)
Deferred compensation..................................... (56) --
Accumulated comprehensive income (loss)................... (188) 144
-------- --------
Total shareholders' equity........................ 19,765 19,169
-------- --------
Total liabilities and shareholders' equity........ $ 33,125 $ 37,613
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
13
<PAGE> 14
ISOCOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues:
Products.................................................. $15,620 $13,959 $21,848
Services.................................................. 6,398 9,320 13,673
------- ------- -------
Total revenues.................................... 22,018 23,279 35,521
------- ------- -------
Cost of revenues:
Products.................................................. 2,863 2,787 3,492
Services.................................................. 2,804 5,071 8,855
------- ------- -------
Total cost of revenues............................ 5,667 7,858 12,347
------- ------- -------
Gross profit................................................ 16,351 15,421 23,174
------- ------- -------
Operating expenses:
Engineering............................................... 7,867 5,885 5,461
Sales and marketing....................................... 13,973 13,138 14,908
Administration............................................ 2,967 3,556 4,533
Agency grants............................................. (69) -- --
Severance costs........................................... 681 -- --
Acquisition costs......................................... -- -- 594
------- ------- -------
Total operating expenses.......................... 25,419 22,579 25,496
------- ------- -------
Loss from operations........................................ (9,068) (7,158) (2,322)
Income (loss) from currency fluctuations.................. 39 241 (390)
Interest income........................................... 1,170 1,008 860
------- ------- -------
Loss before income taxes and minority interest......... (7,859) (5,909) (1,852)
Provision for income taxes.................................. 45 237 280
------- ------- -------
Loss before minority interest.......................... (7,904) (6,146) (2,132)
Minority interest........................................... -- 19 (19)
------- ------- -------
Net loss.................................................... $(7,904) $(6,165) $(2,113)
======= ======= =======
Net loss per share, basic and diluted....................... $ (0.83) $ (0.63) $ (0.21)
======= ======= =======
Weighted average shares outstanding, basic and diluted...... 9,485 9,737 10,299
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
14
<PAGE> 15
ISOCOR
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<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,
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... 720,298 1,114 1,114
Amortization of stock
option deferred
compensation............. 56 56
Payment on note
receivable............... 15 15
Net loss................... (2,113) (2,113)
Currency translation....... 436 436
Loss from unrealized
holdings................. (104) (104)
---------- ------- ---- ----- -------- ----- -------
Balances, December 31,
1999..................... 10,608,336 $40,887 $ 0 $ 0 $(21,862) $ 144 $19,169
========== ======= ==== ===== ======== ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
15
<PAGE> 16
ISOCOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (7,904) $ (6,165) $ (2,113)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Provision for doubtful accounts, returns and price
protection.......................................... 2,916 2,012 (254)
Depreciation and amortization......................... 1,373 1,419 874
Amortization of deferred compensation................. 75 74 56
Deferred rent......................................... (26) -- --
(Increase)/decrease in:
Trade accounts receivable........................... (1,735) (598) (3,364)
Other current assets................................ (538) 624 (1,469)
Other assets........................................ (5) 51 165
Increase/(decrease) in:
Accounts payable.................................... 105 (139) 251
Accrued expenses.................................... 467 1,222 1,922
Deferred revenues................................... 1,176 1,908 3,156
Other current liabilities........................... (224) (46) 1,048
Product development obligation...................... (380) -- --
Other long term-liabilities......................... (18) (96) (67)
-------- -------- --------
Net cash (used) provided by operating activities.... (4,718) 266 205
-------- -------- --------
Cash flows from investing activities:
Cash paid for acquisition, net of cash acquired.......... -- (675) --
Purchase of property and equipment....................... (952) (1,051) (797)
Purchase of marketable securities........................ (13,669) (32,231) (15,704)
Sale of marketable securities............................ 1,000 28,453 15,124
Marketable securities at maturity........................ 14,731 3,999 1,000
-------- -------- --------
Net cash (used) provided by investing activities.... 1,110 (1,505) (377)
-------- -------- --------
Cash flows from financing activities:
Proceeds from the sale of stock, net..................... 285 438 1,129
-------- -------- --------
Net cash provided by financing activities........... 285 438 1,129
-------- -------- --------
Effect of exchange rate changes on cash.................... 733 (327) (293)
-------- -------- --------
Net increase (decrease) in cash..................... (2,590) (1,128) 664
Cash and cash equivalents, beginning of year............... 13,374 10,784 9,656
-------- -------- --------
Cash and cash equivalents, end of year..................... $ 10,784 $ 9,656 $ 10,320
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
16
<PAGE> 17
ISOCOR
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net loss.................................................... $(7,904) $(6,165) $(2,113)
Loss from unrealized holdings............................... -- -- (104)
Income/(loss) from foreign currency translation............. 27 (268) 436
------- ------- -------
Comprehensive loss.......................................... $(7,877) $(6,433) $(1,781)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
17
<PAGE> 18
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.
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 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,
marketable securities 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, 1998 and 1999,
United States, Ireland and rest of Europe represented 25%, 34% and 41% and 27%,
31% and 42%, respectively of the Company's net accounts receivable. At December
31, 1998 and 1999, the Company had balances held in U.S. banks of approximately
$1,805,000 and $1,131,000 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
18
<PAGE> 19
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 98-9. 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.
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
19
<PAGE> 20
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 10).
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.
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, 2,339,291 and 1,908,441 shares in 1997, 1998 and
1999, respectively.
2. MARKETABLE SECURITIES
The Company held the following positions as of December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1999 MATURITIES
------ ------ -------------
<S> <C> <C> <C>
Corporate notes.................................... $9,456 $5,043 1 - 10 months
U.S. Government obligations........................ 0 3,993 1 - 6 months
------ ------
$9,456 $9,036
====== ======
</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, 1997,
1998 and 1999.
4. ACCOUNTS RECEIVABLE
Trade accounts receivable, net of allowances as of December 31 were
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Accounts receivable......................................... $11,035 $13,158
Less: Allowance for doubtful accounts, returns and price
protection................................................ (2,135) (1,703)
------- -------
$ 8,900 $11,455
======= =======
</TABLE>
As of December 31, 1998 and 1999, approximately 75% and 73%, respectively,
of the Company's trade accounts receivable were from customers located in
Europe.
20
<PAGE> 21
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment as of December 31 consisted of the following
(dollars in thousands).
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Computer equipment.......................................... $ 6,575 $ 6,909
Office equipment and furniture.............................. 2,187 1,819
------- -------
8,762 8,728
Less accumulated depreciation............................... (6,382) (6,636)
------- -------
$ 2,380 $ 2,092
======= =======
</TABLE>
For the years ended December 31, 1997, 1998 and 1999, depreciation expense
was $1,362,000, $1,107,000 and $1,080,000, 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
and $48,000 are included in other current liabilities in the accompanying
consolidated balance sheets as of December 31, 1998 and 1999, respectively, for
the 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 1999, net of accumulated amortization of $79,000 and
$247,000, respectively. The Company is committed to purchase the remaining 40%
of System Wizards within the period of January 1, 2000 to 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.
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, 1998 and 1999, net
of accumulated amortization of $188,000 and $213,000, 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 December 31, 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. (See Note 15 -- Subsequent Events)
7. COMMITMENTS AND CONTINGENCIES
The Company leases its offices and operating facilities under various
operating leases which expire at various dates through 2015. Certain leases
contain free rent periods and renewal options and provisions to
21
<PAGE> 22
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1997, 1998 and 1999
was $1,418,000, $1,593,000 and $1,858,000, respectively.
Future minimum rental commitments under operating leases are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
---------------------------------
<S> <C>
2000........................................................ $ 1,734
2001........................................................ 1,273
2002........................................................ 993
2003 and beyond............................................. 7,231
-------
$11,231
=======
</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.
8. ACCRUED EXPENSES
Accrued expenses at December 31 were (dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Salaries and related expenses............................... $1,262 $1,960
Commissions................................................. 461 900
Royalties................................................... 401 511
Corporate and sales taxes................................... 351 298
Other....................................................... 2,159 2,599
------ ------
$4,634 $6,268
====== ======
</TABLE>
9. 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, 1999.
22
<PAGE> 23
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
The sources of income (loss) before income taxes for years ended December
31 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
United States......................................... $(1,881) $(4,516) $(3,544)
Foreign............................................... (5,978) (1,393) 1,692
------- ------- -------
Loss before income taxes.............................. $(7,859) $(5,909) $(1,852)
======= ======= =======
</TABLE>
The components of the provision for income taxes for the years ended
December 31 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current:
U.S. Federal.............................................. $-- $ -- $ --
State..................................................... 1 1 1
Foreign................................................... 52 249 288
53 250 289
Deferred-foreign............................................ (8) (13) (9)
--- ---- ----
Total............................................. $45 $237 $280
=== ==== ====
</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, 1998 or 1999.
The components of the Company's net deferred taxes as of December 31 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for inventory, sales returns and doubtful
accounts............................................... $ 384 $ 214
Accrued vacation.......................................... 56 125
Deferred revenues......................................... 1,584 1,001
Property and equipment.................................... 141 100
Net operating loss carryforward........................... 2,861 6,103
Other..................................................... 54 1
------- -------
Total deferred tax assets......................... 5,080 7,544
Valuation allowance......................................... (5,080) (7,544)
------- -------
Net deferred tax assets........................... $ -- $ --
======= =======
</TABLE>
The valuation allowance on deferred tax assets increased by $341,000,
$2,255,000 and $2,464,000 in 1997, 1998 and 1999, 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
23
<PAGE> 24
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
As of December 31, 1999, the Company had net operating loss carryforwards
for federal and state income tax reporting purposes of approximately $16 million
and $7.4 million, respectively. These carryforwards, if unused, expire in
various periods from 2000 to 2010.
The overall effective tax rate differs from the statutory tax rate for the
years ended December 31 as follows:
<TABLE>
<CAPTION>
% OF PRETAX INCOME
-----------------------
1997 1998 1999
----- ----- -----
<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................. (34.0) (34.0) (34.0)
Foreign taxes, net.......................................... .6 4.0 15.2
----- ----- -----
Effective tax rate.......................................... .6% 4.0% 15.2%
===== ===== =====
</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 results of operations could be materially adversely
affected.
11. 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 1997, 1998, and 1999 consistent with the fair value
provisions of SFAS No. 123, the Company's net loss and loss per share would have
been increased to the pro forma amounts indicated below (amounts in thousands
except per share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
-------- ------- -------
<S> <C> <C> <C>
Net loss as reported................................. $ (7,904) $(6,165) $(2,113)
Net loss, pro forma.................................. $(11,068) $(8,883) $(2,941)
Net loss per share, basic and diluted, as reported... $ (0.83) $ (0.63) $ (0.21)
Net loss per share, basic and diluted, pro forma..... $ (1.17) $ (0.91) $ (0.29)
</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 1997, 1998 and 1999.
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate..................................... 6.13% 5.10% 5.59%
Expected lives (years)...................................... 4 4 4
Expected volatility......................................... 100% 100% 100%
Expected dividends.......................................... 0 0 0
</TABLE>
24
<PAGE> 25
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
25
<PAGE> 26
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
AVERAGE FAIR VALUE
EXERCISE EXERCISE AT GRANT
SHARES PRICE RANGE PRICE DATE
--------- ------------------ -------- ----------
<S> <C> <C> <C> <C>
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 G 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 $ 575
---------
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.............................. 415,980 $4.563 to $31.6875 $9.56 $9.10
Option price G Grant date market
price.............................. 50,000 $5.3438 $5.35
Exercised............................... (655,063) $0.375 to $3.25 $1.34
Canceled or expired..................... (241,767) $.0625 to $8.00 $3.43
---------
Outstanding at December 31, 1999........ 1,908,441 $0.375 to $31.6875 $3.41
=========
</TABLE>
The following table summarizes information about the stock options at
December 31:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Options exercisable....................................... 817,517 978,853 865,212
Options available for future grant........................ 384,154 250,216 376,003
</TABLE>
The following tables summarize information about the stock options
outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING NUMBER WEIGHTED AVERAGE WEIGHTED
RANGE OF OUTSTANDING AS OF REMAINING AVERAGE
EXERCISE PRICES DECEMBER 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE
------------------- ----------------- ---------------- --------------
<S> <C> <C> <C>
$ 0.00 to $ 7.99............................ 1,766,941 7.7 $ 2.51
$ 8.00 to $15.99............................ 76,500 8.9 $ 9.52
$16.00 to $23.99............................ 64,000 9.8 $20.44
$24.00 to $32.00............................ 1,000 9.9 $31.69
---------
1,908,441 7.8 $ 3.41
=========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS NUMBER
EXERCISABLE EXERCISABLE WEIGHTED
RANGE OF AS OF AVERAGE
EXERCISE PRICES DECEMBER 31, 1999 EXERCISE PRICE
--------------- ----------------- --------------
<S> <C> <C>
$ 0.00 to $ 7.99......................................... 857,712 $1.69
$ 8.00 to $15.99......................................... 7,500 $8.00
-------
865,212 $1.74
=======
</TABLE>
26
<PAGE> 27
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 period. For the years ended December 31, 1997, 1998 and 1999, there
were 96,901, 144,946 and 65,235 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, 1997, 1998 or 1999.
12. 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>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
United States.................................... $ 11,077 $ 7,917 $ 14,840
Ireland.......................................... 13,382 13,751 17,587
Other Europe..................................... 8,245 12,773 15,542
Intercompany elimination......................... (10,686) (11,162) (12,448)
-------- -------- --------
$ 22,018 $ 23,279 $ 35,521
======== ======== ========
IDENTIFIABLE ASSETS:
United States.................................... $ 26,123 $ 21,207 $ 19,810
Ireland.......................................... 5,393 5,650 8,182
Other Europe..................................... 2,707 6,268 9,621
-------- -------- --------
Total.................................. $ 34,223 $ 33,125 $ 37,613
======== ======== ========
</TABLE>
27
<PAGE> 28
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1997, 1998 and 1999 were $2,086,000,
$2,485,000 and $3,472,000, 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.
13. RELATED PARTY TRANSACTIONS
Included in related party revenues for the years ended December 31, 1997,
1998 and 1999 was approximately $95,000, $45,000 and $0, respectively, relating
to software license agreements with a shareholder.
Included in revenue for the year ended December 31, 1997, 1998 and 1999 was
approximately $58,000, $345,000 and $734,000 respectively relating to a software
license and maintenance agreement with an affiliate of a shareholder. Included
in accounts receivable as of December 31, 1998 and 1999 was $82,000 and
$473,000, respectively, relating to this distributor.
Included in other assets as of December 31, 1999 was $500,000 for a loan to
Paul Gigg, Chief Executive Officer and $20,000 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. (See Note 15 -- Subsequent Events)
14. AGENCY GRANTS
During 1992, 1994 and 1996, the Industrial Development Authority (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
$69,000, $0 and $0 relating to these grants for the years ended December 31,
1997, 1998 and 1999, 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, 1998 and 1999 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 zero reductions of operating
relating to these grants for the years ended December 31, 1997, 1998 and 1999,
respectively. 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.
28
<PAGE> 29
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS
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 closed on January 19, 2000.
In January 2000, the Company acquired the remaining 40 percent interest in
a sales and distribution company located in Switzerland.
29
<PAGE> 30
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.
/s/ Arthur Andersen LLP
August 20, 1999.
Toronto, Canada.
30
<PAGE> 31
THE DOCSPACE COMPANY INC.
BALANCE SHEETS
(IN US$)
(INFORMATION AT JANUARY 31, 2000 IS UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JULY 31, JULY 31, JANUARY 31,
1998 1999 2000
--------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.......................... $ 66,140 $ 1,485,121 $ 1,803,373
Accounts receivable................................ 37,479 23,073 82,509
Goods and services tax recoverable................. 5,734 68,236 180,787
Advances to shareholders (Note 7).................. 11,265 -- --
Prepaid expenses................................... 1,007 89,453 116,162
--------- ----------- ------------
121,625 1,665,883 2,182,831
PROPERTY AND EQUIPMENT (Note 4)...................... 23,696 356,523 482,952
DEPOSITS AND OTHER ASSETS (Note 5)................... 765 124,244 221,312
--------- ----------- ------------
$ 146,086 $ 2,146,650 $ 2,887,095
========= =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank indebtedness (Note 3)......................... $ 61,984 $ -- $ --
Accounts payable................................... 11,063 1,150,715 2,015,205
Accrued liabilities................................ -- 395,646 4,666,165
Note payable (Note 6).............................. -- -- 1,560,000
Advances from shareholders (Note 7)................ 99,763 -- --
Due to affiliated company (Note 7)................. 21,823 -- --
Deferred revenue................................... 91,267 11,726 79,087
--------- ----------- ------------
285,900 1,558,087 8,320,457
--------- ----------- ------------
SHAREHOLDERS' EQUITY (DEFICIT)
Common shares (Note 8), no par value Unlimited
shares authorized, 42 shares outstanding........ 204,707 1,274,979 1,885,175
Deferred compensation.............................. (5,453) (858,488) (1,210,200)
Share subscriptions (Note 8)....................... 30,223 3,512,124 7,399,179
Accumulated deficit................................ (369,291) (3,340,052) (13,507,516)
--------- ----------- ------------
(139,814) 588,563 (5,433,362)
--------- ----------- ------------
$ 146,086 $ 2,146,650 $ 2,887,095
========= =========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
31
<PAGE> 32
THE DOCSPACE COMPANY INC.
STATEMENTS OF OPERATIONS
(IN US$)
(INFORMATION FOR THE SIX MONTHS ENDED JANUARY 31, 1999 AND 2000 IS UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
NOVEMBER 10, JANUARY 31,
1997 (INCEPTION) YEAR ENDED --------------------------
TO JULY 31, 1998 JULY 31, 1999 1999 2000
---------------- ------------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE................................... $ -- $ 182,203 $ 104,522 $ 40,905
--------- ----------- --------- ------------
EXPENSES
General and administration.............. 77,495 1,774,888 62,592 7,327,802
Research and development................ 73,670 437,413 163,542 618,414
Marketing and selling................... 22,712 729,683 128,625 1,822,034
Foreign exchange (gain) loss............ (4,202) 17,938 7,083 38,920
Share compensation expense (Notes 7 and
8)................................... 199,225 217,237 153,520 258,484
--------- ----------- --------- ------------
368,900 3,177,159 515,362 10,065,654
--------- ----------- --------- ------------
LOSS FROM OPERATIONS...................... (368,900) (2,994,956) (410,840) (10,024,749)
Interest income (expense) and financing
charges, net......................... (391) 24,195 (4,342) (142,715)
--------- ----------- --------- ------------
NET LOSS.................................. $(369,291) $(2,970,761) $(415,182) $(10,167,464)
========= =========== ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE> 33
THE DOCSPACE COMPANY INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN US$)
(INFORMATION FOR THE SIX MONTHS ENDED JANUARY 31, 2000 IS UNAUDITED)
<TABLE>
<CAPTION>
COMMON SHARES
----------------------------------------------------- TOTAL
NUMBER OF PAID-IN DEFERRED SHARE ACCUMULATED SHAREHOLDERS'
SHARES CAPITAL COMPENSATION 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
-- ---------- ----------- ---------- ------------ ------------
Share subscriptions
(unaudited).................. -- -- -- 3,887,055 -- 3,887,055
Deferred compensation
(unaudited).................. -- 610,196 (610,196) -- -- --
Compensation expense related to
share awards (unaudited)..... -- -- 258,484 -- --
Other compensation expense
(unaudited).................. -- -- -- -- -- --
Net loss for the period
(unaudited).................. -- -- -- -- (10,167,464) (10,167,464)
-- ---------- ----------- ---------- ------------ ------------
BALANCE, JANUARY 31, 2000
(UNAUDITED)............... 42 $1,885,175 $(1,210,200) $7,399,179 $(13,507,516) $ (5,433,362)
== ========== =========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE> 34
THE DOCSPACE COMPANY INC.
STATEMENTS OF CASH FLOWS
(IN US$)
(INFORMATION FOR THE SIX MONTHS ENDED JANUARY 31, 1999 AND 2000 IS UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 10, SIX MONTHS ENDED
1997 JANUARY 31,
(INCEPTION) YEAR ENDED --------------------------
TO JULY 31, 1998 JULY 31, 1999 1999 2000
---------------- ------------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss................................. $(369,291) $(2,970,761) $(415,182) $(10,167,464)
Adjustments to reconcile net loss to net
cash used in operating activities:
Income and expense items not affecting
cash Depreciation..................... 3,840 152,963 5,937 124,996
Non-cash compensation (Notes 7, 8 and
9).................................. 199,225 217,237 153,520 258,484
CHANGES IN OPERATING
ASSETS AND LIABILITIES
Accounts receivable...................... (37,479) 14,406 37,479 (59,436)
GST recoverable.......................... (5,734) (62,502) 5,734 (112,551)
Prepaid expenses......................... (1,007) (88,446) (8,279) (26,709)
Accounts payable......................... 11,063 1,139,652 3,155 864,490
Accrued liabilities...................... -- 395,646 -- 4,270,519
Deferred revenue......................... 91,267 (79,541) (79,865) 67,361
--------- ----------- --------- ------------
NET CASH USED IN OPERATING ACTIVITIES...... (108,116) (1,281,346) (297,501) (4,780,310)
--------- ----------- --------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment....... (28,301) (487,980) (10,701) (251,425)
Disposal of property and equipment....... -- 2,190 2,118 --
Deposits and other assets................ -- (123,479) 765 (97,068)
--------- ----------- --------- ------------
NET CASH USED IN INVESTING ACTIVITIES...... (28,301) (609,269) (7,818) (348,493)
--------- ----------- --------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank indebtedness........................ 61,984 (61,984) (61,984) --
Advances from shareholders, net.......... 88,498 (88,498) (14,366) --
Due to affiliated company................ 21,823 (21,823) (8,262) --
Note payable............................. -- -- -- 1,560,000
Share capital issued..................... 29 -- -- --
Share subscription....................... 30,223 3,481,901 381,902 3,887,055
--------- ----------- --------- ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES..................... 202,557 3,309,596 297,290 5,447,055
--------- ----------- --------- ------------
NET INCREASE IN CASH....................... 66,140 1,418,981 (8,029) 318,252
CASH BALANCE, beginning of period.......... -- 66,140 66,140 1,485,121
--------- ----------- --------- ------------
CASH BALANCE, end of period................ $ 66,140 $ 1,485,121 $ 58,111 $ 1,803,373
========= =========== ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE> 35
THE DOCSPACE COMPANY INC.
NOTES TO FINANCIAL STATEMENTS
(IN US$)
(INFORMATION AS AT JANUARY 31, 2000 AND FOR THE SIX MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
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 to January 31, 2000 of
$13,507,516. 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 6 Note
Payable) and entered into a definitive acquisition agreement with Critical Path,
Inc. (see Note 14 Subsequent Events). Management is of the opinion that the
proceeds of this financing along with funds from operations and funds from
Critical Path, Inc. 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 and
January 31, 2000.
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.
35
<PAGE> 36
THE DOCSPACE COMPANY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN US$)
(INFORMATION AS AT JANUARY 31, 2000 AND FOR THE SIX MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
Cash and Cash Equivalents
The Company considers all short-term deposits with original maturities of
90 days or less to be cash equivalents.
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
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.
36
<PAGE> 37
THE DOCSPACE COMPANY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN US$)
(INFORMATION AS AT JANUARY 31, 2000 AND FOR THE SIX MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
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 $86,000 (CDN $125,000) which bears
interest at the bank's prime lending rate and is secured by a general security
agreement. As at January 31, 2000, the Company had unutilized lines of credit of
approximately $86,000 (CDN $125,000). Furthermore, the Company has a letter of
guarantee outstanding in favour of one of its suppliers for $52,000 (CDN
$75,000).
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
JULY 31, 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 $23,696
======= ====== =======
</TABLE>
37
<PAGE> 38
THE DOCSPACE COMPANY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN US$)
(INFORMATION AS AT JANUARY 31, 2000 AND FOR THE SIX MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
<TABLE>
<CAPTION>
JULY 31, 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>
<TABLE>
<CAPTION>
JANUARY 31, 2000
------------------------------------
ACCUMULATED
DEPRECIATION
AND NET BOOK
COST AMORTIZATION VALUE
-------- ------------ --------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment................................ $323,893 $ 69,907 $253,986
Application software.............................. 58,476 29,857 28,619
Licenses.......................................... 266,465 166,887 99,578
Furniture and fixtures............................ 75,755 10,318 65,437
Leasehold improvements............................ 43,500 8,168 35,332
-------- -------- --------
$768,089 $285,137 $482,952
======== ======== ========
</TABLE>
5. DEPOSITS AND OTHER ASSETS
<TABLE>
<CAPTION>
JULY 31, 1999
----------------------------------
AMORTIZATION NET BOOK
COST ACCUMULATED VALUE
-------- ------------ --------
<S> <C> <C> <C>
Prepaid royalties..................................... $ 72,951 $ -- $ 72,951
Prepaid deposits...................................... 51,293 -- 51,293
-------- -------- --------
$124,244 $ -- $124,244
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 2000
----------------------------------
AMORTIZATION NET BOOK
COST ACCUMULATED VALUE
-------- ------------ --------
(UNAUDITED)
<S> <C> <C> <C>
Prepaid royalties..................................... $ 76,012 $ -- $ 76,012
Prepaid deposits...................................... 145,300 -- 145,300
-------- -------- --------
$221,312 $ -- $221,312
======== ======== ========
</TABLE>
Prepaid royalties represent advance payments made by the Company on royalty
fees which are payable on certain software sales and service revenue of the
Company incorporating third party licensed software. The prepaid royalties
balance is drawn down as related sales and service revenue are earned. The
future recoverability of this balance is subject to the Company achieving
certain revenue targets.
Prepaid deposits relate to deposits paid for certain hardware leases that
will be refunded at the end of the lease term.
38
<PAGE> 39
THE DOCSPACE COMPANY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN US$)
(INFORMATION AS AT JANUARY 31, 2000 AND FOR THE SIX MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
6. NOTE PAYABLE (UNAUDITED)
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.
On January 31, 2000, $3.5 million of the convertible promissory note plus
related accrued interest was converted to equity. This amount has been included
on the balance sheet as share subscriptions.
7. 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.
On August 1, 1999, A-Live Holdings Inc. and the Company amalgamated and
continued operations as The docSpace Company Inc. as an Ontario corporation.
8. 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 certain 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 48% in aggregate on a fully diluted basis. Pursuant
to the subscription agreements, the Company has received permanent investments
totalling $7,399,179 as at January 31, 2000 (July 31, 1999 -- $3,512,124;
1998 -- $30,223) to date on account of subscription proceeds. As of the end of
the fiscal year, the Board had not yet issued shares pursuant to the
subscription agreements and consulting agreements and, pending issuance of the
common shares, subscription proceeds have been recorded as Share Subscriptions
on the balance sheet.
9. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123 Accounting for Stock-Based
Compensation Arrangement. As permitted by SFAS No. 123, the Company has
continued to account for employee stock options under Accounting Principles
Board Opinion No. 25 and elected the disclosure-only alternative under FASB
Statement No. 123.
39
<PAGE> 40
THE DOCSPACE COMPANY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN US$)
(INFORMATION AS AT JANUARY 31, 2000 AND FOR THE SIX MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
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 compensation
expense was $258,484 for the six months ended January 31, 2000.
The remaining unamortized compensation charge as at July 31, 1999 is
$858,488 (January 31, 2000 -- $1,216,821).
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. The total pro
forma value of shares awarded during the six months ended January 31, 2000 was
$610,196.
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.
10. 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>
JULY 31, JULY 31, JANUARY 31,
1998 1999 2000
--------- ----------- -----------
<S> <C> <C> <C>
Tax benefit at statutory rates................... $(135,129) $(1,295,905) $(2,824,478)
Valuation allowance and other differences
Domestic federal incentives producing no
benefit..................................... (29,596) (29,596) (30,300)
Domestic losses producing no benefit........... (105,533) (1,266,309) (2,794,178)
--------- ----------- -----------
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>
JULY 31, JULY 31, JANUARY 31,
1998 1999 2000
-------- ----------- -----------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Loss carryforwards.............................. $ 41,970 $ 1,215,748 $ 4,109,502
Maintenance revenue............................. 40,723 5,232 35,289
-------- ----------- -----------
82,693 1,220,980 4,144,791
Less: Valuation allowance....................... (82,693) (1,220,980) (4,144,791)
-------- ----------- -----------
Total deferred tax assets....................... $ -- $ -- $ --
======== =========== ===========
</TABLE>
40
<PAGE> 41
THE DOCSPACE COMPANY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN US$)
(INFORMATION AS AT JANUARY 31, 2000 AND FOR THE SIX MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
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 $9,210,000. 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>
2002........................................................ $ 110,000
2003........................................................ 2,700,000
2004........................................................ 6,400,000
----------
$9,210,000
==========
</TABLE>
11. LEASE COMMITMENTS
The Company is committed to annual rental payments for operating leases on
premises and computers as follows:
<TABLE>
<S> <C>
2000........................................................ $ 630,000
2001........................................................ 1,080,000
2002........................................................ 862,000
2003........................................................ 553,000
2004........................................................ 532,000
</TABLE>
Included in the total lease commitments is $1,984,000 related to office
lease commitments.
12. CONTINGENCY
The Company has been named in lawsuits claiming patent infringement and
trademark infringement. The Company has appointed legal counsel to defend
against these actions but at this time, the likely outcomes cannot be
determined. Accordingly, no amounts have been accrued in the financial
statements. Management is of the opinion that these contingencies will not have
a material effect on the financial condition and operations of the Company.
13. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
SFAS No. 107, Disclosure About Fair Value of Financial Instruments,
requires disclosure about the fair value of financial instruments. Financial
instruments consist primarily of cash and cash equivalents, accounts and
contracts receivable, deposits and other assets, bank indebtedness, accounts
payable and accrued liabilities, the carrying amounts of which approximate fair
value.
Interest Rate Risk
The Company has bank borrowings whose interest rate is subject to the
fluctuations in the prime rate as charged by its bankers. Because of the
short-term nature of its bank borrowings, the Company is not exposed to
significant fluctuations in value due to interest rate changes.
41
<PAGE> 42
THE DOCSPACE COMPANY INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN US$)
(INFORMATION AS AT JANUARY 31, 2000 AND FOR THE SIX MONTHS ENDED
JANUARY 31, 1999 AND 2000 IS UNAUDITED)
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.
14. SUBSEQUENT EVENTS (UNAUDITED)
On November 3, 1999, Critical Path, Inc. entered into a merger and plan of
reorganization agreement with the Company which resulted in Critical Path, Inc.
acquiring all of the common shares of the Company for approximately $30 million
in cash and 4,092,280 shares of Critical Path, Inc. stock. Pursuant to this
transaction, the Company has become a Nova Scotia unlimited liability
corporation. Furthermore, on February 11, 2000 the employee trust was collapsed
and the shares were issued to the respective beneficiaries of the trust. On
March 8, 2000 the transaction with Critical Path was closed.
42
<PAGE> 43
REMARQ COMMUNITIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 44
Consolidated Balance Sheet.................................. 45
Consolidated Statement of Operations........................ 46
Consolidated Statement of Partners' and Stockholders'
Equity.................................................... 47
Consolidated Statement of Cash Flows........................ 48
Notes to Consolidated Financial Statements.................. 49
</TABLE>
43
<PAGE> 44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of RemarQ Communities Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of partners' and stockholders' equity and
of cash flows present fairly, in all material respects, the financial position
of RemarQ Communities Inc. and its subsidiary at December 31, 1998 and 1999 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States, 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
San Jose, California
March 7, 2000, except
as to the second paragraph
of Note 10 which is as of
March 16, 2000
44
<PAGE> 45
REMARQ COMMUNITIES INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,149,780 $ 13,039,534
Short-term investments.................................... -- 490,183
Accounts receivable, net.................................. 331,102 733,085
Prepaid expenses and other current assets................. 265,620 555,570
----------- ------------
Total current assets............................... 1,746,502 14,818,372
Property and equipment, net................................. 3,426,823 6,530,906
Other assets................................................ 181,780 117,738
----------- ------------
Total assets....................................... $ 5,355,105 $ 21,467,016
=========== ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 997,506 $ 2,137,293
Accrued liabilities....................................... 394,695 971,789
Deferred revenue.......................................... 693,752 956,574
Line of credit borrowings................................. 146,784 343,934
Notes payable, current.................................... 127,475 271,529
Capital lease obligations, current........................ 637,343 1,693,916
----------- ------------
Total current liabilities.......................... 2,997,555 6,375,035
Notes payable, net of current portion....................... 351,269 3,685,554
Line of credit borrowing, net of current portion............ 853,216 510,052
Capital lease obligations, long-term........................ 1,244,516 2,175,124
----------- ------------
Total liabilities.................................. 5,446,556 12,745,765
----------- ------------
Commitments (Note 6)
Redeemable Convertible Preferred Stock:
Series A Preferred Stock: $0.001 par value; 3,400,000
shares authorized; 3,131,354 and 3,131,354 shares issued
and outstanding at December 31, 1998 and 1999,
respectively (aggregate liquidation preference
$4,164,701)............................................. 4,159,700 4,159,700
Series B Preferred Stock: $0.001 par value; 2,500,000
shares authorized; 2,352,941 shares issued and
outstanding at December 31, 1999 (aggregate liquidation
preference $19,999,999)................................. -- 19,953,737
----------- ------------
4,159,700 24,113,437
----------- ------------
Stockholders' equity:
Common Stock: $0.001 par value; 12,000,000 shares
authorized; 5,689,650 and 5,564,230 shares issued and
outstanding at December 31, 1998 and 1999,
respectively............................................ 5,690 5,565
Additional paid-in-capital................................ 722,094 8,014,407
Notes receivable from stockholders........................ (557,934) (575,362)
Deferred stock compensation............................... -- (6,000,256)
Accumulated deficit....................................... (4,421,001) (16,836,540)
----------- ------------
Total stockholders' equity......................... (4,251,151) (15,392,186)
----------- ------------
Total liabilities, Redeemable Convertible Preferred
Stock and stockholder's equity................... $ 5,355,105 $ 21,467,016
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
45
<PAGE> 46
REMARQ COMMUNITIES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
---------- ----------- ------------
<S> <C> <C> <C>
Net revenues:
Service revenues.................................. $1,389,372 $ 3,451,704 $ 5,859,644
Advertising....................................... -- 250,268 620,767
Other............................................. -- -- 116,725
---------- ----------- ------------
Total net revenues........................ 1,389,372 3,701,972 6,597,136
Cost of service revenues............................ 327,716 1,436,164 3,115,756
Cost of advertising revenues........................ -- 76,104 694,537
---------- ----------- ------------
Total cost of net revenues................ 327,716 1,512,268 3,810,293
---------- ----------- ------------
Gross profit........................................ 1,061,656 2,189,704 2,786,843
Operating expenses:
Research and development.......................... -- 939,205 3,908,970
Sales and marketing............................... 313,711 2,158,070 5,995,859
General and administrative........................ 528,927 3,018,269 4,403,437
Stock compensation................................ -- -- 719,363
---------- ----------- ------------
Total operating expenses.................. 842,638 6,115,544 15,027,629
---------- ----------- ------------
Income (loss) from operations....................... 219,018 (3,925,840) (12,240,786)
Interest income..................................... -- 47,319 665,635
Interest expense.................................... (10,336) (148,109) (808,879)
Other income (expense), net......................... (547) -- (31,509)
---------- ----------- ------------
Net income (loss)................................... $ 208,135 $(4,026,630) $(12,415,539)
========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
46
<PAGE> 47
REMARQ COMMUNITIES INC.
CONSOLIDATED STATEMENT OF PARTNERS' AND STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED
PARTNERSHIP ------------------ PAID-IN FROM STOCK ACCUMULATED
CAPITAL SHARES AMOUNT CAPITAL SHAREHOLDERS COMPENSATION DEFICIT
----------- --------- ------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $ (25,729) -- $ -- $ -- $ -- $ -- $ --
Distribution to
partners............... (247,838) -- -- -- -- -- --
Net income............... 208,135 -- -- -- -- -- --
--------- --------- ------ ---------- --------- ----------- ------------
Balance at December 31,
1997................... (65,432) -- -- -- -- -- --
Partnership advances
written off............ -- -- -- -- -- -- (394,371)
Issuance of Common Stock
upon conversion to S
corporation............ 65,432 3,600,000 3,600 (69,032) -- -- --
Issuance of Common Stock
to employees for $0.80
per share.............. -- 660,000 660 527,340 (504,000) -- --
Issuance of Common Stock
upon exercise of stock
options................ -- 1,429,650 1,430 263,786 (53,934) -- --
Net loss................. -- -- -- -- -- -- (4,026,630)
--------- --------- ------ ---------- --------- ----------- ------------
Balance at December 31,
1998................... -- 5,689,650 5,690 722,094 (557,934) -- (4,421,001)
Issuance of Common Stock
upon exercise of stock
options................ -- 190,575 191 188,280 (63,000) -- --
Repurchase of Common
Stock.................. -- (315,995) (316) (88,006) 29,250 -- --
Issuance of warrants..... -- -- -- 472,420 -- -- --
Payments on promissory
notes.................. -- -- -- -- 16,322 -- --
Deferred compensation
expense................ -- -- -- 6,719,619 -- (6,719,619) --
Amortization of deferred
compensation........... -- -- -- -- -- 719,363 --
Net loss................. -- -- -- -- -- -- (12,415,539)
--------- --------- ------ ---------- --------- ----------- ------------
Balance at December 31,
1999................... $ -- 5,564,230 $5,565 $8,014,407 $(575,362) $(6,000,256) $(16,836,540)
========= ========= ====== ========== ========= =========== ============
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31,
1996................... $ (25,729)
Distribution to
partners............... (247,838)
Net income............... 208,135
------------
Balance at December 31,
1997................... (65,432)
Partnership advances
written off............ (394,371)
Issuance of Common Stock
upon conversion to S
corporation............ --
Issuance of Common Stock
to employees for $0.80
per share.............. 24,000
Issuance of Common Stock
upon exercise of stock
options................ 211,282
Net loss................. (4,026,630)
------------
Balance at December 31,
1998................... (4,251,151)
Issuance of Common Stock
upon exercise of stock
options................ 125,471
Repurchase of Common
Stock.................. (59,072)
Issuance of warrants..... 472,420
Payments on promissory
notes.................. 16,322
Deferred compensation
expense................ --
Amortization of deferred
compensation........... 719,363
Net loss................. (12,415,539)
------------
Balance at December 31,
1999................... $(15,392,186)
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
47
<PAGE> 48
REMARQ COMMUNITIES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
--------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ 208,135 $(4,026,630) $(12,415,539)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization................ 100,694 441,938 2,061,413
Stock compensation expense................... -- -- 719,363
Amortization of warrants..................... -- -- 78,736
Changes in current assets and liabilities:
Accounts receivable....................... (52,889) (278,213) (401,983)
Prepaid expenses and other current
assets.................................. (56,627) (378,785) (304,644)
Accounts payable.......................... 170,537 817,984 1,139,787
Accrued liabilities....................... (19,136) 360,849 577,096
Deferred revenue.......................... 94,648 496,494 262,822
Loss on sale of equipment................. -- -- 13,247
--------- ----------- ------------
Net cash provided by (used in) operating
activities........................... 445,362 (2,566,363) (8,269,702)
--------- ----------- ------------
Cash flows from investing activities:
Purchase of property and equipment................ (157,792) (1,592,533) (2,014,412)
Proceeds from sale of equipment................... -- -- 50,000
Purchase of short-term investments................ -- -- (490,183)
--------- ----------- ------------
Net cash used in investing activities... (157,792) (1,592,533) (2,454,595)
--------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock............ -- 235,282 125,471
Payments made to repurchase Common Stock.......... -- -- (59,072)
Proceeds from issuance of Series A Convertible
Preferred Stock, net of issuance costs......... -- 4,159,700 --
Proceeds from issuance of Series B Convertible
Preferred Stock, net of issuance costs......... -- -- 19,953,737
Principal payments on capital lease obligations... (21,922) (169,929) (1,148,416)
Principal payments on debt........................ -- -- (127,977)
Principal payments on borrowings.................. -- -- (146,014)
Proceeds from note payable........................ -- 478,744 4,000,000
Proceeds from bank borrowings..................... -- 1,000,000 --
Proceeds from note receivable..................... -- -- 16,322
Partner advances.................................. (247,838) (394,371) --
--------- ----------- ------------
Net cash provided by (used in) financing
activities........................... (269,760) 5,309,426 22,614,051
--------- ----------- ------------
Net increase in cash and cash equivalents........... 17,810 1,150,530 11,889,754
Cash and cash equivalents at beginning of year...... (18,560) (750) 1,149,780
--------- ----------- ------------
Cash and cash equivalents at end of year............ $ (750) $ 1,149,780 $ 13,039,534
========= =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
48
<PAGE> 49
REMARQ COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
RemarQ Communities Inc. (the "Company") is a provider of Internet
discussion services for Internet Service Providers ("ISP's") and leading
websites. RemarQ was originally formed as a partnership in 1995 and subsequently
incorporated as an S-Corp under the name of Supernews on January 1, 1998, in the
state of Delaware. The Company became a C-Corp on May 21, 1998 and was
subsequently renamed as RemarQ Communities Inc, in December 1998.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include accounts of the Company and
its wholly-owned subsidiary, RemarQ Communities (U.K.) Limited. All significant
intercompany balances and transactions have been eliminated in consolidation.
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.
Revenue Recognition
To date, the Company's revenues have been derived primarily from providing
Usenet discussion services. Such revenues were approximately 100%, 89% and 89%
of total revenues for the years ended December 31, 1997, 1998 and 1999,
respectively. Usenet service revenues are derived generally from contracts
ranging from one to thirty-six months in which the Company commits to provide
customers with Internet discussion services for ISPs and websites. Revenues are
recognized ratably over the contracted service period.
The Company records advertising revenues in the period the advertising
impressions are delivered to customers. The Company uses an outside vendor to
solicit customers to use its advertising services, to serve the ads to its
website and to bill and collect for these services. This outside vendor provides
monthly reports indicating the impressions delivered, amounts billed for the
Company's advertising services and the related administrative fee. The Company
records advertising revenues, as reported by the outside vendor, net of this
administrative fee as the Company bears no collection risk for the gross amount
of the advertising fees. The Company's advertising contracts do not guarantee a
minimum number of impressions to be delivered.
During the fiscal year, the Company discontinued the use of the outside
vendor and accordingly, recognizes the gross revenue associated with advertising
as impressions are delivered.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At December
31, 1998 and 1999, $613,549 and $12,707,031, respectively, of money market
funds, the fair value of which approximates costs, are included in cash and cash
equivalents. The Company deposits cash and cash equivalents with high credit
quality financial institutions.
Investments
Investments consist of high quality debt securities with original maturity
dates greater than ninety days. In accordance with Statement of Financial
Accounting Standard ("SFAS") No. 115, "Accounting for
49
<PAGE> 50
REMARQ COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain Investments in Debt and Equity Securities," the Company's investments
are classified as available-for-sale and, at the balance sheet date, are
reported at fair value, with the unrealized gains and losses, net of related
taxes, reported as a component of Other Comprehensive Income (Loss). The cost of
these investments at December 31, 1999 was $490,183. Gains and losses on the
sale of available-for-sale securities are determined using the
specific-identification method.
Advertising Expense
Internet advertising is expensed as incurred. Advertising expense for the
years ended December 31, 1997, 1998 and 1999 was $98,987, $802,729 and
$1,483,658, respectively.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivable and accounts payable are carried at cost, which approximates
their fair value because of the short-term maturity of these instruments.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and accounts
receivable. The Company's accounts receivable are derived from revenue earned
from customers located in the U.S. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The Company maintains an allowance for doubtful
accounts receivable based upon the expected collectibility of accounts
receivable.
No customers accounted for 10% or more of revenues in 1997, one customer
accounted for 11% of revenues in 1998 and no customer accounted for 10% or more
of revenues in 1999. At December 31, 1999, one customer accounted for 15% of the
total outstanding receivables.
Website Development Costs
The Company accounts for website development costs in accordance with AICPA
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Website development costs consist of
internal and external costs incurred to purchase and implement the website
software and significant enhancements used in the Company's business. These
costs are capitalized and amortized using the straight-line method over the
estimated useful life of the asset. Amortization expense for the year ended
December 31, 1999 was not significant.
Internal and external costs of developing website contents are expensed as
incurred and included in product, content and product development expense in the
accompanying consolidated statements of operations.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, three
years, or the lease term of the respective assets.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets in accordance
with Statement of Financial Accounting Standards No. ("SFAS") 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of. SFAS No. 121 requires recognition of impairment of long-lived assets in
50
<PAGE> 51
REMARQ COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the event the net book value of such assets exceeds the future undiscounted cash
flows attributable to such assets.
Stock Split
In February and May 1998, the Board of Directors authorized a
three-and-a-half-for-one and a one for four share split of the Company's Common
stock, respectively. All references in the financial statements to the number of
shares and per share amounts of the Company's Common Stock and Preferred Stock
have been retroactively restated to reflect the decreased number of Common
Stock.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). 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 common stock and the exercise
price. SFAS No. 123 defines a "fair value" based method of accounting for an
employee stock option or similar equity investment. The Company accounts for
stock issued to non-employees in accordance with the provisions of SFAS No. 123
and Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods, or Services."
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 liabilities and assets 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 liabilities and assets 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.
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 component in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
significant transactions that are required to be reported in comprehensive
income.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current period presentation.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the FASB issued SFAS No.
137, "Accounting for Derivative
51
<PAGE> 52
REMARQ COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No. 133
until fiscal years beginning after June 15, 2000. The Company will adopt SFAS
No. 133 during its year ending June 30, 2001. To date, the Company has not
engaged in derivative or hedging activities.
NOTE 2 -- SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid for interest............................ $ 18,693 $ 29,059 $ 706,669
======== ========== ==========
Supplemental noncash investing and financing
activity:
Issuance of Common Stock in exchange for notes
receivable..................................... $ -- $ 557,934 $ 63,000
======== ========== ==========
Property and equipment acquired under capital
leases......................................... $162,522 $1,897,973 $3,214,332
======== ========== ==========
Issuance of warrants for borrowings............... $ -- $ -- $ 472,420
======== ========== ==========
</TABLE>
NOTE 3 -- BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable....................................... $368,384 $826,972
Less: Allowance for doubtful accounts..................... (37,282) (93,887)
-------- --------
$331,102 $733,085
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Prepaid expenses and other current assets:
Prepaid rent.............................................. $ 59,819 $ --
Prepaid insurance......................................... 33,501 60,426
Prepaid equipment lease................................... 84,551 211,012
Prepaid advertising....................................... 12,445 66,060
Prepaid other............................................. 75,304 218,072
-------- --------
$265,620 $555,570
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
---------- -----------
<S> <C> <C>
Property and equipment, net:
Computer equipment....................................... $3,586,505 $ 8,067,576
Furniture and fixtures................................... 163,609 394,758
Leasehold improvements................................... 69,841 70,817
Software................................................. 168,909 621,209
Vehicles................................................. 22,975 22,975
---------- -----------
4,011,839 9,177,335
Less: Accumulated depreciation and amortization.......... (585,016) (2,646,429)
---------- -----------
$3,426,823 $ 6,530,906
========== ===========
</TABLE>
52
<PAGE> 53
REMARQ COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and equipment includes $2,076,395 and $5,290,663 of computer
equipment under capital leases at December 31, 1998 and 1999, respectively.
Accumulated amortization of assets under capital leases totaled $228,834 and
$811,036 at December 31, 1998 and 1999, respectively. At December 31, 1999, the
Company had $847,178 of property and equipment which was not being utilized.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Accrued liabilities:
Payroll and related expenses.............................. $252,357 $414,816
Vacation.................................................. 66,100 230,288
Professional services..................................... -- 165,721
Other..................................................... 76,238 160,964
-------- --------
$394,695 $971,789
======== ========
</TABLE>
NOTE 4 -- INCOME TAXES
No provision for federal or state income tax was recorded for the year
ended December 31, 1999 as the Company incurred a net operating loss during this
period.
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 1,622,100 $ 5,851,953
Accruals and reserves................................... 44,431 145,228
Deferred revenue........................................ 274,520 336,713
Stock compensation...................................... -- 269,976
Other................................................... -- 2,348
----------- -----------
1,941,051 6,606,218
----------- -----------
Deferred tax liabilities:
Depreciation............................................ (166,659) (110,678)
----------- -----------
Net deferred tax assets................................. 1,774,392 6,495,540
Less: Valuation allowance............................... (1,774,392) (6,495,540)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
Management believes that it is more likely than not that the deferred tax
assets will not be utilized, such that a full valuation allowance has been
recorded.
At December 31, 1999, the Company had approximately $14,789,000 of federal
and $7,377,376 of state net operating loss carryforwards available to offset
future taxable income which expire in varying amounts beginning in 2018 and
2003, 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.
The Company elected to be treated as an S corporation for federal and
California income tax purposes in 1997. As a result, minimal income taxes were
payable at the corporate level. Rather, the Company's shareholders included
their respective portions of the Company's taxable income in their individual
income tax returns. On May 21, 1998, the Company became subject to the C
corporation provisions of the Internal Revenue Code.
53
<PAGE> 54
REMARQ COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- BORROWINGS
Line of Credit
In October 1998, the Company entered into a line of credit agreement with a
Bank, which provides for equipment advances, made only on or prior to April 26,
1999, subsequently extended until July 25, 1999, of up to $1,000,000. Interest
on borrowings is set at the bank's prime rate, plus 0.5%. At December 31, 1999,
the prime rate was 8.5%. The agreement requires repayments in 30 equal monthly
installments of principal plus interest, commencing on May 26, 1999. The total
draw down on the line of credit at December 31, 1999, was $853,986.
The amendment requires advances to be repaid in 34 equal monthly
installments of principal plus interest, commencing July 25, 1999. The assets of
the Company are pledged as collateral for the line of credit. Under the line of
credit, the Company is required to maintain certain financial covenants.
Equipment Lease Line
At December 31, 1998 and December 31, 1999, the Company had $1,761,678 and
$3,821,795, respectively, outstanding and due under an equipment lease financing
line with a leasing company. The equipment lease line provides for borrowings of
up to $5,500,000 which are collateralized by the assets of the Company. The
financing line expired on December 31, 1999 and charges interest at a rate of
10.75% per annum. Under the line of credit, the Company is required to maintain
certain financial covenants.
Notes Payable and Subordinated Loan and Security Agreement
On January 19, 1999, the Company entered into a subordinated loan and
security agreement with a leasing company to make available loans up to an
aggregate principal amount of $4,000,000. The loan is available in minimum
advances of $1,000,000 with each advance to be evidenced by a Note bearing
interest at 11.5% per annum. At December 31, 1999 the loan balance was
$4,000,000. The agreement requires that each Note shall be payable in 18 monthly
installments of interest only, followed by 24 equal monthly installments of
principal and interest. The assets of the Company are pledged as collateral for
the loan agreement. Under the agreement, the Company is required to maintain
certain financial covenants.
In connection with the subordinated loan agreement described above, the
Company issued a warrant to purchase 147,058 shares of Series B Preferred Stock
at $6.80 per share. The warrant is outstanding at December 31, 1999 and expires
upon the earliest of (1) ten years from March 25, 1999; (2) the closing of an
Initial Public Offering; or (3) a merger event of acquisition of borrower;
provided that in the case (2) or (3) lender receives at least thirty (30) days
prior notice of such transactions (in order to exercise the purchase option if
it so chooses). The Company estimated the fair value associated with these
warrants at the date of issuance was approximately $472,420 which was recorded
as a discount to the loan and is being amortized as interest expense over the
term of the subordinated note.
54
<PAGE> 55
REMARQ COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Notes payable and subordinated loan consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
--------- ----------
<S> <C> <C>
11.5% subordinate promissory note; interest payable in 18
monthly installments, followed by 24 installments of
interest and principal; matures January 1, 2003;
collateralized by certain assets.......................... $ -- $4,000,000
10.75% promissory note; interest payable in 36 monthly
installments matures November 1, 2001, collateralized by
certain fixed assets...................................... 478,744 350,767
--------- ----------
Less: Unamortized discount.................................. 478,744 4,350,767
Less: Current portion....................................... -- (393,684)
(127,475) (271,529)
--------- ----------
$ 351,269 $3,685,554
========= ==========
</TABLE>
Under the notes payable agreement, the Company is required to maintain
certain financial covenants. Principal payments under notes payable and line of
credit borrowings are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
2000...................................................... $ 750,443
2001...................................................... 2,356,567
2002...................................................... 2,004,951
2003...................................................... 92,792
----------
5,204,753
Less: Unamortized discount.................................. (393,684)
----------
$4,811,069
==========
</TABLE>
At December 31, 1999, the Company was in compliance with all financial
covenants.
NOTE 6 -- COMMITMENTS
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through November 2001. Rent
expense for the years ended December 31, 1997, 1998 and 1999 was $104,951,
$359,855 and $554,203, respectively. The terms of the facility lease provide for
rental payments on a graduated scale. The Company recognizes rent expense on a
straight-line basis over the lease period, and has accrued for rent expense
incurred but not paid.
55
<PAGE> 56
REMARQ COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating and capital
leases, including lease commitments entered into subsequent to December 31, 1999
and future minimum sublease rental receipts under noncancelable operating leases
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ----------- ----------
<S> <C> <C>
2000............................................... $ 2,021,415 $ 417,808
2001............................................... 1,838,305 162,066
2002............................................... 483,454 169,517
2003............................................... -- 143,405
2004............................................... -- 147,203
Thereafter......................................... -- 154,682
----------- ----------
Total minimum lease payments and sublease income... 4,343,174 $1,194,681
==========
Less: Amount representing interest................. (474,134)
-----------
Present value of capital lease obligations......... 3,869,040
Less: Current portion.............................. (1,693,916)
-----------
Long-term portion of capital lease obligations... $ 2,175,124
===========
</TABLE>
NOTE 7 -- CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock at December 31, 1999 consists of the following:
<TABLE>
<CAPTION>
PROCEEDS
SHARE NET OF
------------------------- LIQUIDATION ISSUANCE
SERIES AUTHORIZED OUTSTANDING AMOUNT COSTS
------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
A........................ 3,400,000 3,131,354 $ 4,164,701 $ 4,159,700
B........................ 2,500,000 2,352,941 19,999,999 19,953,737
--------- --------- ----------- -----------
5,900,000 5,484,295 $24,164,700 $24,113,437
========= ========= =========== ===========
</TABLE>
The holders of Preferred Stock have various rights and preferences as
follows:
Voting
Each share of Series A and Series B Preferred Stock have voting rights
equal to an equivalent number of shares of Common Stock into which it is
convertible and votes together as one class with the Common Stock.
As long as any shares of Convertible Preferred Stock remain outstanding,
the Company must obtain approval from a majority of the holders of Convertible
Preferred Stock in order to alter the Articles of Incorporation as related to
Convertible Preferred Stock or change the authorized number of shares of
Convertible Preferred Stock. As long as at least 1,000,000 shares of Convertible
Preferred Stock remain outstanding, the Company must obtain approval from a
majority of the holders of Convertible Preferred Stock in order to repurchase
any shares of Common Stock other than shares subject to the right of repurchase
by the Company, change the authorized number of Directors, authorize a dividend
for any class or series other than Convertible Preferred Stock, create a new
class of stock or effect a merger, consolidation or sale of assets where the
existing shareholders retain less than 50% of the voting stock of the surviving
entity.
Dividends
Holders of Series A and Series B Convertible Preferred Stock are entitled
to receive noncumulative dividends at the per annum rate of $0.1064 and $0.68
per share, respectively, when and if declared by the Board of Directors. The
holders of Series A and Series B Convertible Preferred Stock will also be
entitled to
56
<PAGE> 57
REMARQ COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Convertible Preferred Stock or Common Stock
have been declared by the Board from inception through December 31, 1999.
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 Convertible Preferred Stock own less than 51% of
the resulting voting power of the surviving entity, the holders of Series A and
Series B Convertible Preferred Stock are entitled to receive an amount of $1.33
and $8.50 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 among the holders of Common Stock
pro rata based on the number of shares of Common Stock held by each. Should the
Company's legally available assets be insufficient to satisfy the liquidation
preferences, the funds will be distributed ratably among the holders of the
Series A and Series B Preferred Stock in proportion to the preferential amount
each such holder would have otherwise been entitled to receive.
Conversion
Each share of Series A and Series B Convertible Preferred Stock is
convertible, at the option of the holder, according to a conversion ratio,
subject to adjustment for dilution. Each share of Series A and Series B
Convertible 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 $8.50 per share with gross proceeds of at least
$12,000,000, or (2) the consent of the holders of the majority of Convertible
Preferred Stock.
At December 31, 1999, the Company reserved 5,484,295 shares of Common Stock
for the conversion of Series A and Series B Convertible Preferred Stock,
respectively.
NOTE 8 -- COMMON STOCK
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 15,000,000 shares of $0.001 par value Common Stock. A portion of the
shares sold are subject to a right of repurchase by the Company subject to
vesting, which is generally over a four year period from the earlier of grant
date or employee hire date, as applicable, until vesting is complete. At
December 31, 1999, there were 1,173,998 shares subject to repurchase.
Certain shares were issued in exchange for notes receivable, which are full
recourse and additionally collateralized by the underlying shares of common
stock. These notes receivable have been reported as a reduction of stockholder's
equity.
NOTE 9 -- STOCK OPTION PLANS
In May, 1998, the Company adopted the 1998 Stock Option Plan (the "Plan").
The Plan provides for the granting of stock options to employees and consultants
of the Company. Options granted under the Plan may be either incentive stock
options or nonqualified stock options. Incentive stock options ("ISO") may be
granted only to Company employees (including officers and directors who are also
employees). Nonqualified stock options ("NSO") may be granted to Company
employees and consultants. The Company has reserved 3,268,646 shares of Common
Stock for issuance under the Plan.
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 and NSO shall not be less than 100% and 85% of the
estimated
57
<PAGE> 58
REMARQ COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fair value of the shares on the date of grant, respectively, and (ii) the
exercise price of an ISO and NSO granted to a 10% shareholder shall not be less
than 110% of the estimated fair value of the shares on the date of grant,
respectively. Options are exercisable immediately subject to repurchase options
held by the Company which lapse over a maximum period of five years at such
times and under such conditions as determined by the Board of Directors. To
date, options granted generally vest over four years.
During the period from January 1, 1999 through December 31, 1999, the
Company recorded $6,719,619 of deferred stock compensation in accordance with
APB 25, SFAS 123 and Emerging Issues Task Force 96-18, related to options
granted to consultants and employees. Stock compensation expense is being
recognized over the vesting periods of the related options, generally four
years. The Company recognized stock compensation expense of $719,363 for the
twelve months ended December 31, 1999.
If the stock-based compensation for the year ended December 31, 1999 had
been allocated across the relevant functional expense categories within
operating expenses, it would be allocated as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Cost of service revenues.................................... $ 20,278
Cost of advertising revenues................................ 16,990
Research and development.................................... 267,584
Sales and marketing......................................... 218,644
General and administrative.................................. 195,867
--------
$719,363
========
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES PRICE
---------- --------
<S> <C> <C>
Options outstanding at January 1, 1998...................... -- $ --
Options granted........................................... 1,651,850 $0.22
Options exercised......................................... (1,429,650) $0.18
Options canceled.......................................... (37,000) $0.38
----------
Outstanding at December 31, 1998.......................... 185,200 $0.54
Options granted........................................... 783,850 $1.32
Options exercised......................................... (190,575) $0.98
Options canceled.......................................... (175,325) $0.96
----------
Outstanding at December 31, 1999.......................... 603,150 $1.29
==========
Options exercisable at December 31, 1998.................. 185,200 $0.54
==========
Options exercisable at December 31, 1999.................. 603,150 $1.29
==========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT DECEMBER 31, 1999 OPTIONS EXERCISABLE AT
------------------------------------------------- DECEMBER 31, 1999
RANGE OF WEIGHTED AVERAGE ------------------------------
EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
-------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.00 - $0.50.. 23,200 8.69 $0.48 23,200 $0.48
$0.51 - $1.05.. 119,750 9.01 $0.94 119,750 $0.94
$1.06 - $1.55.. 356,400 9.51 $1.35 356,400 $1.35
$1.56 - $1.75.. 103,800 9.88 $1.69 103,800 $1.69
------- -------
603,150 603,150
======= =======
</TABLE>
58
<PAGE> 59
REMARQ COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value Disclosures
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock
Based Compensation." Accordingly, no compensation expense has been recognized
for the Plan. Had the Company recorded compensation expense based on the
estimated grant-date fair value, as defined by SFAS 123, for awards granted
under the Plan, there would have been no material effect on the Company's net
loss for the period ended December 31, 1998 or 1999.
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes pricing method with the following assumptions:
dividend yield at 0%; weighted average expected option term of five years and
risk free interest rate of between 4.9% and 5.6% for the years ended December
31, 1998 and 4.5% and 6.3% 1999. The weighted average fair value of options
granted during 1998 and 1999 was $0.39 and $10.62.
NOTE 10 -- SUBSEQUENT EVENTS
Acquisition
On January 28, 2000, the Company signed a definitive agreement to be
acquired by Critical Path, Inc. The closing of this transaction is contingent
upon, among other conditions, approval by the companies' shareholders and
approval by regulatory agencies.
On March 16, 2000, a leasing company exercised its warrant for 147,058
shares of Series B preferred stock at a price of $6.80 per share in exchange for
the forgiveness of a $1.0 million loan.
59
<PAGE> 60
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2 Consent of Arthur Andersen LLP, Independent Accountants.
(Incorporated by reference to Exhibit 23.2 to the
Registrant's Current Report on Form 8-K (File No.
000-25331))
99.1 Text of Press release dated March 9, 2000, regarding the
completion of the acquisition of The docSpace Company.
(Incorporated by reference to Exhibit 99.1 to the
Registrant's Current Report on Form 8-K (File No.
000-25331))
</TABLE>
60
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-95933, 333-95279, and 333-87553) of Critical
Path, Inc. of our report dated March 9, 2000 relating to the consolidated
financial statements of ISOCOR, and of our report dated March 7, 2000, except as
to the second paragraph of Note 10 which is as of March 16, 2000 relating to the
financial statements of RemarQ Communities, Inc., each of which appears in this
Current Report on Form 8-K/A.
/s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California
March 24, 2000
