<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OCTOBER 6, 2000
Date of Report (Date of earliest event reported):
CRITICAL PATH, INC.
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(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
CALIFORNIA 000-25331 91-1788300
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(State or other jurisdiction of (Commission File Number) (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
320 FIRST STREET
SAN FRANCISCO, CALIFORNIA 94105
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 808-8800
N/A
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(former name or former address, if changed since last report)
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This Current Report on Form 8-K/A amends Item 7 of the Current Report on
Form 8-K filed with the Securities and Exchange Commission on October 6, 2000.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) PeerLogic, Inc. Consolidated Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998, December 31,
1999 and June 30, 2000
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1999 and the Six Months Ended June 30,
1999 and 2000
Consolidated Statements of Shareholders' Deficit for the Years
Ended December 31, 1998 and 1999 and the Six Months Ended June
30, 2000
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1999 and the Six Months Ended June 30,
1999 and 2000
Notes to Consolidated Financial Statements
(b) Pro Forma Condensed Consolidated Financial Information
(Unaudited)
Overview
Pro Forma Condensed Consolidated Balance Sheet as of June 30,
2000
Pro Forma Condensed Consolidated Statements of Operations for the
Year Ended December 31, 1999 and for the Six Months
ended June 30, 2000
Notes to Pro Forma Condensed Consolidated Financial Information
(c) Exhibit
23.1 Consent of Independent Accountants
-2-
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Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned hereunto duly authorized.
Dated: November 17, 2000 CRITICAL PATH, INC.
/s/ Mark J. Rubash
--------------------------------------------
Mark J. Rubash
Executive Vice President
and Chief Financial Officer
<PAGE> 4
PEERLOGIC, INC.
CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 5
PEERLOGIC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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<CAPTION>
Page
<S> <C>
Report of Independent Accountants............................................... 2
Consolidated Balance Sheets (Information at June 30, 2000 is unaudited)......... 3
Consolidated Statements of Operations (Information for the six months ended
June 30, 1999 and 2000 is unaudited).......................................... 4
Consolidated Statements of Shareholders' Deficit (Information for the six
months ended June 30, 2000 is unaudited)...................................... 5
Consolidated Statements of Cash Flows (Information for the six months
ended June 30, 1999 and 2000 is unaudited).................................... 6
Notes to Consolidated Financial Statements (Information for the six months
ended June 30, 1999 and 2000 is unaudited).................................... 7
</TABLE>
<PAGE> 6
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of PeerLogic, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholders' deficit and of
cash flows present fairly, in all material respects, the financial position of
PeerLogic, Inc. and its subsidiaries at December 31, 1998 and 1999, and the
results of their operations and their cash flows for the two years ended
December 31, 1998 and 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.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 of the
financial statements, the Company has incurred significant losses from
operations that raise substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 18, 2000
2
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PEERLOGIC, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1998 1999 2000
-------- -------- --------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 310 $ 2,917 $ 2,422
Accounts receivable, net 50 3,939 5,449
Prepaid expenses and other current assets 44 290 699
-------- -------- --------
Total current assets 404 7,146 8,570
Property and equipment, net 225 1,051 1,364
Intangible assets, net 581 10,039 7,674
Other assets 38 41 66
-------- -------- --------
Total assets $ 1,248 $ 18,277 $ 17,674
======== ======== ========
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 620 $ 2,699 $ 2,706
Accrued expenses and other current liabilities 262 3,195 3,057
Deferred revenues 861 3,209 4,630
Deposits for unissued Convertible Preferred Stock - 2,000 -
Notes payable 5,098 11,185 8,000
-------- -------- --------
Total current liabilities 6,841 22,288 18,393
-------- -------- --------
Commitments and contingencies (Note 6)
Convertible Preferred Stock, no par value, 15,381 shares authorized;
42, 8,264 and 12,011 issued and outstanding 2,200 9,958 23,374
-------- -------- --------
Shareholders' deficit:
Common Stock, no par value, 30,000 shares
authorized; 147, 3,594 and 3,645
issued and outstanding 14,070 6,076 6,190
Other accumulated comprehensive income - 54 60
Accumulated deficit (21,863) (20,099) (30,343)
-------- -------- --------
Total shareholders' deficit (7,793) (13,969) (24,093)
-------- -------- --------
Total liabilities, convertible preferred stock and shareholders' deficit $ 1,248 $ 18,277 $ 17,674
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 8
PEERLOGIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- -----------------------
1998 1999 1999 2000
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
License $ 2,538 $ 6,372 $ 2,670 $ 6,807
Service 1,424 5,411 1,183 4,505
-------- -------- -------- --------
Total revenues 3,962 11,783 3,853 11,312
-------- -------- -------- --------
Cost of revenues:
License - 196 - 188
Service 553 1,817 401 1,985
-------- -------- -------- --------
Total cost of revenues 553 2,013 401 2,173
-------- -------- -------- --------
Gross profit 3,409 9,770 3,452 9,139
-------- -------- -------- --------
Operating expenses:
Research and development 2,735 5,383 1,601 3,092
Sales and marketing 1,501 7,285 2,044 6,716
General and administrative 2,174 4,779 1,185 6,765
Amortization of intangible assets 94 3,159 784 2,365
Acquired in-process research and development - 1,830 - -
-------- -------- -------- --------
Total operating expenses 6,504 22,436 5,614 18,938
-------- -------- -------- --------
Loss from operations (3,095) (12,666) (2,162) (9,799)
Interest and other expense, net (3,478) (4,295) (2,034) (445)
-------- -------- -------- --------
Net loss $ (6,573) $(16,961) $ (4,196) $(10,244)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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PEERLOGIC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED TOTAL
------------------------------------- ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT WARRANTS DEFICIT INCOME (LOSS) DEFICIT
-------- -------- -------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 147 $ 8,953 $ 1,292 $(15,290) $ - $ (5,045)
Issuance of detachable warrants in
conjunction with short-term notes - - 3,825 - - 3,825
Net loss - - - (6,573) - (6,573)
-------- -------- -------- -------- -------- --------
Balances at December 31, 1998 147 8,953 5,117 (21,863) - (7,793)
Issuance of detachable warrants in
conjunction with short-term notes - - 2,545 - - 2,545
Exchange of debt and equity
securities for convertible
Series B Preferred stock (Note 8) (53) (3,373) (7,520) 18,725 - 7,832
Issuance of Common Stock
to employee 1,633 163 - - - 163
Issuance of Common Stock
in acquisition 1,867 191 - - - 191
Net loss - - - (16,961) - (16,961)
Foreign currency
translation adjustment - - - - 54 54
-------- -------- -------- -------- -------- --------
Balances at December 31, 1999 3,594 5,934 142 (20,099) 54 (13,969)
Fully-vested options granted to
consultants in exchange for
services (unaudited) - 111 - - - 111
Common Stock issued upon
exercise of warrants (unaudited) 50 142 (142) - - -
Common Stock issued upon
exercise of options (unaudited) 1 3 - - - 3
Foreign currency translation
adjustment (unaudited) - - - - 6 6
Net loss (unaudited) - - - (10,244) - (10,244)
-------- -------- -------- -------- -------- --------
Balances at June 30, 2000 (unaudited) 3,645 $ 6,190 $ - $(30,343) $ 60 $(24,093)
-------- -------- -------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 10
PEERLOGIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- -----------------------
1998 1999 1999 2000
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,573) $(16,961) $ (4,196) $(10,244)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of assets 300 3,507 1,090 2,777
Amortization and finance charges related to warrants 3,064 2,913 1,463 -
Compensation expense for options granted
to consultants - - - 111
Acquired in-process research and development - 1,830 - -
Loss on disposal of property and equipment 19 - - -
Changes in assets and liabilities, net of acquisitions:
Accounts receivable 490 (3,889) (836) (1,510)
Other current assets 259 (246) (748) (409)
Other assets (8) (3) - (25)
Accounts payable 438 2,079 505 7
Accrued liabilities 93 2,933 639 (138)
Deferred revenues 525 2,348 424 1,421
-------- -------- -------- --------
Net cash used in operating activities (1,393) (5,489) (1,659) (8,010)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (845) (1,151) (652) (719)
Acquisition of software license (675) - - -
Cash paid for business combinations - (5,854) - -
-------- -------- -------- --------
Net cash used in investing activities (1,520) (7,005) (652) (719)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds received from issuance of Convertible
Preferred Stock - 7,661 - 8,231
Deposit received for unissued Convertible Preferred Stock - 2,000 - -
Options exercised for cash - - - 3
Proceeds from notes payable 4,559 5,440 2,138 -
Principal payments on notes payable (1,400) - - -
-------- -------- -------- --------
Net cash provided by financing activities 3,159 15,101 2,138 8,234
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 246 2,607 (173) (495)
Cash and cash equivalents at beginning of period 64 310 310 2,917
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 310 $ 2,917 $ 137 $ 2,422
-------- -------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING THE PERIOD
Interest paid $ 297 $ 68 $ - $ -
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND
INVESTING ACTIVITIES:
Borrowing for business unit acquisition $ - $ 8,000 $ - $ 8,000
Conversion of liabilities to Convertible Preferred Stock $ - $ 7,442 $ - $ 5,185
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 11
PEERLOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS JUNE 30, 1999 AND 2000 IS UNAUDITED)
NOTE 1 - ORGANIZATION AND BUSINESS:
PeerLogic, Inc. (the "Company"), the LiveContent Company(TM), creates
smart application networks for eBusiness. eBusiness occurs when a company
exchanges real-time information with its customers, suppliers, employees,
consultants and other business partners. Smart application networks integrate
all of a company's existing software applications to create automated eBusiness
relationships that include security, end-to-end transactional integrity and
policy-based solutions. The Company's modular suite of proven components,
LiveContent, enables customers to integrate a vast array of corporate
information to create and enhance online business relationships.
The Company was incorporated in February 1986. Initially, the Company
generated revenues exclusively through consulting contracts with third parties.
From 1992 until August 1998, the Company generated revenues from a single
product, PIPES Platform(TM). Beginning in August 1998, the Company commenced an
acquisition strategy that focused on eBusiness and enterprise application
integration businesses and technologies. While the Company still sells its PIPES
Platform, the majority of revenues are currently generated from products
purchased in various acquisitions. On August 7, 1998, the Company acquired the
exclusive worldwide license rights of DAIS technology, customer integration
software, from International Computers Limited ("ICL"). This software uses
Common Object Request Broker Architecture ("CORBA") that allows a wide variety
of software applications to interact and share information.
The Company acquired ICL's i500 business unit on March 31, 1999. The
i500 Enterprise Directory Server is a central organizing system that provides a
global view of all available software resources, profiles, content models,
policies, rules and container, as well as the configuration and management
information needed to ensure maximum availability. On July 22, 1999, the Company
acquired Fisher Technology Group, Inc.'s UniKix software, which creates an
environment where IBM mainframe-developed mission critical enterprise systems
can operate on lower cost networked computers running Microsoft Windows NT and
UNIX, yet at higher performance levels. On August 19, 1999, the Company acquired
Lincoln Software Limited ("Lincoln"), a company that developed, marketed, and
supported a software product called ENGINEER. This product includes a software
code generator that produces eBusiness applications in the software language
Java, enabling non-technical users to build an eBusiness application using a
graphical model of business processes and transactions. On April 7, 1999, the
Company incorporated Nihon PeerLogic, K.K., a wholly owned subsidiary organized
under the laws of Japan and headquarter in Tokyo. The purpose of this subsidiary
is to facilitate sales of PeerLogic products in Japan.
The Company has recurring losses from operations. At June 30, 2000 and
December 31, 1999, the Company had a working capital deficiency of $9.8 million
and $15.1 million, respectively. Accumulated deficit at June 30, 2000 and
December 31, 1999 was $30.3 million and $20.1 million, respectively. The Company
has sustained operations through a combination of borrowings from related
parties and private equity financing. The borrowings have primarily been in the
form of short-term notes payable to related parties. In addition, the Company
has breached its agreement with ICL relating to repayment of an $8 million note
payable (Note 5). In March 2000, the Company closed a financing round through
the sale of 3.7 million shares of Series D convertible preferred stock (Note 7).
If additional financing is not obtained, the Company may be unable to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
The Company executed a 70 to 1 reverse stock split for all common
shares, Series A preferred shares and warrants outstanding as of July 21, 1999.
All share information in these financial statements has been retroactively
adjusted to reflect this stock split.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation. The Company's
subsidiaries include Fisher Technology Group, Inc., PeerLogic Limited, and
Lookforth Limited.
7
<PAGE> 12
PEERLOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS JUNE 30, 1999 AND 2000 IS UNAUDITED)
(CONTINUED)
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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
UNAUDITED INTERIM RESULTS
The interim financial statements as of June 30, 2000 and for the six
months ended June 30, 1999 and 2000 are unaudited. In the opinion of management,
these interim financial statements have been prepared in the same basis as the
audited financial statements and reflect all adjustments, consisting only of
normal, recurring adjustments necessary for the fair presentation of the results
of interim periods. The financial data and other information disclosed in these
notes to the financial statements for the related periods are unaudited. The
results of the interim periods are not necessarily indicative of the results to
be expected for future periods.
REVENUE RECOGNITION
In October, 1997, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP 97-2"), which the Company has adopted for transactions
entered into during the fiscal year beginning January 1, 1998. SOP 97-2 provides
guidance for recognizing revenue on software transactions and supercedes
Statement of Position No. 97-1, "Software Revenue Recognition." In December
1998, the AICPA issued Statement of Position No. 98-9 ("SOP 98-9")
"Modifications of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions." SOP 98-9 extends the effective date of SOP 98-4 and
provides additional interpretative guidance. SOP 98-9 is effective for fiscal
years beginning after March 15, 1999. During 1999, the Company adopted SOP 98-9.
Adoption of the provisions of SOP 97-2 did not have a material impact on revenue
recognition during 1998 and 1999, respectively.
The Company's revenues are derived from the license of software products
under software license agreements, support agreements, and related services.
Revenue is recognized for the various contract elements based upon
vendor-specific objective evidence of fair value for each element.
The Company's standard end-user product license agreement provides for
an initial fee to use the product in perpetuity on a specified computer. Revenue
from license fees is recognized when persuasive evidence of an agreement exists,
delivery of the product has occurred, no significant company obligations with
regard to implementation or integration exist, the fee is fixed or determinable
and collectibility is probable.
The Company also receives license fees from resellers based on the
revenues generated by the reseller. License fees from resellers are typically
based on a percentage of the Company's list price. Reseller agreement may
include an initial nonrefundable advance royalty which is payable upon the
signing of the contract and license fees from based on the value of copies of
the Company's products distributed by the reseller. Guaranteed license fees from
resellers are recognized as revenue upon shipment if there are no, or
insignificant, post-delivery obligations, and due within one year.
Non-guaranteed per-copy license fees from resellers are initially deferred and
are recognized when they are reported as sold by the reseller.
Revenue from support agreements is generally deferred and amortized on a
straight-line basis over the life of the contract.
The Company provides consulting and training services to its customers.
Revenues from such services are generally recognized as the services are
performed.
8
<PAGE> 13
PEERLOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS JUNE 30, 1999 AND 2000 IS UNAUDITED)
(CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
SEGMENT AND GEOGRAPHIC INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
Statement establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. In accordance with the provisions of SFAS No. 131, the Company has
determined that it does not have separately reportable operating segments. The
Company operates in one principal business segment across domestic and
international markets. Substantially all of the Company's operating results and
identifiable assets are in the United States.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is calculated on a straight-line basis over the
estimated useful lives of the assets, which range from three to five years.
Leasehold improvements are amortized over the shorter of the estimated useful
life or the term of the lease. Ordinary maintenance and repairs are charged to
expense as incurred; major improvements are capitalized.
Depreciation and amortization expense for the year ended December 31,
1998 and 1999 and the six months ended June 30, 1999 and 2000 was $206,000,
$348,000, $110,000 and $412,000, respectively.
INTANGIBLE ASSETS
Intangible assets are presented at cost, net of accumulated
amortization. Amortization is computed using the straight line method over the
estimated useful life of the assets, which is generally three years. At each
balance sheet date, the Company assesses the value of recorded intangible assets
for possible impairment based upon a number of factors including turnover of the
acquired workforce and the undiscounted value of expected future operating cash
flows.
Amortization expense for the year ended December 31, 1998 and 1999 and
the six months ended June 30, 1999 and 2000 was $94,000, $3,159,000, $784,000
and $2,365,000, respectively.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach in
accordance with SFAS No. 109, "Accounting for Income Taxes". The asset and
liability approach 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.
CAPITALIZATION OF INTERNAL-USE SOFTWARE COSTS
Effective January 1, 1999, the Company adopted Statement of Position
("SOP") 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance on accounting for
computer software developed or obtained for internal use including the
requirement to capitalize specified costs and amortization of such costs. The
adoption of SOP 98-1 did not have a material effect on the Company's results of
operations, financial position or cash flows.
9
<PAGE> 14
PEERLOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS JUNE 30, 1999 AND 2000 IS UNAUDITED)
(CONTINUED)
SOFTWARE DEVELOPMENT COSTS
Software development costs are included in research and development and
are expensed as incurred. After technological feasibility is established,
material software development costs are capitalized. The capitalized cost is
then amortized on a straight-line basis over the estimated product life, or in
proportion to the current revenues to total projected product revenues,
whichever is greater. To date, the period between achieving technological
feasibility, which the Company has defined as the establishment of a working
model which typically occurs when the beta testing commences, and the general
availability of such software has been short and software development costs
qualifying for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs.
ADVERTISING EXPENSE
The Company expenses the cost of advertising as incurred. The Company
incurred approximately $59,000, $551,000, $162,000 and $856,000 in advertising
costs for the years ended December 31, 1998 and 1999 and for the six-months
ended June 30, 1999 and 2000, respectively.
CERTAIN RISKS AND UNCERTAINTIES
The Company's products are concentrated in the software industry which
is characterized by rapid technological advances, changes in customer
requirements and evolving regulatory requirements and industry standards. Any
failure by the Company to anticipate or to respond adequately to technological
developments in its industry, changes in customer requirements or changes in
regulatory requirements or industry standards, or any significant delays in the
development or introduction of products or services, could have a material
adverse effect on the Company's business and operating results.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily of cash and cash
equivalents, accounts receivable which are generally not collateralized. The
Company limits its exposure to credit loss by placing it cash and cash
equivalents with high quality financial institutions. The Company performs
ongoing credit evaluations of its customers' financial condition to determine
the need for an allowance for doubtful accounts. At December 31, 1998, 1999 and
June 30, 2000, the Company's allowance for doubtful accounts was $0 and $110,000
and $369,000, respectively. Because of their short-term nature, the carrying
value of all financial instruments approximate their respective fair value.
For the year ended December 31, 1998, the revenues of one customer
accounted for 83% of total revenues. For the year ended December 31, 1999, the
revenues of four customers accounted for 46% of total revenues. For the six
months period ended June 30, 2000, the revenues of five customers accounted for
36% of total revenues.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation
arrangements in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and complies
with the disclosure provisions of Statement of Financial Accounting Standards
("SFAS") No. 123. "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of the Company's stock and the exercise price of
the option. The Company accounts for equity instruments issued to nonemployees
in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services."
10
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PEERLOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS JUNE 30, 1999 AND 2000 IS UNAUDITED)
(CONTINUED)
The Company recognized stock-based compensation of $111,000 (included in
Common Stock) for the six month period ended June 30, 2000 for fully-vested
options granted to consultants. Of this amount, $43,000 was allocated to general
and administrative expense, $47,000 was allocated to sales and marketing expense
and $21,000 was allocated to research and development expense.
COMPREHENSIVE INCOME
Effective January 1998, the Company adopted the provisions of SFAS No.
130, Reporting Comprehensive Income. This statement requires companies to
classify items of other comprehensive income by their nature in the financial
statements and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Company had no comprehensive
income items for fiscal year 1998, but had an accumulated foreign exchange
translation gains of $54,000 at December 31, 1999 and $60,000 at June 30, 2000.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The functional currency of each foreign subsidiary is the local
currency. The monetary assets and liabilities of the Company's foreign
subsidiaries are translated at the exchange rate in effect at the balance sheet
date, while all other assets, liabilities and shareholders' equity, income and
expense items are translated at the average annual rate of exchange for the
period. The resulting unrealized gains and losses are included in the component
of shareholders' equity designated as "accumulated comprehensive income."
Realized gains and losses from foreign currency transactions are included in
interest and other expense.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative financial
instruments and hedging activities. Because the Company currently holds no
derivative instruments and does not engage in hedging activities, the Company
does not expect the adoption of SFAS No. 133 to have a material impact on its
financial position, results of operations or cash flows. The Company will adopt
SFAS No. 133 as required by SFAS No. 137, "Deferral of the Effective Date of the
FASB Statement No. 133," beginning with the third quarter of fiscal 2000.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). This
Interpretation clarifies the definition of employee for purposes of applying
Accounting Practice Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. To the extent that FIN 44 covers events occurring during
the period after December 15, 1998, or January 12, 2000, but before the
effective date of July 1, 2000, the effects of applying this Interpretation are
recognized on a prospective basis from July 1, 2000.
11
<PAGE> 16
PEERLOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS JUNE 30, 1999 AND 2000 IS UNAUDITED)
(CONTINUED)
NOTE 3 - BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1998 1999 2000
-------- -------- --------
(UNAUDITED)
PROPERTY AND EQUIPMENT, NET:
<S> <C> <C> <C>
Furniture and fixtures $ 84 $ 85 $ 85
Leasehold improvements 33 33 35
Computer equipment 1,867 3,034 3,740
-------- -------- --------
1,984 3,152 3,860
Less: Accumulated depreciation and amortization (1,759) (2,102) (2,496)
-------- -------- --------
$ 225 $ 1,050 $ 1,364
======== ======== ========
INTANGIBLE ASSETS, NET:
Software license $ 675 $ 675 $ 675
Acquired technology - 4,762 4,762
Acquired customer base - 3,740 3,740
Assembled workforce - 1,847 1,847
Trademarks - 1,439 1,439
Goodwill - 822 822
-------- -------- --------
675 13,285 13,285
Less: Accumulated amortization (94) (3,246) (5,611)
-------- -------- --------
$ 581 $ 10,039 $ 7,674
======== ======== ========
</TABLE>
NOTE 4 - INCOME TAXES:
The Company incurred net losses for each of the two years ended December
31, 1999 and accordingly, no provision for income taxes has been recorded. The
tax benefit is reconciled to the amount computed using the federal statutory
rate as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------
1998 1999
------- -------
<S> <C> <C>
Federal statutory benefit $(2,235) $(5,190)
States taxes, net of federal benefit (177) (783)
Future benefits not currently recognized 2,412 5,973
------- -------
$ - $ -
======= =======
</TABLE>
At December 31, 1999, the Company had approximately $19.8 million of
federal and $8.1 million of state net operating loss carryforwards available to
offset future taxable income which expire at various dates through 2019. Under
the Tax Reform Act of 1986, the amount of and benefits from net operating loss
carryforwards may be impaired or limited in certain circumstances. At December
31, 1999, the Company had $902,000 and $605,000 in federal and state research
and development credit carryforwards, respectively. 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.
12
<PAGE> 17
PEERLOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS JUNE 30, 1999 AND 2000 IS UNAUDITED)
(CONTINUED)
Deferred tax assets and liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
-------- --------
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $ 5,858 $ 7,215
Research credits 1,044 1,507
Accruals and allowances 407 3,907
Other 30 (69)
-------- --------
Net deferred tax assets 7,339 12,560
Valuation allowance (7,339) (12,560)
-------- --------
$ - $ -
-------- --------
</TABLE>
The Company has incurred losses for the years ended December 31, 1998
and 1999. Management believes that based on the history of such losses and other
factors, the weighted of available evidence indicates that it is more likely
than not that the Company will not be able to realize its deferred tax assets
and thus a full valuation allowance has been recorded at December 31, 1998 and
1999.
NOTE 5 - NOTES PAYABLE:
Indebtedness consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1998 1999 2000
------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
7.5% note payable to ICL $ - $ 8,000 $ 8,000
9.0% notes payable to shareholders due within one year 5,098 175 -
7.0% convertible notes payable - 3,010 -
------- ------- -------
$ 5,098 $11,185 $ 8,000
------- ------- -------
</TABLE>
NOTES PAYABLE TO ICL
In April 1999, the Company issued an $8 million unsecured note payable
to ICL (the "ICL Note Payable") in conjunction with the Company's purchase of
i500. The ICL Note Payable accrues interest at a rate of seven and one-half
percent per annum and is payable in equal, principal and interest, monthly
installments of $249,000 commencing on August 1, 1999 until June 30, 2002, when
the balance of the unpaid principal and accrued interest shall be paid in full.
To date no payment has been made and the Company is in default of the note. The
Company is contending certain representations that were made by ICL with regard
to the ICL-Fujitsu i500 license. ICL's attorneys have demanded payment in full
of the note and accrued interest.
13
<PAGE> 18
PEERLOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS JUNE 30, 1999 AND 2000 IS UNAUDITED)
(CONTINUED)
NOTES PAYABLE TO SHAREHOLDERS
During May 1997 through July 1999, the Company issued $10.6 million in
unsecured six months and one year notes payable to its shareholders, which bear
interest at 9.0% and expire in varying amounts throughout 1998 and 1999. In
connection with these notes payable, the Company issued warrants as described in
Note 9. As the Company defaulted on many of these notes as they became due, the
note holders were given additional warrants to extend the notes payables. The
fair value of the warrants, as determined at their respective letter of
issuance, was $1,007,000 and $624,000 in 1998 and 1999, respectively. As
described in the Note 8, notes with a face value of $8.4 million outstanding
were canceled in July 1999 in conjunction with the recapitalization of the
Company.
CONVERTIBLE NOTES PAYABLE
During September 1999 through December 1999, the Company issued
approximately $3.2 million in unsecured, one year convertible notes payables to
shareholders, which bear interest at 9.0%. During March 2000, the principle and
interest on the notes payable were converted into D series preferred stock at
the $3.58 Series D preferred stock price.
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases its facilities and certain furniture under
noncancelable operating lease agreements which expire through 2005. The terms of
the leases 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 rent expense in excess of amounts paid. Operating lease rental expense
for the years ended December 31, 1998 and 1999, totaled $388,000 and $699,000,
respectively. Rental expense totaled $230,000 and $848,000 for the six months
ended June 30, 1999 and 2000.
Future minimum lease payments and commitments under noncancelable
agreements are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
----------------
<S> <C>
2000 (Remaining six months) $1,735
2001 760
2002 182
2003 131
2004 128
2005 146
------
Total $3,082
------
</TABLE>
CONTINGENCIES
From time to time, the Company may have certain contingent liabilities
that arise in the ordinary course of its business activities. The Company
accrues contingent liabilities when it is probable that future expenditures will
be made and such expenditures can be reasonably estimated. In the opinion of
management, there are no pending claims of which the outcome is expected to
result in a material adverse effect on the financial position or results of
operations or cash flows of the Company.
14
<PAGE> 19
PEERLOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS JUNE 30, 1999 AND 2000 IS UNAUDITED)
(CONTINUED)
NOTE 7 - CONVERTIBLE PREFERRED STOCK:
The Company's Articles of Incorporation designate and authorize
15,381,000 shares of no par value preferred stock ("Convertible Preferred
Stock").
The Convertible Preferred stock is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
SHARES SHARES NET LIQUIDATION
AUTHORIZED OUTSTANDING PROCEEDS VALUE
---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Series A 2,913 7 387 $ 5
Series B 8,250 8,250 9,570 21,367
Series C 28 7 1 5
------- ------- ------- -------
Balance at December 31, 1999 11,191 8,264 9,958 21,377
Series D (unaudited) 4,190 3,747 13,416 13,416
------- ------- ------- -------
Balance at June 30,
2000 (unaudited) 15,381 12,011 23,374 $34,793
------- ------- ------- -------
</TABLE>
The rights and preferences of the Series A, B, C and D Convertible Preferred
Stock are as follows:
VOTING
Each holder of Series A, B, C and D Convertible Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which the shares of the Series A, B and C Convertible Preferred Stock could
be converted.
REDEMPTION
In the event of any voluntary or involuntary merger or consolidation of
the Company with another entity or a sale of substantially all of the assets,
holders of Series A, Series B, Series C and Series D Convertible Preferred Stock
shall be entitled to certain cash liquidation preferences as discussed below.
LIQUIDATION
In the event of any voluntary liquidation, dissolution or winding up of
the Company's operations, holders of the Series A Convertible Preferred Stock
are entitled to a per share distribution, in preference to holders of Common
Stock and any other Series of Convertible Preferred Stock. Holders of the Series
B Convertible Preferred Stock are entitled to a per share distribution in
preference to Common Stock and Series C and D Convertible Preferred Stock.
Holders of the Series C Convertible Preferred Stock are entitled to a per share
distribution in preference to the Common Stock and Series D Convertible
Preferred Stock. Holders of the Series D Convertible Preferred Stock are
entitled to a per share distributions in preference to the Common Stock. For the
purposes of conversion, a liquidation, dissolution or wind-up shall include a
merger or consolidation or a sale of all or substantially all of the assets of
the corporation, unless there is no effective change in control.
DIVIDENDS
The holders of Convertible Preferred Stock are entitled to participate
in dividends on Common Stock, when and if declared by the board of directors,
based on the number of shares of Common Stock held on an as converted basis. No
dividends on Convertible Preferred Stock or Common Stock were declared by the
board in 1998, 1999 and 2000.
15
<PAGE> 20
PEERLOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS JUNE 30, 1999 AND 2000 IS UNAUDITED)
(CONTINUED)
The distribution to the holders of Series A, B, C and D Convertible
Preferred Stock is equal to the greater of (a) the liquidation value (as
adjusted for share combinations, split and the like) plus an amount equal to all
declared but unpaid dividends on such shares, and (b) the pro rata amount per
share of the entire assets of the Company available for distribution to the
holders of Preferred shares and Common shares, based on the total number of
shares of Common stock outstanding (assuming conversion into Common Stock of all
Series of Preferred Stock).
Liquidation value of Series A, B, C and D Convertible Preferred Stock
are $0.7552, $2.59, $0.7552 and $3.58, respectively.
CONVERSION
All outstanding series of Convertible Preferred Stock may be converted
at the option of the holder or automatically convert upon certain specified
events. Holders of Series A, Series B and Series C Convertible Preferred Stock
may convert their shares into Common Stock at any time. The conversion rate is
determined by dividing the original series issue prices by the conversion price
for the series to be converted. The original series issue prices for Series A,
Series B, Series C and Series D Convertible Preferred Stock are $0.7552, $1.25,
$0.7552 and $3.58, respectively. The initial conversion price for Series A,
Series B and Series C Convertible Preferred Stock are in each case the original
series issue price for such series. Thus, assuming that there is no share split
or other reorganization that affects the conversion price of the Convertible
Preferred Stock, each outstanding share is convertible into one share of Common
Stock. The conversion price of Series A, Series B and Series C Convertible
Preferred Stock adjusts proportionately in the event of a split or subdivision
of the Common Stock or other distribution payable in additional shares of Common
Stock or if the number of shares of Common Stock is decreased by a combination
of the outstanding shares of Common Stock so that, in effect, the holders of
shares of Convertible Preferred Stock maintain the same equity position and
voting rights in the Company. The Series A, Series B, Series C and Series D are
currently convertible into 7,311, 8,250,000, 7,044, and 3,747,000 shares of
Common Stock, respectively.
Each share of Series A, Series B and Series C Convertible Preferred
Stock shall automatically be converted into shares of Common Stock at the
conversion price at the time in effect for the respective series immediately
upon (i) a firm commitment underwritten initial public offering of Common Stock
which results in net proceeds of at least $25,000 or (ii) approval of holders of
a majority of outstanding shares of the respective series of Convertible
Preferred Stock.
NOTE 8 - MULTIPLE SECURITY EXCHANGE:
On July 21, 1999, the Board of Directors adopted a plan to raise $7.7
million in cash in anticipation of planned business acquisitions. In order to
raise the cash, the Company offered a selected group of investors the
opportunity to purchase Series B Convertible Preferred Stock. The participating
investors did not include management or employees. As a condition to closing the
Series B round of Convertible Preferred Stock, the existing investors were
required to exchange multiple securities (common shares, warrants, notes and
Series A preferred shares) to Series B Convertible Preferred Stock at
predetermined rates. In addition, these participating investors were generally
required to buy additional Series B Convertible Preferred Stock at a share price
of $1.25.
The predetermined rates to exchange the securities are set forth. The
participating investors could exchange Common Stock, Series A Convertible
Preferred Stock and warrants at a rate of 1:1. Upon election to exercise the
warrants in exchange for Series B Convertible Preferred Stock, the Company
waived the warrant exercise price, ranging between $0.10 to $0.50. In addition,
the participating investors had to agree to forgive all of their notes payables
outstanding and accrued interest as of July 21, 1999.
The multiple security exchange was recorded at the fair value of the
Series B Convertible Preferred Stock and the difference between the fair value
and historical basis of the securities exchanged has been recorded as a
reduction of the Company's accumulated deficit.
16
<PAGE> 21
PEERLOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS JUNE 30, 1999 AND 2000 IS UNAUDITED)
(CONTINUED)
The amount and carrying value of the securities exchanged were the
following: 53,009 Common Stock amounting to $3.2 million; 1,560,295 warrants for
Common Stock amounting to $7.5 million; 34,302 Series A Convertible Preferred
Stock with a carrying value of $1.8 million; notes payable with a carrying value
of $7.4 million, net of unamortized discount of $933,000; and, accrued interest
on the notes payable amounting to $486,000. In addition to exchanging all of the
above securities, the participating investors were required to make a cash
contribution of $7.7 million. In return for the securities exchanged and the
cash contribution, the investors received 8,250,000 Series B Convertible
Preferred Stock.
Other non-participating investors were allowed to convert Common Stock
into Series C Convertible Preferred Stock. In this exchange, 7,044 Common shares
with a carrying value of $114,000 were exchanged for 7,044 Series C Convertible
Preferred Stock. This transaction was recorded consistently with the accounting
for the Series B Convertible Preferred Stock.
NOTE 9 - STOCKHOLDERS' EQUITY:
The Company's Articles of Incorporation designate and authorize
30,000,000 shares of no par value common stock ("Common Stock").
COMMON STOCK
The Company has reserved shares of Common Stock for issuance as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
2000
-------
(UNAUDITED)
<S> <C>
Conversion of Series A $ 7
Conversion of Series B 8,250
Conversion of Series C 7
Conversion of Series D 3,747
Common stock issued 3,645
Exercise of options under the Stock Option Plan 2,534
Undesignated 11,810
-------
$30,000
-------
</TABLE>
The above shares do not include 766,000 shares reserved for future
issuance of options under the Company's Stock Option Plan.
STOCK OPTION PLAN
The Company has established a stock option plan (the "Option Plan")
which is described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for fixed price options granted under this plan,
and accordingly, no compensation cost has been recognized for options granted to
employees.
Had compensation cost for the Company's Option Plan been determined
based on the minimum value at the grant dates for awards under the Option Plan
consistent with the method prescribed by SFAS 123, the Company's net loss would
have been increased to $6,610,000, $16,990,000 and $13,886,000 for 1998, 1999
and 2000, respectively.
17
<PAGE> 22
PEERLOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS JUNE 30, 1999 AND 2000 IS UNAUDITED)
(CONTINUED)
For purposes of determining the SFAS 123 compensation expense, the
minimum value of each option grant is estimated on the grant date using the
minimum value option-pricing model with the following weighted average
assumptions used for grants during 1998 and 1999: no dividend yield, risk free
interest rates ranging between 4.23% and 6.4% and expected life ranging between
three and five years.
Because additional option grants are expected to be made each year, the
above pro forma disclosures are not representative of pro forma effects of
reported net income for future years.
The Option Plan authorizes the Option Committee of the Board of
Directors to grant incentive and nonqualified stock options to employees and
others who provide services to the Company. The Option Plan provides for the
issuance of up to 3,300,000 options and expires in 2002.
Options granted under the Option Plan are exercisable for periods not
exceeding 10 years from the date of grant. Options generally must be issued at
prices not less than 100% and 85%, for incentive and nonqualified stock options,
respectively, of the estimated fair value of the stock on the date of grant as
determined by the Board of Directors. Options granted to shareholders who own
greater than 10% of the outstanding stock at the time of grant are exercisable
for periods not exceeding five years from the date of grant, and must be issued
at prices not less than 110% of the estimated fair value of the stock on the
date of grant.
Options granted under the Option Plan generally vest ratably over four
years following the date of grant, although the Board may issue options that
vest over shorter periods. At December 31, 1999, 7,364 shares are available for
future grant under the Option Plan. On February 7, 2000, the Company increased
the reserve for future grants under the Option Plan to 3.3 million. The
following table summarizes the status and activity under the Option Plan as of
December 31, 1997, 1998 and 1999 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999 JUNE 30, 2000 (UNAUDITED)
----------------------- ---------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ------- ------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 32 $ 0.84 33 $ 0.82 35 $ 0.57
Granted 6 $ 0.50 12 $ 0.50 2,773 $ 1.88
Exercised -- $ -- (1) $ 0.50 (1) $ 1.54
Canceled (5) $ 0.55 (9) $ 1.00 (273) $ 1.86
-- -- -----
Outstanding at end of year 33 $ 0.82 35 $ 0.57 2,534 $ 1.86
-- -- -----
Weighted-average fair value of each
option granted during the year $-- $-- $1.385
</TABLE>
18
<PAGE> 23
PEERLOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS JUNE 30, 1999 AND 2000 IS UNAUDITED)
(CONTINUED)
The following table summarizes the information about stock options
outstanding and exercisable as of June 30, 2000 (unaudited):
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED-
RANGE OF AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE
PRICE OUTSTANDING LIFE PRICE
--------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
$0.33-$0.50 22 6.25 $0.40
$0.55-$1.75 10 5.04 $0.88
$ 1.88 2,502 9.25 $1.88
----------- ---------
$0.33-$1.88 2,534 9.22 $1.87
----------- ---------
</TABLE>
At June 30, 2000 and December 31, 1999, 483,793 and 19,279 options were
exercisable, respectively.
COMMON STOCK WARRANTS
The following table summarizes warrant transaction activity for December
31, 1997, 1998 and 1999, and for each of the two years then ended (in thousands,
except per share amounts).
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999 JUNE 30, 2000 (UNAUDITED)
---------------------- ------------------------- ------------------------
RANGE OF RANGE OF RANGE OF
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ---------- -------- ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 149 $0.10-0.50 649 $0.10-0.50 72 $0.10-0.50
Granted 500 $0.10-0.50 983 $ 0.10 -- $--
Exercised -- $-- -- $0.10-0.50 (50) $--
Exchanged -- $-- (1,560) -- -- $--
Canceled -- $-- -- $-- (22) $--
--- ------ ---
Outstanding at end of year 649 $0.10-0.50 72 $0.10-0.50 -- $--
--- ------ ---
</TABLE>
During 1998 and 1999, detachable warrants to purchase the Company's
Common Stock were issued in connection with short-term bridge financing in the
form of notes to shareholders. The warrants issued in 1998 and 1999 entitled the
holders to purchase a total of 386,000 shares and 379,000 shares, respectively,
at exercise prices ranging from $0.10-$0.50 per share. The value ascribed to the
warrants at the time of issuance was $3.8 million in 1998 and $2.5 million in
1999. This amount has been recorded and was amortized over the term of the
related notes. All warrants were immediately exercisable at the date of grant.
The Company has recorded $2.1 million of interest expense related to the
warrants in 1998 and $2.3 million in 1999.
In addition, 114,285 and 604,285 bonus warrants were issued during 1998
and 1999 respectively for past due notes to shareholders. The Company recorded
financing charges of $1.0 million in 1998 and $624,000 in 1999 for the fair
value of the bonus warrants at the time the warrants were issued.
Warrants outstanding at the time of the multiple security exchange were
allowed to exchange their warrants for Series B Convertible Preferred Stock on a
1:1 basis.
19
<PAGE> 24
PEERLOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS JUNE 30, 1999 AND 2000 IS UNAUDITED)
(CONTINUED)
NOTE 10 - EMPLOYEE BENEFITS:
The Company's employees are eligible to participate in the Company's
401(k) defined contribution plan. The Company may make a discretionary match of
up to 6% of the participant's salary to the participant's account. No such
contributions were made in 1998, 1999 or 2000.
NOTE 11 - ACQUISITIONS:
On March 31, 1999, the Company acquired the i500 business unit of
International Computer Limited ("ICL"). The i500 business unit develops and
markets an electronic directory service that enables corporations to store,
access and manage information in a secure manner. The Company acquired the i500
business unit in exchange for an $8.0 million note payable to ICL. This
acquisition included the unit's employees, technology, fixed assets, existing
contracts, design, development, manufacturing, marketing, distribution and
licensing activities. The i500 employees became employees of PeerLogic, Ltd. The
acquisition was accounted for using the purchase method of accounting. The
Company allocated $7.8 million of the purchase price to existing technology
existing customer base, assembled workforce and goodwill based on an independent
third-party valuation.
On July 22, 1999, the Company acquired Fisher Technology Group, Inc.
("FTG"), a wholly owned subsidiary of Fisher Scientific, Inc., for $5 million in
cash. FTG's software product, formerly called UniKix, enables companies to
migrate large software applications running on mainframe systems to an open
system environment (i.e. UNIX and/or NT). Companies using this software can
rapidly integrate these applications at greatly reduced cost. In January 2000,
the UniKix software product was renamed LiveContent TRANS(TM). The acquisition
was accounted for using the purchase method of accounting. The Company allocated
$3.3 million of the purchase price to existing technology and trademarks based
on an independent third-party valuation.
On August 19, 1999, the Company acquired Lincoln Software Limited
("Lincoln"), a company headquartered in Macclesfield, England. The Company
acquired Lincoln in exchange for $832,000 in cash, issued 1,866,564 shares of
its Common Stock and assumed an insignificant amount of stock options granted by
Lincoln to its employees. Lincoln's flagship product, formerly called ENGINEER,
provides a comprehensive set of application development tools to fully integrate
hand coded, or "legacy" applications with packaged, or "shrink-wrapped"
solutions. This software also allows programmers to use visual guides rather
than complicated code to create modern, Java-based programs. The Lincoln
employees became employees of PeerLogic, Ltd. In January 2000, the ENGINEER
software was renamed LiveContent VISION(TM). The acquisition was accounted for
using the purchase method of accounting. The Company allocated $1.5 million of
the purchase price to existing technology, assembled workforce and goodwill
based on an independent third-part valuation.
The following unaudited pro forma information presents the Company's
consolidated results of operations for the year ended December 31, 1999, as if
the acquisitions had been consummated at the beginning of the period. The pro
forma consolidated results of operations include certain pro forma adjustments,
including the amortization of intangible assets (in thousands):
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Net revenues $ 17,423
Net loss $(22,049)
</TABLE>
20
<PAGE> 25
PEERLOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS JUNE 30, 1999 AND 2000 IS UNAUDITED)
(CONTINUED)
NOTE 12 - SUBSEQUENT EVENTS (UNAUDITED):
On August 8, 2000, Critical Path Inc., a global provider of
business-to-business Internet messaging services, signed a definitive agreement
to acquire PeerLogic, Inc. The acquisition is anticipated to close in the third
quarter of 2000. Upon consummation of the acquisition, Critical Path, Inc. will
issue 6.4 million shares of its common stock and assume all outstanding
PeerLogic options.
In July and August 2000, the Company issued a total of 1,109,000 options
to purchase shares of Common Stock to employees with an exercise price of $10.
Additionally, during July 2000, the Company issued 115,000 options to purchase
shares of Common Stock to non-employees with an exercise price of $10 per share.
21
<PAGE> 26
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 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 an independent valuation using a combination of methods, including an
income approach for the acquired customer base 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 (approximately
109,000 shares) and other acquisition related expenses of approximately
$100,000. Of the total purchase price, approximately $500,000 was allocated to
property and equipment, and the remainder was allocated to intangible assets,
including customer base ($2.1 million), assembled workforce ($400,000) and
goodwill ($17.1 million). The fair value of the acquired intangible assets,
excluding goodwill, was capitalized and is being amortized over their estimated
useful lives of two to three years. Goodwill is being amortized using the
straight-line method over three years.
On July 21, 1999, the Company acquired dotOne Corporation ("dotOne"), a
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 an independent 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 (approximately
640,600 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 legal and financial advisory services. 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 fair value of
the acquired intangible assets, excluding goodwill, was capitalized and is being
amortized over their estimated useful lives of three to five years. Goodwill is
being amortized using the straight-line method over three years.
On August 31, 1999, the Company acquired Amplitude Software Corporation
("Amplitude"), a 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 an independent 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 (approximately 4.1
million shares), assumed stock options with a fair value of $22.0 million, and
other acquisition related expenses of approximately $6.1 million, consisting
primarily of payments for legal and financial advisory services. 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 fair value of the acquired intangible assets,
excluding goodwill, was capitalized and is being amortized over their estimated
useful lives of two to four years. Goodwill is being amortized using the
straight-line method over four years.
<PAGE> 27
CRITICAL PATH, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
On December 6, 1999, the Company acquired FaxNet Corporation ("FaxNet"), a
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 an independent valuation using a combination of methods, including an
income approach for the acquired existing technology and the customer base, and
a 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 (approximately 2.8
million shares), assumed stock options with a fair value of $7.3 million,
assumed subordinated notes of $4.2 million, other liabilities of $7.5 million
and other acquisition related expenses of approximately $7.9 million, consisting
primarily of payments for legal and financial advisory services. 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 fair value of the acquired
intangible assets, excluding goodwill, was capitalized and is being amortized
over their estimated useful lives of three to eight years. Goodwill is amortized
using the straight-line method over eight years.
On January 19, 2000, the Company acquired ISOCOR Corporation ("ISOCOR"), a
leading supplier of Internet messaging, directory and meta-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 an independent valuation using a combination of methods, including an
income approach for the acquired in-process research and development and
existing technologies and the customer base, and a replacement cost approach for
the value of the assembled workforce.
The total purchase price of approximately $274.9 million consisted of $226.7
million of the Company's Common Stock (approximately 5.0 million shares),
assumed stock options with a fair value of $37.2 million, and other acquisition
related expenses of approximately $11.0 million, consisting primarily of
payments for legal and financial advisory services. Of the total purchase price,
$18.7 million was allocated to net tangible assets, and the remainder was
allocated to intangible assets, including in-process research and development
technology ($200,000), existing technology ($18.3 million), customer base ($9.8
million), assembled workforce ($3.4 million) and goodwill ($224.5 million). The
acquired in-process research and development was recognized as research and
development expense in the period the transaction was consummated. The fair
value of the other acquired intangible assets, excluding goodwill, was
capitalized and is being amortized over their estimated useful lives of three
years. Goodwill is being amortized using the straight-line method over three
years.
On March 8, 2000, the Company acquired The docSpace Company ("docSpace"), a
provider of Web-based services for secure file delivery, storage and
collaboration. 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 an independent valuation using a combination of methods, including a cost
approach for the acquired existing technology, and a replacement cost approach
for the value of the assembled workforce.
The total purchase price of approximately $258.0 million consisted of $30.0
million of cash, approximately $218.0 million of the Company's Common Stock
(approximately 3.8 million shares), and other acquisition related expenses of
approximately $10.0 million, consisting primarily of payments for legal and
financial advisory services. Of the total purchase price, approximately $7.1
million was allocated to net tangible liabilities, and the remainder was
allocated to intangible assets, including existing technology ($21.5 million),
assembled workforce ($500,000) and goodwill ($243.1 million). The fair value of
the acquired intangible assets, excluding goodwill, was capitalized and is being
amortized over their estimated useful lives of three years. Goodwill is
amortized using the straight-line method over three years.
<PAGE> 28
CRITICAL PATH, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
On March 30, 2000, the Company acquired RemarQ Communities, Inc. ("RemarQ"), a
provider of Internet collaboration services for corporations, Web portals and
Internet service providers. 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 an independent valuation using a combination of methods,
including cost and royalty savings approaches for the value of the acquired
existing technology, cost and income approaches for the value of the customer
base, and a cost approach for the value of the assembled workforce.
The total purchase price of approximately $267.6 million consisted of $259.3
million of the Company's Common Stock (3.9 million shares), assumed stock
options with a fair value of $7.7 million, and other acquisition related
expenses of approximately $600,000, consisting primarily of payments for legal
and financial advisory services. Of the total purchase price, approximately $7.8
million was allocated to net tangible assets and the remainder was allocated to
intangible assets, including existing technology ($4.5 million), assembled
workforce ($3.3 million), customer base ($5.9 million) and goodwill ($246.1
million). The fair value of the acquired intangible assets, excluding goodwill,
was capitalized and is being amortized over the estimated useful lives of two to
three years. Goodwill is being amortized using the straight-line method over
three years.
On September 26, 2000, the Company acquired PeerLogic, Inc. ("PeerLogic"), a
vendor of directory and data integration software. 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 an independent valuation using a
combination of methods, including an income approach for the acquired in-process
research and development and existing technologies and the customer base, and a
replacement cost approach for the value of the assembled workforce.
Upon consummation of the PeerLogic acquisition, the Company recognized $3.5
million representing the value attributable to acquired in-process research and
development in certain enterprise application integration software that had not
yet reached technological feasibility and had no alternative future use. The
value was determined using an income approach, by estimating the future net
cash flows of the acquired in-process research and development over its
estimated useful life and discounting the net cash flows back to their present
value. The discount rate included a factor that took into account the
uncertainty surrounding the successful development of the acquired in-process
research and development. The acquired in-process research and development is
expected to become commercially available in 2001.
The total purchase price of approximately $445.1 million consisted of $374.7
million of the Company's Common Stock (6.4 million shares), assumed stock
options with a fair value of $63.4 million, other acquisition related expenses
of approximately $4.0 million, consisting primarily of payments for legal and
financial advisory services, and the Company's previous $3.0 million minority
investment in PeerLogic. Of the total purchase price, approximately $22.4
million was allocated to the net tangible liabilities, approximately $28.3
million was allocated to unearned compensation related to the unvested portion
of assumed stock options, and the remainder was allocated to intangible assets,
including in-process research and development ($3.5 million), existing
technology ($30.3 million), assembled workforce ($7.4 million), customer base
($5.5 million) and goodwill ($392.5 million). The unvested portion of the
assumed stock options was capitalized and is being amortized over the estimated
remaining service period of two years. The fair value of other acquired
intangible assets, excluding goodwill, was capitalized and is being amortized
over their estimated useful lives of three years. Goodwill is being amortized
using the straight-line method over three years.
The accompanying unaudited pro forma condensed consolidated balance sheet gives
effect to these consummated acquisitions as if they had occurred on June 30,
2000, by combining the balance sheet of the Company with the balance sheet of
PeerLogic at June 30, 2000. The acquisitions of Fabrik, dotOne, Amplitude,
FaxNet, ISOCOR, docSpace and RemarQ were consummated prior to June 30, 2000;
accordingly, the Critical Path historical condensed consolidated balance sheet
at June 30, 2000, includes the allocated purchase price for these acquisitions.
The accompanying unaudited pro forma condensed consolidated statement of
operations gives effect to these consummated acquisitions as if they had
occurred on January 1, 1999, by consolidating the results of operations of:
- Fabrik for the period from January 1, 1999, to May 25, 1999, with the
results of operations of the Company for the year ended December 31,
1999.
- dotOne for the period from January 1, 1999, to July 20, 1999, with the
results of operations of the Company for the year ended December 31,
1999.
<PAGE> 29
CRITICAL PATH, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
- Amplitude for the period from January 1, 1999, to August 30, 1999, with
the results of operations of the Company for the year ended December 31,
1999.
- FaxNet for the period from January 1, 1999, to December 5, 1999, with the
results of operations of the Company for the year ended December 31,
1999.
- ISOCOR for the year ended December 31, 1999, and the period from January
1, 2000, to January 18, 2000, with the results of operations of the
Company for the year ended December 31, 1999, and six months ended June
30, 2000, respectively.
- docSpace for the twelve months ended January 31, 2000, and the period
from February 1, 2000, to March 8, 2000, with the results of operations
of the Company for the year ended December 31, 1999, and six months ended
June 30, 2000, respectively.
- RemarQ for the year ended December 31, 1999, and the period from January
1, 2000, to March 29, 2000, with the results of operations of the Company
for the year ended December 31, 1999, and six months ended June 30, 2000,
respectively.
- PeerLogic for the year ended December 31, 1999, and the period from
January 1, 2000, to June 30, 2000, with the results of operations of the
Company for the year ended December 31, 1999, and six months ended June
30, 2000, respectively.
The unaudited pro forma condensed consolidated statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of January 1, 1999, and should not be
construed as being representative of future operating results.
<PAGE> 30
CRITICAL PATH, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 2000
----------------------------------------------------------------------------
Historical Adjustments
---------------------------- ---------------------------
Critical Path PeerLogic (a) (b) Pro Forma
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 291,309 $ 2,422 $ -- $ (4,000) $ 289,731
Restricted cash 325 -- -- -- 325
Accounts receivable, net 33,306 5,449 (875) -- 37,880
Other current assets 7,706 699 -- -- 8,405
----------- ----------- ----------- ----------- -----------
Total current assets 332,646 8,570 (875) (4,000) 336,341
Investments 26,326 -- (3,000) -- 23,326
Notes receivable from officers 977 -- -- -- 977
Property and equipment, net 73,555 1,364 -- -- 74,919
Intangible assets, net 1,159,083 7,674 (7,674) 421,317 1,580,400
Other assets 9,260 66 -- -- 9,326
----------- ----------- ----------- ----------- -----------
Total assets $ 1,601,847 $ 17,674 $ (11,549) $ 420,817 $ 2,025,289
=========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 30,714 $ 2,706 $ (875) $ -- $ 32,545
Accrued expenses 16,496 3,057 -- -- 19,553
Deferred revenue 14,552 4,630 (376) -- 18,806
Capital lease and other obligations,
current 9,637 -- -- -- 9,637
Note payable, current -- 8,000 -- -- 8,000
----------- ----------- ----------- ----------- -----------
Total current liabilities 71,399 18,393 (1,251) -- 88,541
Convertible subordinated notes payable 300,000 -- -- -- 300,000
Capital lease and other obligations,
long term 8,198 -- -- -- 8,198
----------- ----------- ----------- ----------- -----------
Total liabilities 379,597 18,393 (1,251) -- 396,739
----------- ----------- ----------- ----------- -----------
Commitments and contingencies
Minority interest in consolidated subsidiary 325 -- -- -- 325
Mandatorily redeemable convertible
preferred stock -- 23,374 (23,374) -- --
----------- ----------- ----------- ----------- -----------
379,922 41,767 (24,625) -- 397,064
----------- ----------- ----------- ----------- -----------
Shareholders' equity
Common stock 1,677,303 6,190 (6,190) 438,100 2,115,403
Notes receivable from shareholders (1,180) -- -- -- (1,180)
Unearned compensation (119,353) -- -- (28,300) (147,653)
Accumulated deficit, including other
comprehensive income (334,845) (30,283) 30,283 (3,500) (338,345)
----------- ----------- ----------- ----------- -----------
Total shareholders' equity 1,221,925 (24,093) 24,093 409,800 1,631,725
----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity $ 1,601,847 $ 17,674 $ (532) $ 409,800 $ 2,025,289
=========== =========== =========== =========== ===========
</TABLE>
Refer also to the accompanying Notes to Pro Forma Condensed Consolidated
Financial Information.
<PAGE> 31
CRITICAL PATH, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31, 1999
--------------------------------------------------------------------------------------------
Historical
--------------------------------------------------------------------------------------------
Critical Path Fabrik dotOne Amplitude FaxNet ISOCOR
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net revenues(a) $ 16,157 $ 4,506 $ 1,978 $ 5,109 $ 13,557 $ 35,521
Cost of net revenues(a) (21,557) (1,627) (1,288) (2,063) (10,674) (12,347)
--------- --------- --------- --------- --------- ---------
Gross profit (loss) (5,400) 2,879 690 3,046 2,883 23,174
--------- --------- --------- --------- --------- ---------
Operating expenses
Sales and marketing 13,811 1,625 374 4,752 8,234 14,908
Research and development 7,682 527 154 1,615 2,579 5,461
General and administrative 14,051 1,500 800 2,596 3,421 4,533
Amortization of intangible
assets(d) 32,259 -- -- -- -- --
Acquisition-related retention
bonus(c) 3,587 -- -- -- -- 594
Acquired in-process research
and development(d) -- -- -- -- -- --
Stock-based expenses(e) 46,460 -- 21 -- -- --
--------- --------- --------- --------- --------- ---------
Total operating expenses 117,850 3,652 1,349 8,963 14,234 25,496
--------- --------- --------- --------- --------- ---------
Loss from operations (123,250) (773) (659) (5,917) (11,351) (2,322)
Interest and other income, net 7,061 (109) (238) 50 (581) 470
Interest expense (752) -- -- -- -- --
Foreign exchange loss -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net loss $(116,941) $ (882) $ (897) $ (5,867) $ (11,932) $ (1,852)
========= ========= ========= ========= ========= =========
Pro forma net loss per share(f)
Net loss per share - basic and
diluted $ (3.93)
=========
Weighted average shares -
basic and diluted 29,770
=========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1999
-------------------------------------------------------------------------
Historical
-------------------------------------------------------------------------
docSpace RemarQ PeerLogic Adjustments Pro Forma
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues(a) $ 119 $ 6,597 $ 11,783 $ (825) $ 94,502
Cost of net revenues(a) -- (3,810) (2,013) 825 (54,554)
--------- --------- --------- --------- ---------
Gross profit (loss) 119 2,787 9,770 -- 39,948
--------- --------- --------- --------- ---------
Operating expenses
Sales and marketing 2,423 5,996 7,285 -- 59,408
Research and development 893 3,909 5,383 -- 28,203
General and administrative 9,040 4,403 4,779 -- 45,123
Amortization of intangible
assets(d) -- -- 3,159 493,422 528,840
Acquisition-related retention
bonus(c) -- -- -- 18,241 22,422
Acquired in-process research
and development(d) -- -- 1,830 3,700 5,530
Stock-based expenses(e) 322 719 -- 14,731 62,253
--------- --------- --------- --------- ---------
Total operating expenses 12,678 15,027 22,436 530,094 751,779
--------- --------- --------- --------- ---------
Loss from operations (12,559) (12,240) (12,666) (530,094) (711,831)
Interest and other income, net (114) 635 -- -- 7,174
Interest expense -- (809) (4,295) -- (5,856)
Foreign exchange loss (50) -- -- -- (50)
--------- --------- --------- --------- ---------
Net loss $ (12,723) $ (12,414) $ (16,961) $(530,094) $(710,563)
========= ========= ========= ========= =========
Pro forma net loss per share(f)
Net loss per share - basic and
diluted $ (13.08)
=========
Weighted average shares -
basic and diluted 54,337
=========
</TABLE>
Refer also to the accompanying Notes to Pro Forma Condensed Consolidated
Financial Information.
<PAGE> 32
CRITICAL PATH, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000
-------------------------------------------------------------------------------------------
Historical
-------------------------------------------------------------------------------------------
Critical Path ISOCOR docSpace RemarQ PeerLogic Adjustments Pro Forma
------------- --------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues(a) $ 58,048 $ 1,393 $ 31 $ 1,985 $ 11,312 $ (653) $ 72,116
Cost of net revenues(a) (41,013) (550) (512) (956) (2,173) 653 (44,551)
--------- --------- --------- --------- --------- --------- ---------
Gross profit (loss) 17,035 843 (481) 1,029 9,139 -- 27,565
--------- --------- --------- --------- --------- --------- ---------
Operating expenses
Sales and marketing 30,947 805 464 1,398 6,716 -- 40,330
Research and development 15,536 294 205 909 3,092 -- 20,036
General and administrative 14,098 282 4,909 1,014 6,765 -- 27,068
Amortization of intangible
assets(d) 136,685 -- -- -- 2,365 114,207 253,257
Acquisition-related retention
bonus(c) 6,372 29 -- -- -- -- 6,401
Acquired in-process research
and development(d) -- -- -- -- -- -- --
Stock-based expenses(e) 18,645 -- 34 175 -- 3,824 22,678
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses 222,283 1,410 5,612 3,496 18,938 118,031 369,770
--------- --------- --------- --------- --------- --------- ---------
Loss from operations (205,248) (567) (6,093) (2,467) (9,799) (118,031) (342,205)
Interest and other income, net 5,954 39 14 170 -- -- 6,177
Interest expense (5,533) -- (48) (239) (445) -- (6,265)
Minority interest in net income of
consolidated subsidiary (325) -- -- -- -- -- (325)
Foreign exchange loss -- 164 31 -- -- -- 195
--------- --------- --------- --------- --------- --------- ---------
Loss before income taxes $(205,152) $ (364) $ (6,096) $ (2,536) $ (10,244) $(118,031) $(342,423)
Provision for income taxes (1,799) (100) -- -- -- -- (1,899)
--------- --------- --------- --------- --------- --------- ---------
Net loss $(206,951) $ (464) $ (6,096) $ (2,536) $ (10,244) $(118,031) $(344,322)
========= ========= ========= ========= ========= ========= =========
Pro forma net loss per share(f)
Net loss per share - basic and
diluted $ (3.79) $ (5.16)
========= =========
Weighted average shares -
basic and diluted 54,581 66,693
========= =========
</TABLE>
Refer also to the accompanying Notes to Pro Forma Condensed Consolidated
Financial Information.
<PAGE> 33
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,
RemarQ and PeerLogic 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 and transactions in consolidation and
certain intangible assets that were not acquired by the Company.
(b) To allocate the purchase price, assuming the acquisition occurred on June
30, 2000.
<TABLE>
<CAPTION>
Fabrik dotOne Amplitude FaxNet ISOCOR
------ ------ --------- ------ ------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Cash paid $ 12,000 $ 17,500 $ 45,000 $ 20,000 $ --
Value of stock issued 8,000 35,000 141,300 152,400 226,700
Value of stock options assumed -- 3,200 22,000 7,300 37,200
Assumption of subordinated notes *** -- -- -- 4,200 --
Estimated acquisition costs 100 1,300 6,100 15,400 11,000
-------------------------------------------------------------------
Total purchase price $ 20,100 $ 57,000 $ 214,400 $ 199,300 $ 274,900
===================================================================
Net tangible assets/(liabilities)* $ 500 $ (1,700) $ 4,400 $ 1,600 $ 18,700
Intangible assets:
In-process technology** -- -- -- -- 200
Assembled workforce 400 1,500 3,800 900 3,400
Customer base 2,100 4,600 600 5,500 9,800
Existing technology -- 600 4,100 6,100 18,300
Patented/proprietary technology -- -- -- -- --
User base -- -- -- -- --
Goodwill 17,100 52,000 201,500 185,200 224,500
-------------------------------------------------------------------
Total Intangible assets 19,600 58,700 210,000 197,700 256,200
Unearned compensation**** -- -- -- -- --
-------------------------------------------------------------------
Total purchase price allocation $ 20,100 $ 57,000 $ 214,400 $ 199,300 $ 274,900
===================================================================
</TABLE>
<TABLE>
<CAPTION>
docSpace RemarQ PeerLogic Total
-------- ------ --------- -----
(Amounts in thousands)
<S> <C> <C> <C> <C>
Cash paid $ 30,000 $ -- $ 3,000 $ 127,500
Value of stock issued 218,000 259,300 374,700 1,415,400
Value of stock options assumed -- 7,700 63,400 140,800
Assumption of subordinated notes *** -- -- -- 4,200
Estimated acquisition costs 10,000 600 4,000 48,500
------------------------------------------------------
Total purchase price $ 258,000 $ 267,600 $ 445,100 $1,736,400
======================================================
Net tangible assets/(liabilities)* $ (7,100) $ 7,800 $ (22,400) $ 1,800
Intangible assets:
In-process technology** -- -- 3,500 3,700
Assembled workforce 500 3,300 7,400 21,200
Customer base -- 5,900 5,500 34,000
Existing technology 21,500 4,500 30,300 85,400
Patented/proprietary technology -- -- -- --
User base -- -- -- --
Goodwill 243,100 246,100 392,500 1,562,000
------------------------------------------------------
Total Intangible assets 265,100 259,800 439,200 1,706,300
Unearned compensation**** -- -- 28,300 28,300
------------------------------------------------------
Total purchase price allocation $ 258,000 $ 267,600 $ 445,100 $1,736,400
======================================================
</TABLE>
--------------
* The purchase prices associated with the acquisitions of Fabrik, dotOne,
Amplitude, FaxNet, ISOCOR, docSpace, and RemarQ are included in the
historical condensed consolidated balance sheet components of Critical
Path as of June 30, 2000.
** In-process research and development totaling $3.7 million was expensed
in the periods in which the related acquisitions were consummated.
Accordingly, the in-process research and development is reflected in the
Pro Forma Condensed Consolidated Balance Sheet as an addition to
Accumulated Deficit of $3.5 million, in connection with the PeerLogic
acquisition. The in-process research and development charge associated
with the acquisition of ISOCOR is included in the historical condensed
consolidated balance sheet components of Critical Path as of June 30,
2000.
*** The Company assumed certain liabilities, including subordinated notes
issued by FaxNet in October 1999.
**** Unearned stock-based compensation, resulting from unvested employee
stock options assumed in connection with the acquisition of PeerLogic,
was recorded in the period in which the acquisition was consummated.
Accordingly, the unearned compensation is reflected in the Pro Forma
Condensed Consolidated Balance Sheet as an addition to Unearned
Compensation of $28.3 million related to the PeerLogic acquisition. The
related employee stock-based compensation expense is being recognized
over the estimated remaining service period of two years.
(c) Pursuant to the purchase agreements between Critical Path and dotOne,
Amplitude, FaxNet, ISOCOR, and docSpace, Critical Path was obligated to
establish retention bonuses totaling $20.7 million to provide incentives
for certain employees of these companies to continue their employment
with Critical Path. Payment of bonuses to the listed employees will occur
one year following the date of acquisition, unless the listed employees
voluntarily terminate their employment with the Company prior to the
respective acquisition's one-year anniversary. The aggregate amount of
the eligible bonuses is reduced for the bonus amount allocated to each
former dotOne, Amplitude, FaxNet, ISOCOR, and docSpace employee that
chooses to terminate his or her employment with the Company.
<PAGE> 34
CRITICAL PATH, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
A ratable share of the adjusted eligible bonus amount will be accrued and
charged to compensation expense over the respective 12-month period
commencing on the date the bonuses are granted.
(d) To record amortization of intangible assets associated with the
acquisitions of Fabrik, dotOne, Amplitude, FaxNet, ISOCOR, docSpace,
RemarQ and PeerLogic as follows: assembled workforce totaling $21.2
million over the estimated period of benefit of two to three years,
acquired customer base totaling $34.0 million over the estimated period
of benefit of one to eight years, existing technology totaling $85.4
million over the estimated period of benefit of one to four years,
goodwill totaling $1,562.0 million over the estimated period of benefit
of three to eight years. The in-process research and development was
expensed in the periods in which the acquisitions of ISOCOR ($200,000)
and PeerLogic ($3.5 million) were consummated.
(e) To record stock-based compensation expense associated with the
acquisition of PeerLogic. Unearned stock-based compensation of $28.3
million was recorded in the period in which the PeerLogic acquisition was
consummated and is being amortized over the estimated remaining service
period of two years.
(f) Pro forma basic net loss per share for the year ended December 31, 1999,
and the six months ended June 30, 2000, 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 basic and diluted net loss per share is
computed by dividing the net loss for the period by the weighted average
number of Common and Potential Common shares outstanding during the
period if their effect is dilutive. Potential Common Shares are comprised
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 and the
Company's $300 million five year, 5.75% Convertible Subordinated Notes
due April 1, 2005. The adjustment to historical weighted average shares
outstanding result from inclusion of actual shares issued in conjunction
with the consummated acquisitions, 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
106,000 shares), 10% of the stock consideration to Amplitude
(approximately 410,700 shares), 9.3% of the stock consideration to FaxNet
(approximately 266,100 shares), 11.86% of stock consideration to docSpace
(approximately 486,000 shares), 20% of stock consideration to RemarQ
(approximately 796,600 shares), and 10% of stock consideration to
PeerLogic (approximately 640,000 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 and
included for the six months ended June 30, 2000.
<PAGE> 35
EXHIBIT INDEX
<TABLE>
Exhibits Description
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<S> <C>
23.1 Consent of Independent Accountants
</TABLE>
