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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 000-25331
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CRITICAL PATH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 911788300
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
532 FOLSOM STREET, 94105
SAN FRANCISCO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 808-8800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK
(TITLE OF CLASS)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $153,619,078 as of March 15, 2001, based on the
closing price of the Common Stock as reported on The Nasdaq Stock Market for
that date. There were 74,294,434 shares of the Registrant's Common Stock issued
and outstanding on March 15, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of Critical Path, Inc.'s definitive Proxy Statement for
the 2001 Annual Meeting of Shareholders anticipated to be held on June 6, 2001,
are incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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CRITICAL PATH, INC.
INDEX
PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 16
Item 3. Legal....................................................... 16
Item 4. Submission of Notes to a Vote of Security Holders........... 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 18
Item 6 Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 21
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 39
Item 8. Financial Statements and Supplemental Data.................. 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 42
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 42
Item 11. Executive Compensation...................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 44
Item 13. Certain Relationships and Related Party Transactions........ 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 45
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that are based on current
expectation, estimates and projections about our industry, management's beliefs,
and certain assumptions made by management. The words "anticipate," "expect,"
"intend," "plan," "believe," "seek" and "estimate" and similar expressions are
intended to identify forward-looking statements. These statements are not
guarantees of future performance and actual actions or results may differ
materially. These statements are subject to certain risks, uncertainties and
assumptions that are difficult to predict, including those discussed below in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Additional Factors That May Affect Future Operating Results" and
noted in the documents incorporated herein by reference. We undertake no
obligation to update publicly any forward-looking statements as a result of new
information, future events or otherwise, unless required by law. Readers should,
however, carefully review the risk factors included in other reports or
documents filed by us from time to time with the Securities and Exchange
Commission, particularly the Quarterly Reports on Form 10-Q.
This Annual Report on Form 10-K includes trademarks and registered
trademarks of Critical Path. Products or service names of other companies
mentioned in this Annual Report on Form 10-K may be trademarks or registered
trademarks of their respective owners.
COMPANY OVERVIEW
Critical Path is a leading global provider of Internet messaging
infrastructure products and services for corporate enterprises and service
providers around the world. Our Internet messaging infrastructure, which
includes messaging, directory and security products and services, allows our
customers to benefit from the rapidly increasing number of messaging
applications that are driving the complexity and scale of messaging. Our
integrated portfolio of messaging services enables our customers to provide
messaging solutions to their customers and employees via desktop, wireline or
wireless medium. As messaging becomes increasingly directory-centric, Critical
Path's mission-critical directory products provide unified identity and security
management across our customers' new and existing messaging and eBusiness
initiatives. We believe our Internet messaging infrastructure products and
services position us to serve our customers with highly scalable, mission
critical messaging, directory and security.
Our Internet messaging infrastructure integrates a rich selection of
messaging products and services, including email messaging, wireless messaging
and secure file delivery services, calendaring, and directory and meta-directory
components providing a framework for unified user profile management and secure
access control. We offer our messaging solutions through both outsourced
services, where we host the software on our servers, and insourced server
software packages, where the customer licenses software to run on its own
servers. In addition, a customer may choose to midsource, a combination of
outsourced and insourced solutions. We believe our combination of outsourcing,
midsourcing and insourcing options provides our customers with continuity of
relationship and technology across a variety of offerings and user populations.
We provide products and services, both on a licensed and hosted basis, to
customers located around the world. We have offices, operations and customers in
North America, Europe, Latin America and Asia.
Examples of customers across our major target markets include:
CORPORATE ENTERPRISES: AFLAC, Bechtel, BNP Paribas SA, Bristol-Myers
Squibb, Circuit City, EDS, Federal Express, PricewaterhouseCoopers,
Promus Hotel Corporation, and Texas Instruments.
WIRELESS AND TELECOMMUNICATIONS PROVIDERS: Aether Systems, British
Telecom, Comverse Technology, Corio, Debitel, France Telecom, Global
Crossings, i3 Mobile, Liberty Surf, Logica, MCI WorldCom, Motient,
OmniSky, Omnitel, SK Telecom, Tiscali, and Verizon.
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INTERNET-CENTRIC COMPANIES: Amazon.com, eBay, E*TRADE, ICQ, Intuit,
Netian, Network Solutions (VeriSign), Yahoo!, and ZipNet.
POSTAL AUTHORITIES: AnPost, Deutsche Post, Dutch Post, Finland Post, La
Poste, Posta Hungary, PosteCom Italia, Royal Mail ViaCode, and Swedish
Post.
We have a number of distribution channel relationships with companies,
including British Telecom, Bull and MCI WorldCom. Our directory services are
leveraged through partnerships with the leading Internet security and access
management vendors including Entrust and Verisign. In June 2000, we formed a
joint venture, Critical Path Pacific, with Mitsui, NTT Communications, and NEC
to serve the Japanese and other Asian markets. As a result of our global focus,
more than 38% of our revenue in 2000 came from outside the United States.
We believe email is pervasive as a communications tool and is shifting from
being simply an application to a delivery platform, or infrastructure, for
mission-critical messaging and transactions. As message volumes, complexity and
security requirements of transactions increase, and as mobile users demand
access and seamless identity management across laptops, cell phones, hand held
devices and pagers, corporations struggle to keep pace with the rapid rate of
change with a scarcity of skilled technology resources. Service providers also
serve increasingly mobile customers and seek to grow their business models
beyond basic connectivity and email with value-added services and commerce
opportunities. Anticipating these trends, we have expanded our range of products
and services and the delivery options we offer domestic and international
customers. Our Internet messaging infrastructure delivers carrier-class
standards-based messaging with rich extensions for wireless device support,
collaborative applications and secure delivery. Additionally, through the
acquisitions of ISOCOR and PeerLogic, we built and solidified our position as a
leading directory services provider, able to help our customers unify identity
management and security access across multiple platforms, devices, and
enterprises.
Carrier-class reliability, scalability and security are fundamental as
global organizations move an increasing percentage of business communications
and transactions to the standards-based Internet. Our messaging infrastructure
is designed to support the scalability and performance demands of hundreds of
millions of mailboxes, transactions and users with the "uptime" and reliability
metrics required for mission-critical eBusiness. We currently are servicing
widespread, global organizations with the most demanding messaging needs.
Many companies attempting to manage expanding and increasingly
sophisticated messaging systems lack the resources and expertise to
cost-effectively implement, maintain, scale, enhance and service the hardware
and software components of their messaging infrastructure. Our flexible
deployment or "allsourcing" strategy provides flexibility and value to our
customers by giving them the option of using our hosted services, licensing our
software to run on their own hardware, or selecting a combination of both. Our
product and service solutions enable customers to improve messaging performance,
ensure security and reliability in their messaging, reduce the cost of providing
messaging services and focus on other aspects of their businesses.
As the Internet continues to grow and profoundly change the way people
conduct business and communicate, we believe we are positioned to participate in
and benefit from the rapidly evolving communications and messaging environment.
We believe our category leadership, mega-scale technology, proven customer
benefits, flexible deployment, strategic partnerships and strong customer
relationships provide us with our competitive edge.
We were incorporated as a California corporation in 1997. Our principal
executive offices are located at 532 Folsom Street, San Francisco, California
94105. Our telephone number is (415) 808-8800 and our web site is located at
www.cp.net.
RECENT DEVELOPMENTS
Restatement and Revision of Unaudited Financial Results and Litigation. On
February 2, 2001, we issued a press release announcing that we believed that our
previously announced unaudited financial results for the fourth quarter of 2000
may have been materially misstated, the Board of Directors had formed a
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special committee to conduct an investigation into the matter, and our president
and vice president of worldwide sales had been placed on administrative leave
related to the matter. On February 15, 2001, we announced that, based on the
preliminary results of the investigation being conducted, we would revise our
previously announced unaudited financial results for the fourth quarter of 2000
and were reviewing certain specific transactions that were reported as revenue
during the third quarter of 2000. During February and March 2001, the
investigation by the special committee of the Board of Directors was completed,
we completed our internal review, and our auditors completed the annual audit.
Beginning on February 2, 2001, a number of securities class action
complaints were filed against us, certain of our current and former officers and
directors, and our independent accountants, in the United States District Court
for the Northern District of California. Additionally, beginning on February 5,
2001, we were named as a nominal defendant in a number of derivative actions,
purportedly brought on our behalf, filed in the Superior Court of the State of
California.
In February 2001, the Securities and Exchange Commission issued a formal
order of investigation of our company and certain unidentified individuals
associated with us with respect to non-specified accounting matters, financial
reports, other public disclosures and trading activity in our securities. While
we do not know the current status of the investigation or any possible actions
that may be taken against us as a result, any SEC action against us could harm
our business.
Shareholder Rights Plan. In March 2001, the Board of Directors adopted a
Shareholder Rights Plan. Under this plan, certain Rights will be distributed as
a dividend at the rate of one Right for each share of Critical Path common stock
held by shareholders of record as of the close of business on May 15, 2001. The
Rights Plan is designed to prevent an acquirer from gaining control of Critical
Path without offering a fair and adequate price and terms to all of our
shareholders. The Rights Plan is intended to increase our ability to negotiate
with potential acquiring companies to maximize shareholder value and is not
intended to interfere with takeover offers or other strategic alternatives that
our Board of Directors believes are in the best interests of our shareholders.
The Rights Plan was not adopted in response to any attempt to acquire the
Company.
CP Italia. In March 2001, we purchased the outstanding 27.13% minority
interest in CP Italia for approximately $4.2 million and CP Italia became a
wholly owned subsidiary of Critical Path. At December 31, 2000, we owned a
72.87% interest in CP Italia.
Management Changes. In February 2001, we announced a series of changes in
Critical Path management. David Hayden, our Chairman and a founder, was
appointed Executive Chairman of the Board of Directors and was asked to take a
greater role in the day-to-day operations of the company. A search for a new
Chief Executive Officer currently is ongoing, following the resignation of Doug
Hickey. Diana Whitehead, formerly our Vice President of Engineering and
Operations, was promoted to President, following David Thatcher's resignation
from Critical Path. Additionally, Mari Tangredi, formerly our Vice President of
Corporate Development, was named Executive Vice President of Business
Development, Sales and Professional Services following William Rinehart's
resignation from Critical Path.
Amended Articles of Incorporation. In January 2001, we amended our Articles
of Incorporation to increase our authorized shares of common stock from 150
million to 500 million shares. This increase had been previously approved by our
shareholders at the Annual Meeting of Shareholders held on June 13, 2000.
THE CRITICAL PATH SOLUTION
We deliver Internet messaging infrastructure products and services to
corporate enterprises, wireless and telecommunications providers,
Internet-centric companies and postal authorities. Our technology gives our
customers the ability to better utilize their physical, human and information
assets, by providing feature-rich email, messaging, directory and security
solutions to their customers, partners and employees.
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Our products and services are designed to provide a superior return on our
customers' technology budgets through the following key benefits:
Flexibility and Depth of Offerings. Our customers benefit from
Critical Path's depth of expertise in many areas of Internet messaging
infrastructure, including messaging, directory and security services.
Critical Path delivers access to an entire suite of solutions, leveraged
across an integrated platform. Our customers can deploy Critical Path's
products and services regardless of whether they choose to outsource their
messaging needs to us or license our software to manage their messaging
needs internally or a combination of both.
Broad, Standards-based Infrastructure. Our messaging infrastructure
supports industry standards at the messaging, directory and security
services levels. This standards-based approach allows our customers ease of
integration as they deploy Critical Path's solutions around their existing
environments, as well as the ability to augment and change their use of our
solutions with future developments in their wireless strategies, all within
one centrally managed and administered infrastructure.
Anytime, Anywhere Accessibility. Critical Path's services are designed
to allow administrators and end users to access their email system at any
time anywhere and provide end users with the means to send and receive
messages to and from cellular phones, personal digital assistants, pagers
and other wireless devices. Critical Path's services are compatible with
leading desktop software, and we have developed a web-based email interface
that is compatible with leading web browsers.
Carrier-Class Scalability, Reliability and Security. As messaging
evolves from email as an application to messaging infrastructure that
supports multi-faceted communications and business transactions, we have
designed our hosted and licensed systems for high levels of scalability,
reliability and security.
Critical Path has designed its hosted architecture to support its
service over hundreds of millions of mailboxes across millions of domains.
Our hardware and software infrastructure consists of multiple servers
running software in a manner that balances the use of the servers and
eliminates single points of failure by not dedicating any server or
hardware or network component to a specific domain or mailbox. This
infrastructure allows multiple domain hosting while reducing the amount of
required equipment and capacity. The scalability of our directory and
meta-directory capabilities enables us to provide identity management and
access security to many of the world's largest corporations for intranet
and extranet user populations, and many of the world's largest service
providers, including postal authorities servicing entire countries of
users. Our high performance standards-based directory is used to house
digital certificates in some of the world's largest public key
infrastructure installations where sub-second response times across
thousands of simultaneous queries are demanded.
Our design methodology reduces the number of computer instructions
required to perform common operations, which in turn reduces the risk that
messages will be lost or will not be duplicated in the event of external
system breakdowns such as loss of power or hardware failures. This promotes
high reliability of the electronic information exchange. In addition, we
have network and data center surveillance 24 hours a day, seven days a week
to identify and curtail potential service issues or security breaches.
Critical Path currently maintains six data centers in the United States,
two data centers in Europe and one in Asia.
Lower Total Cost of Ownership. Customers can reduce the total cost of
ownership of their messaging infrastructures through the ability of our
products and services to interoperate with changing standards and scale
with our customers regardless of how they plan to deploy our product and
service solutions. By using our hosted and outsourced solutions, our
customers can avoid the need to lease, buy or continually upgrade existing
hardware and software, or recruit and retain systems engineers and
administrative personnel for their messaging services. Our service is
designed to reduce customers' administrative burden by eliminating the
cycle of purchasing, installing, testing, debugging and deploying messaging
systems.
Allsourcing. We provide customers with great flexibility to solve
their messaging, directory and security infrastructure challenges through
our "allsourcing" strategy, allowing customers access to
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outsource, midsource or insource solutions. Our outsourced messaging
solutions eliminate the need for customers and partners to maintain a core
competency in advanced messaging. Midsourcing and insourcing allow our
customers to choose among the best of Critical Path's offerings, while
taking advantage of their own internal capabilities where appropriate, to
maximize their technology budgets.
Branding and Customer Control. Critical Path's messaging service
solution enables our customers to maintain brand control by allowing
graphical user interfaces to be branded uniquely for each customer.
Critical Path's fully customized web-based "brandable" email product
interface enables our customers to present their messaging solutions in
their own brand image.
PRODUCTS AND SERVICES
Messaging Solutions. Critical Path offers a wide range of email, wireless
and secure delivery messaging solutions for corporate enterprises and service
providers. Our primary messaging products and services are described below:
- InScribe(TM) Email Messaging is an outsourced messaging service for
corporate enterprises and service providers. Customers can easily layer
other value added services around messaging, including security related
add-ons, such as spam-blocking, anti-virus and secure-socket-layer or
SSL, and collaborative applications such as calendaring and scheduling.
Critical Path's all-inclusive service model pricing includes all
enhancements, upgrades and new standard features. Pricing for email and
other hosted messaging services generally is based on a per mailbox, per
month charge that varies depending on functionality and volume.
- InScribe(TM) Messaging Server, or IMS, provides robust message
management, administrative control and support for the secure message
transfer and access standards as an insourced product for corporate
enterprises and service providers. The architecture is optimized for
corporate enterprises and service provider environments and delivers
superior cost performance at scale as well as easy deployment for faster
time to market. The IMS management center provides the high level of
service necessary for implementing mission-critical messaging systems.
The management center performs remote management of components over
TCP/IP, allowing the administrator to manage multiple sites centrally,
including remote configuration, routing configuration, fault
notification, performance monitoring, system management and message
tracking.
- InScribe(TM) Secure File Services enables large and/or sensitive
documents as well as Internet transactions, to be transported in a
secure, trackable and guaranteed manner using open Internet protocols
rather than via closed value-added networks. Critical Path supports a
broad range of secure delivery environments.
- InOne(TM) Groupware Messaging is a bundled service offering that delivers
a groupware integration of email messaging, address book and calendaring,
which is accessible from web browsers, email clients and wireless
devices.
- InSchedule(TM) Calendaring is designed for corporate enterprises and
service providers and supports both personal calendaring, group
scheduling and public events and programs. InSchedule Calendaring creates
a single source of program and event information for more-informed
planning and streamlined coordination.
- InVoke(TM) Wireless. Cellular network operators, network service
providers and corporations are faced with increasing demands to provide
Internet messaging, business applications and information services to
mobile users. InVoke Wireless provides a broad platform for anytime,
anywhere access across a diverse array of wireless devices and protocols.
- InVoke(TM) Wireless Services.
- WAP Access. Developed to be wireless protocol and device agnostic,
InVoke Wireless allows access over WAP-enabled devices to InScribe
Email Messaging, personal address books, user
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directories and InSchedule(TM) Calendaring. The same information is
also accessible via a web browser or desktop client.
- Wireless Notifications. When email messages are received or when
specific events occur, such as a meeting reminder or inbound fax,
users can choose to be notified via their wireless device. This
notification service also includes a filtering feature, which allows
the user to specify, through a web-based interface, which messages
generate notifications to the wireless device.
- Email Aggregation automatically checks multiple mailboxes for
messages at specified intervals. Copies of all Internet messages are
then forwarded to a single Critical Path mailbox.
- InVoke(TM) SMS Server provides a feature-rich gateway between the short
message service or SMS, of mobile networks and the Internet mail
protocol, SMTP. Direct mapping enables users to send and receive email
messages as well as information services like stock quotes, traffic
reports, sports results and online banking on a wireless device using
the cost-effective SMS service.
Directory Products. As messaging systems and business environments increase
in size and complexity, organizations increasingly need to implement a unified
approach to user profile management and security access across intranet and
extranet applications. Our primary directory products are described below:
- InJoin(TM) Directory Server, our directory product, is designed to store
and disseminate information on both a wide area and local area network
basis. This information may include user or device profile information
including name, location, email address, fax numbers, telephone numbers,
physical mail address and pictures as well as personal digital
certificates. The directory provides a general purpose, standards-based
repository for authentication and authorization information that can be
accessed across the enterprise and extranet, supporting varying levels of
access control to suit the customer's requirements.
- InJoin(TM) Meta-Directory works alongside the InJoin Directory Server and
other directory servers, databases and applications to form a unified
user profile management framework across heterogeneous systems, which can
be updated in real-time. Changes in one system are propagated to other
systems based on policy management rules defined by the system
administrator. For example, an entry in a human resources system that
signals an employee's departure can facilitate the automatic
de-provisioning of the employee's email box and security card access.
Meta-directory saves internal technology departments from the task of
manually updating information such as user profile information and status
changes in disparate systems, as well as significantly reduces security
risks associated with inaccurate and out of date user profile
information.
Professional Services and Customer Support. Our professional services group
provides technical consulting, training, customer support and product
maintenance to assist our customers in maximizing the utilization and
functionality of our messaging, directory and security products.
- InTouch(TM) Professional Services. Critical Path's worldwide professional
services team helps to design customer solutions around Critical Path
products and hosted service offerings. Our creativity, experience and
timely delivery of solutions provides a competitive edge and affords
opportunities to upsell additional services and products to our customer
base. We offer a comprehensive range of migration, installation and
training services. Our professional services consultants design complex
messaging, directory and security infrastructures and work closely with
each customer to deploy optimal solutions based on unique business and
messaging demands. Additionally, our training services group delivers
education and training to our customers and partners. We offer a
comprehensive series of classes and on-line training to provide the
knowledge and skills to successfully deploy, use and maintain our
products and services.
- InTouch(TM) Customer Support and Product Maintenance. Critical Path
believes customer satisfaction is essential for our long-term success and
offers multiple levels of customer assistance 24 hours a day, 7 days a
week. Our technical support provides dependable and timely resolution of
customer technical inquiries and is available by telephone, the web or
email. Critical Path leverages customer support's
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regular interaction with our expanding customer base to identify new
market opportunities and provide product development guidance. In
addition to the technical support, we offer product maintenance to our
midsource and insource customers. Customers are entitled to receive
software updates, upgrades and technical support for an annual
maintenance fee. We notify customers about the availability of regular
maintenance and enhancement software releases via the web, email and our
account management group.
Other Product and Services. Critical Path offers several other products and
services which complement our suite of core products. Our primary complementary
products are detailed below:
- InJoin(TM) TRANS enables companies to re-host their existing legacy and
batch applications to Unix or NT platforms with little or no change to
the application code or data files while incurring cost reductions from
the re-hosting.
- InLine(TM) Project Collaboration enables corporate project teams to
manage, collaborate and track complex projects anytime and anywhere using
a standard web browser.
- InLine(TM) Resource Management helps customers reduce costs and increase
efficiency through the automated scheduling of shared corporate resources
such as conference rooms, audio-visual equipment and services.
- InScribe(TM) Fax Messaging supports the integration of fax sending and
delivery into corporate messaging environments and eBusiness web-based
applications.
- InScribe(TM) Message Boards enable discussion communities to be built
into corporate extranets and intranets and service provider community
sites.
- InScribe(TM) Usenet Service enables customers to provide access to Usenet
newsgroups without hardware and software investments or significant
administrative resources, through our hosted Usenet servers.
TARGET MARKETS, CUSTOMERS AND STRATEGIC PARTNERS
Target Markets
We target corporate enterprises and service providers in the corporate
enterprises, wireless and telecommunications providers, Internet-centric and
postal authority markets.
- Corporate Enterprises. Messaging infrastructure products and services
have become an important concern for businesses. As the workforce
mobilizes, as enterprises become increasingly global, and as critical
business information is leveraged outside the physical building of an
enterprise in eBusiness applications, the need for reliable messaging and
security access controls has expanded significantly.
- Wireless and Telecommunications Providers. Much debate exists over which
wireless platforms, devices and applications will survive over the next
few years. Regardless of the outcome of these debates, wireless users
require a way to access the Internet and send and receive messages via
their application over their chosen platform and through their chosen
device. We believe we provide the necessary access and messaging
capability to provide wireless service providers' customers with superior
performance. Additionally, to increase the value of their own service,
and to grow the value of and retain their customers, telecommunications
providers often add advanced Internet messaging solutions to their
connectivity and data management offerings.
- Internet-Centric Companies. Within the Internet-centric market, we focus
on Internet service providers, or ISPs, application service providers, or
ASPs, and web portals. Internet service providers are companies that
provide access to the Internet via dial-up, ISDN, DSL or broadband
connections. Email and other messaging services have become an integral
part of ISP service offerings. As basic connection services have become
increasingly commoditized, ISPs are aggressively expanding value-added
services, including wireless messaging, unified messaging and mobile
commerce. Application service providers offer application hosting
services and custom application development for corporate customers. Many
ASPs offer email messaging as one of their core applications and can take
advantage
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of Critical Path's outsourced offering and brand-behind-the-brand
strategy to get to market quickly. Portal web sites are attempting to
develop a sense of community to draw large online audiences, encourage
repeat visits, and keep users engaged. Portals are attempting this by
providing users with value-rich content and services, including search
engines, access to applications and services, email and other forms of
advanced messaging.
- Postal Authorities. Postal authorities worldwide use our email solutions
to provide country-wide "email for life" and our directory and
meta-directory products to serve as central repositories of user profile
information that provide security and access control for trusted third
party services for hundreds of millions of postal customers. Postal
authorities including France's La Poste, Germany's Deutsche Post,
Ireland's AnPost and the United Kingdom's Royal Mail ViaCode, have based
their eBusiness platform on Critical Path's products. By leveraging our
highly scalable directory products, countries are able to build an
eBusiness infrastructure capable of extending physical mail delivery
services to the electronic world, while reducing business costs, creating
new revenue streams, and delivering the trackability, security, and
reliability people have come to trust for mission critical information
exchange.
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Customers and Strategic Partners
We currently offer our products and services to millions of end users
across our target markets. The following is a list of various representative
companies with whom Critical Path has service, product or strategic agreements
within their respective categories.
CORPORATE ENTERPRISES WIRELESS AND TELECOMMUNICATIONS PROVIDERS
AFLAC Access360
Amdahl Aether Systems
APL British Telecom
Bechtel Comverse Technology
BNP Paribas SA Corio
Bristol-Myers Squibb Debitel
Canadian Department of National Defense Ericsson
Chevron France Telecom
Circuit City Global Crossings
Cisco Systems i3 Mobile
Continental Airlines Korea Telecom
Deloitte & Touche Liberty Surf
The Dow Chemical Company Logica
EDS MCI WorldCom
Ernst & Young Motient
Federal Express OmniSky
JCPenney Omnitel
KPMG QUALCOMM
Macy's SK Telecom
Exxon Mobil Tiscali
New York Life Verizon
PepsiCo
PricewaterhouseCoopers INTERNET-CENTRIC COMPANIES
Promus Hotel Corporation
SmithKline Beecham 123 India -- Intersoft Technologies
Sun Microsystems Alta Vista
Texas Instruments Amazon.com
Ariba
POSTAL AUTHORITIES eBay
E*TRADE
AnPost ICQ
Deutsche Post Infostrada
Dutch Post Intuit
Finland Post KataWeb
La Poste Netian
Posta Hungary Network Solutions (VeriSign)
PosteCom Italia PSINet
Royal Mail ViaCode SatyamOnline
Swedish Post Yahoo!
ZipNet
A key element of Critical Path's strategy is to expand our distribution
channels through strategic relationships and entities with which we have
contractual reseller or joint sales relationships. Current partners fall into
three categories: telecommunications and Internet infrastructure providers,
wireless infrastructure and service providers, and Internet security and
privilege management infrastructure partners. The following are examples of the
existing strategic relationships that we believe will position Critical Path to
increase market presence and penetration.
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- Telecommunications and Internet Infrastructure Providers. We have sought
reseller relationships with leading telecommunications and Internet
infrastructure providers as a means to develop the growing market for
outsourced messaging. We believe these relationships provide our partners
with vital, value-added services that enable them to retain customers,
grow into new business areas, and increase revenue from their installed
base. Partners in this space include Comverse Technology, Corio, Critical
Path Pacific, ICQ, Network Solutions, and MCI WorldCom.
- Wireless Infrastructure and Service Providers. Critical Path's technology
supports one-way and two-way messaging services to millions of wireless
devices and is one of few companies able to provide end users with the
means to send and receive messages to and from mobile phones, paging and
other wireless devices. We are aggressively targeting the wireless market
across all major segments including ISPs, web portals, wireless original
equipment manufacturers, or OEMs, and other cellular and paging
companies. Partners in this space include Aether, i3 Mobile, Logica,
Motient and Verizon.
- Internet Security and Privilege Management Infrastructure
Partners. Critical Path has established relationships with major public
key infrastructure and Internet security vendors. Our InJoin Directory
Server is included in several of our customers' security solutions.
Additionally, our InJoin Meta-Directory plays a growing role in large
corporation's efforts to develop comprehensive privilege management
systems. By working with leading public key infrastructure, password
management, and provisioning vendors as well as systems integrators that
specialize in this area, we are expanding our channel of large
corporations and enterprises. Partners in this space include Access 360
and Entrust.
SALES AND MARKETING
Sales Strategies
Direct Sales. We maintain our own direct sales force to introduce and
educate prospective customers and partners about our products and services. The
world-wide direct sales group targets the Fortune 1000 and other corporate
customers, telecommunications companies, larger ISPs, large web hosting
companies and high-trafficked web portals. Critical Path currently has members
of its sales group in domestic offices in San Francisco, Los Angeles, Phoenix,
Boston, New York, Atlanta, and other cities throughout the United States.
Internationally, we have members of our sales group in Argentina, Australia,
Brazil, Canada, Denmark, France, Germany, Hong Kong, India, Ireland, Italy,
Japan, Korea, Malaysia, Sweden, Switzerland and the United Kingdom. Within
Critical Path's direct sales group, a subgroup is responsible for retaining and
increasing use by existing customers. This group is critical to ensuring
customer satisfaction and selling existing customers new add-on services as they
become available in our products and services offerings.
Telesales. Our telesales group conducts sales activities over the phone.
The target markets of the telesales group are small to medium-sized businesses,
ISPs, and portals. The majority of the activity generated through this group
results from phone calls that we initiate to prospective customers. The
telesales group also handles outbound calls to a specific list of contacts
provided by our marketing organization. In addition, the telesales group follows
up on leads resulting from web and telephone communication initiated by
prospective customers and qualifies those leads by placing additional calls or
referring them to the direct sales group.
Indirect sales. The indirect sales group uses the sales forces of Critical
Path's partners to offer our products and services to their end users. To gain
market presence and market share overseas, Critical Path teams with leading
distributors, OEM suppliers, resellers, complementary software makers, and
system integrators that have strong industry backgrounds and market presence in
their respective markets and geographic regions. These partners include
Access360, Ameritech, British Telecom, Comverse Technology, Corio, Entrust and
MCI WorldCom. In addition, Critical Path uses partners to resell its products
throughout most of Asia and Latin America.
Marketing Strategy
Marketing. We are focused on media relations and public relations in order
to develop a reputation as an industry leader for Internet messaging
infrastructure products and services. Critical Path intends to continue
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to focus on print and online advertising campaigns for lead generation. We use
event, forum and trade show participation to promote our business-to-business
brand presence. Unlike many Internet related companies, we are not fully
dependent on developing our own brand, as many of our customers frequently want
their own name and branding associated with the Critical Path products or
services we provide them. As such, Critical Path's capital requirements for
brand building are lower than many companies in the Internet space.
TECHNOLOGY
Our core technology expertise is in messaging, directory and security. This
allows us to deliver highly scalable Internet messaging infrastructure composed
of messaging and directory software.
Anchored by our messaging server software, we have a range of highly
scalable, standards-based, messaging software including calendaring and short
message service. Our InScribe Messaging Server is designed for corporate
enterprises and service providers and is capable of serving millions of end
users with email, accessible through our web mail application, wireless
application protocol or WAP, and through standard desktop software using POP or
IMAP protocols. Our web mail application is highly customizable and feature rich
with our own address book. Our InScribe Messaging Server has a distributed
architecture, allowing single or multiple domains to be split over multiple
servers, geographically distributed and setup as clusters. Our InScribe
Messaging Server also has support for security features including
secure-socket-layer, anti-virus and anti-spam.
Directory. Our InJoin Directory Server software includes both directory and
meta-directory products. Our directory software is useful in providing a common
store of user or resource information that can be accessed via standard
lightweight directory access or LDAP and X.500 protocols. With two-phase commit
technology, the directory is reliable, mission critical software that can be
used to store user profiles, digital certificates from public key infrastructure
or PKI software, and eBusiness information. The directory is a distributed
database, meaning that it can be partitioned both logically and physically, and
in order to provide improved performance, replicas can be made and updated
according to replication agreements.
Our InJoin Meta-Directory software keeps user and resource profile
information consistent between disparate messaging and business systems, to
improve security, data integrity and reduce overall administration cost. At the
core of meta-directory technology is the join engine, with plug-ins that connect
to various business systems. Meta-directory is valuable as an integration tool
in large organizations to propagate data between disparate directories,
databases, network operating systems, applications and messaging systems.
Meta-directory is also a valuable provisioning tool for corporate enterprises
and service providers, allowing services to be provisioned across multiple
disparate systems.
Additionally, both directory and meta-directory incorporate security
technology like secure-socket-layer for secure transport and authentication.
Hosted Messaging. With our deep technical expertise in messaging, directory
and security, we also have developed a hosted messaging service that employs our
Critical Path Internet messaging infrastructure to offer messaging applications
and services to a broad range of customers, reaching tens of millions of
accounts and over one million domains. This includes services such as our
InScribe Email Messaging, InOne Groupware Messaging and InScribe Secure File
Services.
Our hosted messaging service can handle high-volume loads for complex and
diverse messaging environments including those required by Internet service
providers, telecommunications providers, web hosting companies, web portals and
corporate enterprises providing accounts to their end-users for activities such
as trading securities, shopping or participating in online communities. We have
developed proprietary load-balancing and messaging software, and uses Oracle
databases for account provisioning and management.
Our hosted messaging service is comprised of multiple groups of servers and
routers acting as a single, virtual point of contact to customers for messaging
services. Our hosted messaging service hardware and software consists of Sun
Microsystems servers running Solaris, Cisco routers, EMC redundant storage
arrays, Veritas software and rack-mounted Intel processor-based servers.
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All aspects of our hosted messaging service are deployed in a redundant
configuration with the goal of ensuring that if any process or system goes down,
another will be available to handle customer traffic seamlessly. This behavior
is called "transparent failover" and is designed to increase the availability of
messaging services to the customer. Our hosted messaging service also includes a
dynamic load-balancing system that acts as proxy servers for firewall safety.
The load balancers are configured in parallel to ensure that if one goes down,
the load is transferred to the remaining systems.
We have created a proprietary account provisioning protocol for account
creation and maintenance. This enables account transitioning from other services
or legacy systems to be bulk-loaded, tested, replicated and deployed on our
service automatically. This protocol addresses a critical time to market issue
by enabling organizations to quickly transition to the new standards-based email
service with minimal down-time and degradation to their existing internal
systems. In addition, it can be used by customers and partners to facilitate
automatic account sign-ups from web sites, typically in less than three minutes.
Data Centers. Our hardware for operating production services currently is
located throughout nine data centers across three continents. With multiple
high-speed connections to diverse backbone providers and a robust network
architecture, we aim to eliminate single points of failure, thus reducing the
likelihood that our customers will suffer downtime as a result of network
outages. Our backbone architecture and interconnect strategy consists of
multiple clear channel OC-3 and DS-3 circuits. We currently have bilateral
peering arrangements in place with over 35 networks. Our data centers feature
redundant systems for power, raised floors, HVAC temperature control systems,
seismically braced racks, fire protection, and physical security and
surveillance 24 hours a day, seven days a week.
Security. We have a diverse set of firewall solutions that are specifically
tailored for each of our hosted services, reducing the likelihood of security
breaches. To enhance security for our network, our staff members monitor the
network hardware 24 hours a day, seven days a week. Suspicious activity is
reported and investigated immediately.
Spam and Viruses. Our messaging services include comprehensive content
filtering including InCase(TM) Spam Blocking to guard against unsolicited
commercial email and InCase(TM) Virus Scanning. Our message filtering technology
has been enhanced with partnerships with Brightmail and Symantec, allowing our
hosted messaging customers to benefit from new spam and virus filters as they
are created in response to attacks worldwide.
RESEARCH AND DEVELOPMENT
Our products and services are mostly based on systems which were internally
developed or acquired through acquisitions. We must continually improve these
systems to accommodate the level of use of our products and services. In
addition, we may add new features and functionality to our products and services
that could result in the need to develop, license or integrate additional
technologies. Our inability to add additional software and hardware or to
upgrade our technology or network infrastructure could have adverse
consequences, which include service interruptions, impaired quality of the
users' experience and the diversion of development resources. Our failure to
provide new features or functionality to our products and services also could
result in these consequences. We may not be able to effectively upgrade and
expand our systems in a timely manner or to integrate smoothly any newly
developed or purchased technologies with our existing systems. These
difficulties could harm or limit our ability to improve our business.
We invested $2.1 million in research and development expenses in 1998, $7.7
million in 1999 and $31.0 million in 2000. Additionally, we incurred $3.7
million of in-process research and development expense in 2000 related to
technologies acquired through two of our acquisitions. We anticipate that we
will continue to devote significant resources to product development in the
future as we add new features and functionality to our products and services.
The market in which we compete is characterized by rapidly changing technology,
evolving industry standards, frequent new service and product announcements,
introductions and enhancements and changing customer demands. Accordingly, our
future success will depend on our ability to adapt to rapidly changing
technologies, to adapt our services to evolving industry standards and to
continually improve the performance, features and reliability of our products
and services. The failure to adapt to such
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changes would harm our business. In addition, the widespread adoption of new
Internet, networking or telecommunications technologies or other technological
changes could require us to undertake substantial expenditures to modify or
adapt our services or infrastructure.
EMPLOYEES
At December 31, 2000, we had 1,041 employees, including 340 in operations,
305 in sales and marketing, 252 in research and development and 144 in general
corporate and administration. Our future success depends, in significant part,
upon the continued service of our key technical and senior management personnel
and our continuing ability to attract and retain highly qualified technical,
sales and managerial personnel. Competition for such personnel is intense, and
we cannot guarantee that we can retain our key technical and managerial
employees or that we will be able to attract, assimilate or retain other highly
qualified technical, sales and managerial personnel in the future. None of our
employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.
COMPETITION
Because we have numerous Internet messaging infrastructure products and
services, we are not aware of a single enterprise that competes across all of
our products and services. However, we encounter different competitors at each
level of our products and services. For corporate customers seeking outsourced
hosted messaging solutions, we compete with email service providers, including
Commtouch, mail.com, USA.NET and application service providers offering hosted
exchange services. For service providers seeking insourced or outsourced
product-based solutions we compete with iPlane and OpenWave. For secure delivery
services, competitors include Tumbleweed for product-based solutions and
SlamDunk for service-based solutions. In the directory and meta-directory
market, we encounter primarily iPlanet, Microsoft and Novell in the
enterprise/eBusiness directory category, and iPlanet, Microsoft, Novell, and
Siemens are among our competitors in the meta-directory market.
While these competitors exist in each of our individual product markets, we
believe our complete solution of products and services serves as a competitive
advantage, because our customers can easily integrate their infrastructure with
our broad product line, selecting multiple Critical Path products and services
as their requirements demand.
We believe that competitive factors affecting the market for Internet
messaging infrastructure solutions include:
- Breadth of platform features and functionality;
- Ease of integration into customers' existing systems;
- Ease of expansion and upgrade;
- Flexibility to enable customers to manage certain aspects of their
systems internally and leverage outsourced services in other cases when
resources, costs and time to market reasons favor an outsourced offering;
- Cost of ownership and operation;
- Scalability, reliability and performance; and
- Ability to enhance customers' brand identities by allowing them to
maintain brand control.
The relative importance of each of these factors depends upon the specific
customer environment. Although we believe that our products and services
currently compete favorably with respect to such factors, we may not be able to
maintain our competitive position against current and potential competitors.
We believe competition will increase as current competitors increase the
sophistication of their offerings and as new participants enter the market. Many
current and potential competitors have longer operating histories, larger
customer bases, greater brand recognition and significantly greater financial,
marketing and
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other resources than we do and may enter into strategic or commercial
relationships with larger, more established and better-financed companies. Any
delay would also allow competitors additional time to improve their service or
product offerings, and provide time for new competitors to develop Internet
messaging infrastructure products and services and solicit prospective customers
within our target markets. Increased competition could result in pricing
pressures, reduced operating margins and loss of market share, any of which
could cause our business to suffer.
GOVERNMENT REGULATION
Although there are currently few laws and regulations directly applicable
to the Internet and commercial messaging services, it is possible that a number
of laws and regulations may be adopted with respect to the Internet or
commercial email services covering issues such as user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality of
products and services. Further, the growth and development of the market for
online email may prompt calls for more stringent consumer protection laws that
may impose additional burdens on those companies conducting business online. The
adoption of any additional laws or regulations may impair the growth of the
Internet or commercial online services, which could, in turn, decrease the
demand for our products and services and increase our cost of doing business, or
otherwise harm our business, operating results and financial condition.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
Any such new legislation or regulation, the application of laws and regulations
from jurisdictions whose laws do not currently apply to our business or the
application of existing laws and regulations to the Internet could harm our
business, operating results and financial condition.
ITEM 2. PROPERTIES
Our corporate headquarters and primary operations and development
facilities are located in two office buildings in San Francisco, California. We
occupy approximately 64,500 square feet in these two office buildings. There are
two leases which relate to our initial San Francisco location, one of which will
be expiring on June 30, 2002 but has a five-year renewal option and the second
of which is a sublease that will expire on March 31, 2002. The lease for the
second location will expire on February 1, 2011, but has a five-year renewal
option. In addition to these locations, we currently occupy a 24,300 square foot
building in Dublin, Ireland under a lease expiring on July 14, 2014. We lease
additional facilities in Argentina, Brazil, Canada, Denmark, France, Germany,
Ireland, Italy, Malaysia, Sweden, Switzerland, the United Kingdom and several
cities throughout the United States. We continually evaluate the adequacy of our
existing facilities, and we believe that the current facilities will be suitable
for our needs for the next 12 months, or that additional space will be available
on commercially reasonable terms, if necessary.
ITEM 3. LEGAL
We are a party to lawsuits in the normal course of our business. Litigation
in general, and securities and intellectual property litigation in particular,
can be expensive and disruptive to normal business operations. Moreover, the
results of complex legal proceedings are difficult to predict. Other than as
described below, we are not a party to any other material legal proceedings.
Securities Class Actions
Beginning on February 2, 2001, a number of securities class action
complaints were filed against us, certain of our current and former officers and
directors and our independent accountants in the United States District Court
for the Northern District of California. The complaints have been filed as
purported class actions by individuals who allege that they purchased our common
stock during a purported class period; the alleged class periods vary among the
complaints and are in the process of being consolidated into a single action.
The complaints generally allege that, in differing periods from April 2000 to
February 1, 2001, we and other named the defendants made false or misleading
statements of material fact about our financial statements, including our
revenues, revenue recognition policies, business operations and prospects for
the year
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2000 and beyond. The complaints seek an unspecified amount in damages on behalf
of persons who purchased Critical Path stock during certain periods.
Derivative Actions
Beginning on February 5, 2001, we have been named as a nominal defendant in
a number of derivative actions, purportedly brought on our behalf, filed in the
Superior Court of the State of California. The derivative complaints allege that
certain of our current and former officers and directors breached their
fiduciary duties to us, engaged in abuses of their control of us, were unjustly
enriched by their sales of our common stock, engaged in insider trading in
violation of California law or published false financial information in
violation of California law. The plaintiffs seek unspecified damages on our
behalf from each of the defendants. Because of the nature of derivative
litigation, any recovery in the action would inure to our benefit.
SEC Investigation
In February 2001, the Securities and Exchange Commission issued a formal
order of investigation of Critical Path and certain unidentified individuals
associated with Critical Path with respect to non-specified accounting matters,
financial reports, other public disclosures and trading activity in our
securities. While we do not know the current status of the investigation or any
possible actions that may be taken against us as a result, any SEC action
against us could harm our business.
The uncertainty associated with substantial unresolved lawsuits and the SEC
investigation could seriously harm our business and financial condition. In
particular, the lawsuits or the investigation could harm our relationships with
existing customers and our ability to obtain new customers. The continued
defense of the lawsuits and conduct of the investigation could also result in
the diversion of our management's time and attention away from business
operations, which could harm our business. Negative developments with respect to
the lawsuits or the investigation could cause our stock price to decline
significantly. In addition, although we are unable to determine the amount, if
any, that we may be required to pay in connection with the resolution of these
lawsuits or the investigation by settlement or otherwise, the size of any such
payment could seriously harm our financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of security holders during
the quarter ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on the Nasdaq National Market under the
symbol "CPTH" since March 29, 1999. The following table presents, for the
periods indicated, the high and low sales prices per share of our common stock
as reported on the Nasdaq National Market.
HIGH LOW
------- ------
YEAR ENDED DECEMBER 31, 1999
First Quarter (from March 29, 1999 to March 31, 1999)..... $ 77.00 $65.88
Second Quarter (from April 1, 1999 to June 30, 1999)...... $134.88 $36.88
Third Quarter (from July 1, 1999 to September 30, 1999)... $ 53.88 $30.94
Fourth Quarter (from October 1, 1999 to December 31,
1999).................................................. $ 94.38 $35.06
YEAR ENDED DECEMBER 31, 2000
First Quarter (from January 1, 2000 to March 31, 2000).... $119.50 $60.00
Second Quarter (from April 1, 2000 to June 30, 2000)...... $ 87.00 $26.00
Third Quarter (from July 1, 2000 to September 30, 2000)... $ 79.38 $46.13
Fourth Quarter (from October 1, 2000 to December 31,
2000).................................................. $ 59.75 $19.38
As of March 15, 2001, there were approximately 1,265 holders of record of
our common stock. Most shares of our common stock are held by brokers and other
institutions on behalf of shareholders.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will depend upon our
financial condition, operating results, capital requirements and other factors
the board of directors deems relevant.
RECENT SALES OF UNREGISTERED SECURITIES
1. On September 26, 2000, in connection with the acquisition of all of the
outstanding capital stock of PeerLogic Inc., we issued 6,120,000 shares of
common stock to the former shareholders of PeerLogic. The securities issued
were exempt from the registration requirements of the Securities Act by
virtue of Section 3(a)(10) thereof. The terms and conditions of the share
exchange were approved by the Commissioner of Corporations of the State of
California after a public hearing upon the fairness of such terms and
conditions.
2. On June 26, 2000, in connection with the acquisition of all of the
outstanding capital stock of Netmosphere, Inc., we issued 1,007,835 shares of
common stock to the former shareholders of Netmosphere. The securities issued
were exempt from the registration requirements of the Securities Act by
virtue of Section 3(a)(10) thereof. The terms and conditions of the share
exchange were approved by the Commissioner of Corporations of the State of
California after a public hearing upon the fairness of such terms and
conditions.
3. On March 30, 2000, in connection with the acquisition of all of the
outstanding capital stock of RemarQ Communities, Inc., we issued 3,868,450
shares of common stock to the former shareholders of RemarQ. The securities
issued were exempt from the registration requirements of the Securities Act
by virtue of Section 3(a)(10) thereof. The terms and conditions of the share
exchange were approved by the Commissioner of Corporations of the State of
California after a public hearing upon the fairness of such terms and
conditions.
4. On March 30, 2000, we issued $300.0 million of 5.75% Convertible Subordinated
Notes due April 2005 to qualified institutional buyers within the meaning of
Rule 144A under the Securities Act. The Notes are
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subject to a conversion rate of 9.8546 shares per $1,000 principal amount and
may be converted into approximately 2,956,000 shares of Critical Path common
stock, subject to adjustment in certain circumstances. We issued the Notes in
reliance on the exemptions from the registration requirements of the
Securities Act provided in Section 4(2) thereof and Rule 144A promulgated
thereunder.
5. On March 8, 2000, in connection with the acquisition of all of the
outstanding capital stock of The docSpace Company, we issued one share of
special voting stock to Montreal Trust Company of Canada as exchange agent
for the former Canadian shareholders of docSpace. In addition, we agreed to
issue from time to time an aggregate of 3,805,820 shares of Critical Path
common stock to the former shareholders of docSpace. This transaction was
made in reliance on the exemption from the registration requirements of the
Securities Act provided in Section 4(2) thereof.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated balance sheet data as of December 31, 1997, 1998,
1999 and 2000, and the selected consolidated statement of operations data for
the period from February 19, 1997 (our inception) to December 31, 1997, and
during the years ended December 31, 1998, 1999 and 2000, have been derived from
our Consolidated Financial Statements. The data set forth below should be read
in conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere in this document.
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999 2000
------- -------- --------- -----------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues....................................... $ -- $ 897 $ 16,157 $ 135,653
Gross profit (loss)................................ -- (1,449) (5,400) 13,732
Operating expenses(1).............................. (1,056) (9,999) (117,850) (1,831,449)
Loss from operations............................... (1,056) (11,448) (123,250) (1,817,717)
Non-operating income (expense), net................ (18) (13) 6,309 (28,235)
Loss before income taxes........................... (1,074) (11,461) (116,941) (1,845,952)
Provision for income taxes......................... -- -- -- (6,513)
------- -------- --------- -----------
Net loss........................................... $(1,074) $(11,461) $(116,941) $(1,852,465)
======= ======== ========= ===========
Net loss per share -- basic and diluted............ $ (0.54) $ (2.94) $ (3.93) $ (30.67)
======= ======== ========= ===========
Weighted average shares -- basic and
diluted.......................................... 1,994 3,899 29,770 60,399
======= ======== ========= ===========
AT DECEMBER 31,
--------------------------------------------
1997 1998 1999 2000
------- -------- --------- -----------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 1 $ 14,791 $ 75,932 $ 216,542
Working capital (deficit).......................... (1,524) 12,524 76,060 186,777
Total assets....................................... 550 20,663 673,805 450,855
Convertible subordinated notes payable............. -- -- -- 300,000
Capital lease and other obligations, long-term..... 42 2,454 5,669 4,687
Shareholders' equity (deficit)..................... (1,021) 15,358 616,992 66,349
(1) Operating expenses for the year ended December 31, 2000, include a $1.31
billion charge related to impairment of intangible assets including the
deferred costs associated with its ICQ and Qwest relationships (see Note 9
of Notes to Consolidated Financial Statements -- Intangible Assets).
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of Critical Path, Inc.
appearing elsewhere in this Annual Report. The following discussion contains
forward-looking statements. Our actual results may differ significantly from
those projected in these forward-looking statements. Factors that might cause
future results to differ materially from those projected in the forward-looking
statements include, but are not limited to, difficulties of forecasting future
results due to our limited operating history, evolving business strategy and the
emerging nature of the market for our products and services, pending litigation
and SEC investigation, turnover of senior management and other key personnel,
difficulties of integrating acquired businesses, failure to expand our sales and
marketing activities, potential difficulties associated with strategic
relationships, investments and uncollected bills, risks associated with our
international operations, foreign currency fluctuations, unplanned system
interruptions and capacity constraints, software defects, and those discussed in
"Additional Factors That May Affect Future Operating Results" and elsewhere in
this report. Readers are cautioned not to place undue reliance on these forward-
looking statements. We have no obligation to publicly release the results of any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this filing.
OVERVIEW
Critical Path, Inc. is a leading global provider of Internet messaging
infrastructure products and services. We provide solutions to manage the flow of
mission-critical information through an integrated portfolio of messaging,
directory, and security solutions. Our technology provides the messaging
infrastructure that fuels customers' new and existing eBusiness initiatives.
Critical Path was founded in 1997 and is headquartered in San Francisco,
with offices worldwide. From inception through 1999, our primary source of
revenue came from service fees related to hosted messaging. Through a series of
acquisitions during 1999 and 2000, we expanded our product offerings to include
a wide range of messaging and collaboration licensed products and services. In
total, we acquired ten companies, all of which were accounted for using the
purchase method of accounting (see Note 2 of Notes to Consolidated Financial
Statements -- Acquisitions).
1999 ACQUISITIONS. On May 26, 1999, we acquired substantially all the
operating assets of the Connect Service business of Fabrik Communications,
including the ongoing business operations as well as nearly 500 customer
relationships for a total purchase price of approximately $20.1 million. On July
21, 1999, we acquired dotOne Corporation, a corporate email messaging service
provider for a total purchase price of approximately $57.0 million. On August
31, 1999, we acquired Amplitude Software Corporation, a provider of
business-to-business Internet calendaring and resource scheduling solutions for
a total purchase price of approximately $214.4 million. On November 24, 1999, we
acquired Xeti, Inc., a developer of standards-based public key infrastructure
solutions for a total purchase price of approximately $23.8 million. On December
6, 1999, we acquired FaxNet Corporation, a outsource supplier of carrier-class
enhanced fax and integrated messaging solutions for a total purchase price of
approximately $187.6 million.
2000 ACQUISITIONS. On January 19, 2000, we acquired ISOCOR Corporation, a
supplier of Internet messaging, directory and meta-directory software solutions
for a total purchase price of approximately $277.4 million. On March 8, 2000, we
acquired The docSpace Company, a provider of web-based services for secure file
delivery, storage and collaboration for a total purchase price of approximately
$258.0 million. On March 30, 2000, we acquired RemarQ Communities, Inc., a
provider of Internet collaboration services for corporations, web portals and
Internet service providers for a total purchase price of approximately $267.6
million. On June 26, 2000, we acquired Netmosphere, Inc., a provider of
e-Business solutions for project collaboration and communications for a total
purchase price of approximately $41.3 million. On September 26, 2000, we
acquired PeerLogic, Inc., a provider of directory and enterprise application
integration software for a total purchase price of approximately $445.1 million.
We are currently evaluating our various products, services, facilities and
the business plan under which we are operating. As part of this evaluation, we
are reviewing the products and services we sell to customers, the locations in
which we operate, and the manner in which we go to market with our core product
and service
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offerings. Many alternatives are currently being considered but as of the
current date no decisions have been made. Ultimately, we may decide to continue
to operate as we do today, sustain certain products and services where customer
commitments prevent us from eliminating the offering all together, or eliminate
the offering through termination, sale or other disposition. The results of
these decisions will likely vary, depending on the product or service offering
being considered and the decision that is ultimately made. If a decision is made
to eliminate any product or service, it will most likely involve the receipt or
outlay of capital, realization of gains or losses, a reduction in workforce,
facility consolidation, and the elimination of revenue streams and any related
costs.
We currently have offices in Argentina, Brazil, Canada, Denmark, France,
Germany, Ireland, Italy, Malaysia, Sweden, Switzerland, the United Kingdom, and
several cities throughout the United States.
We have incurred significant losses since our inception, and as of December
31, 2000, had an accumulated deficit of approximately $2.0 billion, inclusive of
a $1.31 billion charge for impairment of certain long-lived assets recorded in
the fourth quarter of 2000. We intend to continue to invest in sales and
marketing, continued development of our network infrastructure, and continued
technology enhancements. We expect to continue to incur substantial operating
losses for the foreseeable future.
In view of the rapidly evolving nature of our business, recent
acquisitions, and limited operating history, we believe that period-to-period
comparisons of revenues and operating results, including gross profit margin and
operating expenses as a percentage of total net revenues, are not meaningful and
should not be relied upon as indications of future performance. At December 31,
2000, we had 1,041 employees, in comparison with 488 employees at December 31,
1999 and 93 employees at December 31, 1998. We do not believe that our
historical growth rates for revenue, expenses, or personnel are indicative of
future results.
RESULTS OF OPERATIONS
On February 2, 2001, we issued a press release announcing that we believed
that our previously announced unaudited financial results for the fourth quarter
of 2000 may have been materially misstated, that the Board of Directors had
formed a special committee to conduct an investigation into the matter, and that
our president and vice president of worldwide sales had been placed on
administrative leave related to the matter. On February 15, 2001, we announced
that, based on the preliminary results of the investigation being conducted, we
would revise our previously announced unaudited financial results for the fourth
quarter of 2000 and were reviewing certain specific transactions that were
reported as revenue during the third quarter of 2000. During February and March
2001, the investigation by the special committee of the Board of Directors was
completed, we completed our internal review, and our auditors completed the
annual audit. As a result, our financial results for certain periods within the
year 2000 were materially restated or revised (see Note 22 of Notes to
Consolidated Financial Statements -- Quarterly Financial Data (Unaudited)).
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The following table presents the historical results of Critical Path's
operations during 1998, 1999 and 2000 and the relative composition of net
revenues and selected statement of operations data as a percentage of net
revenues during 1998, 1999 and 2000.
AS A PERCENTAGE
OF TOTAL NET
REVENUES
------------------
YEAR ENDED DECEMBER 31 1998 1999 2000 1998 1999 2000
---------------------- -------- --------- ----------- ---- ---- ----
(IN THOUSANDS)
Net revenues
License............................. $ -- $ -- $ 51,607 0% 0% 38%
Service............................. 897 16,157 84,046 100 100 62
-------- --------- ----------- ---- --- ---
Total net revenues.......... 897 16,157 135,653 100 100 100
-------- --------- ----------- ---- --- ---
AS A PERCENTAGE
OF RELATED NET
REVENUES
------------------
Cost of net revenues
License............................. -- -- 2,731 0% 0% 5%
Service............................. 2,153 16,505 73,109 240 102 87
Amortization of purchased
technology....................... -- -- 18,140
Acquisition-related retention
bonuses.......................... -- 520 1,040
Stock-based expenses................ 193 4,532 1,586
Impairment of long-lived assets..... -- -- 25,315
-------- --------- ----------- ---- --- ---
Total cost of net
revenues.................. 2,346 21,557 121,921 262 133 90
-------- --------- ----------- ---- --- ---
Gross profit (loss)................... (1,449) (5,400) 13,732 (162) (33) 10
-------- --------- ----------- ---- --- ---
AS A PERCENTAGE
OF TOTAL NET
REVENUES
------------------
Operating expenses
Sales and marketing................. 1,687 13,811 66,125 188% 85% 49%
Research and development............ 2,098 7,682 31,022 234 48 23
General and administrative.......... 3,814 14,051 30,444 425 87 22
Amortization of intangible assets... -- 32,259 355,868
Acquisition-related retention
bonuses.......................... -- 3,587 8,294
Stock-based expenses................ 2,400 46,460 47,151
Acquired in-process research and
development...................... -- -- 3,700
Employee severance expenses......... -- -- 6,695
Impairment of long-lived assets..... -- -- 1,282,150
-------- --------- -----------
Total operating expenses.... 9,999 117,850 1,831,449
-------- --------- -----------
Loss from operations.................. (11,448) (123,250) (1,817,717)
Interest and other income, net........ 375 7,061 12,970
Interest expense...................... (388) (752) (15,948)
Equity in net loss of joint venture... -- -- (1,019)
Minority interest in net income of
consolidated subsidiary............. -- -- (649)
Loss on investments................... -- -- (23,589)
-------- --------- -----------
Loss before income taxes.............. (11,461) (116,941) (1,845,952)
Provision for income taxes............ -- -- (6,513)
-------- --------- -----------
Net loss.............................. $(11,461) $(116,941) $(1,852,465)
======== ========= ===========
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Net Revenues
We derive most of our revenues through the sale of our Internet messaging
infrastructure solutions. These solutions include both licensed software
products and hosted messaging and collaboration services. In addition, we
receive revenues from professional services and post-contract customer support.
Agreements with some of our customers require minimum performance standards
regarding the availability and response time of our messaging services. If we
fail to meet these standards, customers could terminate their relationships and
we could be subject to contractual monetary penalties.
License revenue is derived from perpetual and term licenses for our
messaging, directory, collaborative and enterprise application integration
technologies. License revenues are recognized when persuasive evidence of an
arrangement exists, delivery of the licensed software to the customer has
occurred and the collection of a fixed or determinable license fee is considered
probable.
Service revenue is derived from hosted services, professional services and
post-contract customer support. Hosted services relate to fees for our hosted
messaging and collaboration services. These are primarily based upon monthly
contractual per unit rates for the services involved, which are recognized on a
ratable monthly basis over the term of the contract beginning with the month in
which service delivery starts. Amounts billed or received in advance of service
delivery, including but not limited to branding and set-up fees, are initially
deferred and subsequently recognized on a ratable monthly basis over the term of
the contract beginning with the month in which service delivery starts.
Professional services revenue is derived from fees primarily related to
training, installation and configuration services. The associated revenues are
recognized in the period in which the services are performed. Customer support
revenue is derived from fees related to post-contract customer support
agreements associated with software product licenses. These fees are recognized
ratably over the term of the support contract, generally one year.
License. We recognized $51.6 million in license revenues during 2000, as
compared to insignificant license revenues in 1999 and none in 1998. This
significant increase over 1999 and 1998 was attributed to the introduction of
our insource product offerings related to messaging, directory and
meta-directory as a result of our acquisitions of Amplitude, ISOCOR, and
PeerLogic. In addition, during 2000 we experienced an increase in demand for our
messaging, directory, and meta-directory applications.
Service. We recognized $84.0 million in service revenues during 2000, as
compared to $16.2 million in 1999 and approximately $897,000 during 1998. We
experienced significant increases in 2000, over the 1999 and 1998 service
revenue levels as a result of the introduction of new product offerings,
additional post-contract customer support agreements and an increase in our
professional services, each of which is primarily attributable to our numerous
acquisitions, specifically Amplitude, ISOCOR, RemarQ, and PeerLogic.
Additionally, we experienced penetration into the hosted messaging services
market, and have experienced increases in the number of email boxes hosted,
including enterprise customers, and increased demand for our value-added
outsourced services.
Critical Path's international operations accounted for approximately 38% of
net revenues during 2000. Revenues from international operations were
insignificant in 1999 and 1998. This significant increase in international
revenues related primarily to the acquisition of ISOCOR.
Cost of Net Revenues
License. Cost of net license revenues consists primarily of product media
duplication, manuals and packaging materials, personnel and facility costs, and
third-party royalties. This significant increase in 2000 over 1999 and 1998
levels was attributed to the introduction of new product offerings related to
messaging, directory and meta-directory, as a result of our numerous
acquisitions in 1999 and 2000, specifically, the acquisitions of Amplitude,
ISOCOR, and PeerLogic.
Service. Cost of net service revenues consists primarily of costs incurred
in the delivery and support of messaging services, including depreciation of
capital equipment used in network infrastructure, amortization of purchased
technology, Internet connection charges, accretion of acquisition-related
retention bonuses, personnel costs incurred in operations, customer support
functions and professional services including custom
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engineering, installation and training services for both hosted and licensed
solutions, and other direct and allocated indirect costs. We added 15 new hosted
messaging clusters to our data centers during 2000, expanding the capacity of
our hosting network to manage current customer requirements and future growth.
Additional costs were incurred during 2000 to add technology platforms for new
service offerings. As a result of these significant acquisitions of equipment
and related support and professional services resources, depreciation and other
costs during 2000 increased substantially in comparison with 1999 and 1998.
Cost of net service revenues also was impacted by the increased
compensation and other personnel costs resulting from the additional headcount
added through our ten acquisitions completed during 1999 and 2000, and through
our continued efforts to enhance our portfolio of product and service offerings.
Operations, customer support, and professional services staff increased to 340
employees at December 31, 2000, from 174 employees at December 31, 1999, and 25
employees at December 31, 1998.
During 2000, we recognized charges associated with amortization of acquired
technology as a result of our various acquisitions. Additionally, we recognized
charges related to acquisition-related retention bonuses during 1999 and 2000
and stock-based charges associated with employee stock options during 1998, 1999
and 2000.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation for sales and marketing personnel, advertising, public relations,
other promotional costs, and, to a lesser extent, related overhead. Increases in
marketing and promotional expenses, incentive compensation payments to sales
personnel, and increases in compensation associated with additional headcount
added through our ten acquisitions completed during 1999 and 2000, resulted in
the increase in sales and marketing expenses. Sales and marketing staff
increased to 305 employees at December 31, 2000, from 168 employees at December
31, 1999 and 30 employees at December 31, 1998, primarily through our
acquisitions.
Research and Development. Research and development expenses consist
primarily of compensation for technical staff, payments to outside contractors,
depreciation of capital equipment associated with research and development
activities, and, to a lesser extent, related overhead. These significant
increases from 1998 to 2000 resulted primarily from increased compensation and
other personnel costs from the additional headcount added through our ten
acquisitions completed during 1999 and 2000. Additionally, we increased
headcount to continue to develop and enhance our portfolio of messaging,
directory and security solutions. Research and development staff increased to
252 employees at December 31, 2000, from 94 employees at December 31, 1999, and
27 employees at December 31, 1998, primarily through our acquisitions.
General and Administrative. General and administrative expenses consist
primarily of compensation for personnel, fees for outside professional services,
occupancy costs and, to a lesser extent, related overhead. These significant
increases from 1998 to 2000, resulted primarily from increased compensation and
other personnel costs associated with additional headcount added through our ten
acquisitions completed during 1999 and 2000, and higher fees for outside
professional services. General and administrative staff increased to 144
employees at December 31, 2000, from 52 employees at December 31, 1999, and 11
employees at December 31, 1998, primarily through our acquisitions.
Amortization of Intangible Assets
In connection with our 1999 and 2000 acquisitions, which were all accounted
for using the purchase method of accounting, we recorded goodwill and other
intangible assets, primarily including assembled workforce, customer base, and
existing technology. There were no acquisitions in 1998. Based on the types of
identifiable intangibles acquired in 2000, amortization expense of $18.1 million
was allocated to cost of net revenues and amortization expense of $355.9 million
was allocated to operating expenses. All amortization expense was allocated to
operating expenses in 1999.
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Acquisition-Related Retention Bonuses
In connection with the acquisitions of dotOne, Amplitude, Xeti, FaxNet,
ISOCOR, and docSpace, we established various retention bonus programs that in
the aggregate amounted to approximately $20.7 million in incentives for certain
former employees of these companies to encourage their continued employment with
Critical Path (see Note 3 of Notes to Consolidated Financial
Statements -- Acquisition-Related Retention Bonuses).
Stock-Based Expenses
Stock Options. We granted certain stock options with exercise prices below
market value on the date of grant and issued certain common stock to employees,
directors and advisors during 1999 and 1998. As a result, we recorded unearned
compensation totaling $22.3 million in 1999 and $19.9 million in 1998. These
amounts are being amortized over the vesting periods of the related options. In
March 2001, in connection with an employee retention program, we granted options
with exercise prices below market value on the date of grant to certain
employees. This program will result in approximately $16.1 million in additional
unearned compensation. We expect aggregate annual amortization related to
unearned compensation of $19.4 million in 2001, $5.9 million in 2002, and
$85,000 in 2003.
During 2000, we also incurred stock-based charges of approximately $5.7
million in connection with certain severance agreements for terminated
employees. Approximately, $3.4 million of this charge was included in employee
severance expense in connection with our plan to reduce worldwide headcount and
the remaining $2.3 million was included in stock-based expenses. During 1999, we
incurred a stock-based charge of approximately $2.0 million in connection with a
severance agreement for a terminated employee. This expense was charged to cost
of net revenues based on the employee's function.
Warrants. During 1999 and 2000, we issued warrants to purchase shares of
our preferred and common stock pursuant to certain strategic agreements (see
Note 15 of Notes to Consolidated Financial Statements -- Shareholders' Equity).
We believe that these warrant agreements could have a significant current and
potential future impact on our results of operations.
In January 1999, we entered into an agreement with ICQ, Inc., a subsidiary
of AOL Time Warner, pursuant to which we provide email hosting services that are
integrated with ICQ's instant messaging service provided to ICQ's customers. As
part of the agreement, ICQ agreed to provide sub-branded advertising for
Critical Path in exchange for a warrant to purchase 2,442,766 shares of Series B
Preferred Stock, issuable upon attainment of each of five milestones. As of
April 9, 2000, all five milestones had been attained and the final revised
aggregate fair value of all vested warrants was $93.8 million, which is being
amortized to advertising expense using the straight-line method over four years.
Aggregate charges recorded to stock-based expenses were $19.5 million during
2000 and $27.4 million during 1999. There were no related stock-based expenses
recorded during 1998. In connection with our review of our fourth quarter
financial results, we recorded an impairment charge of $16.8 million (see Note
17 of Notes to Consolidated Financial Statements -- Impairment of Long-Lived
Assets). The adjusted fair value at December 31, 2000, of approximately $30.1
million will be amortized over the remaining benefit period of three years.
In October 1999, we entered into an agreement with Qwest Communications
Corporation, a telecommunications company, pursuant to which we will provide
email hosting services to Qwest's customers. As part of the agreement, Qwest
agreed to provide sub-branded advertising for us in exchange for a warrant to
purchase up to a maximum of 3,534,540 shares of common stock upon attainment of
each of six milestones. In October 1999, the first of the six milestones had
been attained and the final revised aggregate fair value of the vested warrants
associated with the first milestone approximated $22.2 million, which is being
amortized to advertising expense using the straight-line method over three
years. None of the remaining milestones are considered probable and as a result,
the fair value of the warrants relating to the shares underlying the second
through sixth milestones has not been recognized. Aggregate charges recorded to
stock-based expenses were $7.4 million during 2000 and $1.5 million during 1999.
In connection with our review of our fourth quarter financial results, we
recorded an impairment charge of $4.8 million (see Note 17 of Notes to
Consolidated
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Financial Statements -- Impairment of Long-Lived Assets). The adjusted fair
value at December 31, 2000, of approximately $8.6 million will be amortized over
the remaining benefit period of two years.
In December 1999, we entered into an agreement with Worldsport Network
Ltd., the sole and exclusive provider of Internet solutions for the General
Association of International Sports Federations or GAISF and a majority of the
international federations it recognizes. Under the terms of the agreement,
Worldsport offers Critical Path's web-based email and calendaring services to
the entire GAISF network and its members. As part of the agreement, Worldsport
agreed to provide sub-branded advertising for Critical Path in exchange for
warrants to purchase up to a 1.25% equity interest in Critical Path on a fully
diluted basis upon attainment of each of five milestones based on the number of
email boxes for which Worldsport registers and provides sub-branding. The
warrants are exercisable for five years after becoming vested. Any warrants not
vested within five years of the date of the agreement will be cancelled. As of
December 31, 2000, Worldsport had filed for bankruptcy and accordingly, none of
the milestones were considered probable and no deferred compensation associated
with these warrants was recognized.
In December 1999, we entered into an agreement with one of our lessors, in
connection with an office lease, pursuant to which the lessor is entitled to
purchase up to a maximum of 25,000 shares of our common stock. The warrants may
be exercised beginning January 1, 2000 through December 20, 2006 at a price of
$90.00 per share. The warrants vest at the beginning of each month on a
straight-line basis in the amount of 521 shares per month. The fair value of
approximately $2.0 million is being amortized to general and administrative
expenses using the straight-line method over 10 years. During 2000, $200,000 was
charged to stock-based expense related to the vested warrants. No amounts were
charged to stock-based expense related to the vested warrants during 1999.
In January 2000, The docSpace Company entered into an agreement with a
major telecommunications company ("Telco") pursuant to which docSpace would
provide secure messaging services to the Telco's customers. As part of the
agreement, Telco agreed to provide marketing, publicity, and promotional
services to docSpace. As a result of the completion of our acquisition of
docSpace, Critical Path assumed warrants that allowed Telco to purchase up to a
maximum of 349,123 shares of Critical Path common stock upon attainment of each
of three milestones. Subsequent to the acquisition, we entered into discussions
with Telco to modify our relationship. Accordingly, we believe the vesting
provisions of the proposed agreement will be modified to reflect the
requirements of the new relationship. As of December 31, 2000, none of the
vesting milestones of the original agreement had been attained; however, we
believe that all shares underlying these warrants are probable of issuance. As a
result, the shares underlying these milestones were remeasured, resulting in a
revised fair value of the warrants of $9.6 million. As of December 31, 2000, no
amounts had been recognized as stock-based expense related to these warrants. We
expect that future changes in the trading price of our common stock at the end
of each quarter, and at the time certain milestones are achieved, will cause
additional substantial changes in the ultimate amount of the related stock-based
charges.
Acquired In-Process Research and Development
In connection with the acquisitions of ISOCOR and PeerLogic during 2000, we
recognized $3.7 million representing the value attributable to acquired
in-process research and development that had not yet reached technological
feasibility and had no alternative future use. These values were determined by
estimating the future net cash flows of the acquired in-process research and
development over their respective estimated useful life and discounting the net
cash flows back to their present value. No amounts were recognized resulting
from acquired in-process research and development during 1999 and 1998.
Employee Severance Expenses
On July 19, 2000, we announced our plan to reduce our worldwide employee
headcount by approximately 11%. This employee reduction plan was executed with
the intent to realize various synergies gained through the nine acquisitions we
completed in 1999 and the first half of 2000. During 2000, we recognized a
charge for severance-related costs totaling approximately $6.6 million, composed
of $3.2 million in cash
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charges and $3.4 million in stock-based compensation expense, resulting from the
acceleration of certain employee stock options.
Impairment of Long-Lived Assets
As part of our review of our fourth quarter financial results, an
impairment assessment of our long-lived assets was performed. The assessment was
performed primarily due to the significant decline in our stock price, the net
book value of assets significantly exceeding our market capitalization, the
significant underperformance of certain acquisitions relative to projections,
the overall decline of growth rates in the industry, and our lower fourth
quarter 2000 and projected 2001 operating results compared to earlier forecasts.
As a result, we recorded a $1.3 billion impairment charge to reduce goodwill and
other intangible assets and deferred costs associated with our ICQ and Qwest
relationships in the fourth quarter of 2000 to their estimated fair values. The
estimates of their fair values were based upon our estimated discounted cash
flows for the succeeding three years using a discount rate of 25% and an
estimated terminal value. The assumptions supporting the cash flows, including
the discount rate and estimated terminal value, were determined using
management's best estimates. The discount rate was primarily based upon the
weighted average cost of capital for comparable companies. The remaining
goodwill and identifiable intangibles balance of approximately $77.3 million
will be amortized over the remaining useful lives, which approximates two years.
These remaining identifiable intangible assets primarily relate to existing
technology for some of the licensed products we acquired in 2000 and certain
amounts related to assembled work forces acquired in 1999 and 2000. The
aggregate adjusted fair value at December 31, 2000, relative to the ICQ and
Qwest warrants, approximates $38.7 million and will be amortized over the
remaining relative benefit periods of between two and three years.
Interest and Other Income (Expense)
Interest and other income (expense) consists primarily of interest earnings
on cash and cash equivalents as well as net realized gains (losses) on foreign
exchange transactions. We completed private placements of equity securities in
April 1998, September 1998, and January 1999, and we completed public offerings
of common stock in April 1999 and June 1999. In addition, on March 30, 2000, we
issued $300.0 million of five-year, 5.75% Convertible Subordinated Notes due
April 1, 2005. As a result, interest income increased significantly during the
latter half of 1999 and into 2000, in comparison with early 1999, due to higher
cash balances available for investing. During 2000, we recognized a net loss
from foreign currency transactions associated with our international operations
in the amount of $280,000. Foreign currency transaction gain or loss were
insignificant during 1999 and 1998.
Interest Expense
Interest expense consists primarily of the interest and amortization of
related issuance costs related to the Convertible Subordinated Notes we issued
in March 2000, the amortization of related issuance costs and interest on
certain capital leases. We incurred approximately $13.0 million in interest
expense on the Convertible Subordinated Notes, and approximately $1.6 million
related to amortization of debt issuance costs in 2000. Interest on capital
leases and other long-term obligations amounted to approximately $1.3 million
during 2000, $688,000 during 1999, and $227,000 during 1998. Additionally,
amortization of stock-based charges associated with warrants issued in
connection with various of our financings in 1998 and 1999, amounted to $64,000
during 2000, $64,000 during 1999 and $161,000 during 1998.
Equity in Net Loss of Critical Path Pacific
In June 2000, we established a joint venture, Critical Path Pacific, with
Mitsui and Co., Ltd., NTT Communications Corporation and NEC Corporation to
deliver advanced Internet messaging solutions to businesses in Asia. We invested
$7.5 million and hold a 40% ownership interest in the joint venture. This
investment is being accounted for using the equity method. During 2000, we
recorded equity in net loss of joint venture of approximately $1.0 million.
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Minority Interest in Net Income of Consolidated Subsidiary
As of December 31, 2000, we owned a 72.87% interest in CP Italia, a
consolidated subsidiary, which was acquired in connection with the acquisition
of ISOCOR. For 2000, the minority interest in net income of CP Italia amounted
to $649,000. In March 2001, in connection with our agreement to purchase the
remaining minority interest, we acquired the outstanding 27.13% interest in CP
Italia for approximately $4.2 million.
Loss on Investments
During 2000, we determined that certain of our investments were permanently
impaired and recorded write downs of $23.6 million, consisting of $2.6 million
in investments in marketable securities and $21.0 million in investments in
non-marketable securities (see Note 7 of Notes to Consolidated Financial
Statements -- Investments).
Provision for Income Taxes
No current provision or benefit for U.S. federal or state income taxes has
been recorded as we have incurred net operating losses for income tax purposes
since our inception. No deferred provision or benefit for federal or state
income taxes has been recorded as we are in a net deferred tax asset position
for which a full valuation allowance has been provided due to uncertainty of
realization. We recognized a provision for foreign income taxes during 2000 as
certain of our European operations generated income taxable in certain European
jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
During 2000 and 1999, we invested our cash primarily in money market funds
and other highly liquid securities with maturities of less than 90 days with the
intent to make such funds readily available for operating purposes. Beginning in
2001, we have begun investing a portion of our cash in high grade, low risk
investments with an average maturity of 12 months. As of December 31, 2000, our
cash balance was $216.5 million and our working capital amounted to
approximately $186.8 million.
We used cash to fund operating activities during 2000 primarily due to our
net loss adjusted for non-cash charges, severance expense and
acquisition-related retention bonus payments. These disbursements related
primarily to compensation for our employees. In addition, we used cash to fund
various other operating costs, which are identified in the Results of Operations
portion of this section. During 1999, we used cash to fund operating activities,
primarily related to compensation for our employees. The large increase in cash
used in operations from 1999 to 2000 was predominantly caused by the increase in
employees and facilities resulting from our numerous acquisitions and to a
lesser extent the operating costs of the new products and services acquired.
We used cash in investing activities during 2000 to purchase property,
equipment and other capital expenditures and to fund certain strategic
acquisitions and investments. The significant outlay in capital expenditures
during 2000 was primarily related to installation of additional network
infrastructure equipment in our data centers, licenses of new software
platforms, and purchases of furniture and equipment for new employees. During
2000, we completed our acquisitions of ISOCOR, docSpace, RemarQ, Netmosphere,
and PeerLogic, and as a result, expended a significant amount of capital. In
addition, we made several strategic investments in private entities and an
initial capital contribution to fund our interest in the Critical Path Pacific
joint venture. We advanced funds to certain employees pursuant to promissory
notes. These uses of cash were offset by the repayment of a previous advance to
a private company pursuant to a promissory note and certain of the employee
notes. During 1999, we disbursed capital to purchase property and equipment,
expended significant capital related to our 1999 acquisitions, advanced funds to
obtain equity positions in strategic partners, and issued notes to certain
employees and officers.
We received cash proceeds from financing activities during 2000 from the
sale of $300.0 million in convertible subordinated notes, as well as from the
exercise of employee stock options and the purchase of stock under our employee
stock purchase plan. These cash proceeds were partially offset by a payment to
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retire a note payable assumed in the PeerLogic acquisition and payments to
retire principal on capital lease obligations. During 1999, we received cash
proceeds from the sale of our preferred stock, the closing of our initial public
offering of common stock, and closing of our follow-on offering of common stock.
These increases in cash in 1999 were offset by a payment to retire principal on
capital lease obligations and the purchase of treasury stock.
Liquidity
Since inception, we have incurred substantial costs as a result of the
rapid expansion of our product offerings and network infrastructure during 1999
and 2000. We continue to face significant risks associated with successful
execution of our business strategy. These risks include, but are not limited to,
technology and product development, introduction and market acceptance of new
products and services, changes in the marketplace, liquidity, competition from
existing and new competitors which may enter the marketplace, retention of key
personnel, and pending litigation.
We require sufficient capital to implement our strategy, to adequately
address the appropriate target markets, generate sales demand for our current
and planned future products and services. In addition, our liquidity could be
adversely impacted by the litigation referred to in Note 13 of Notes to
Consolidated Financial Statements -- Commitments and Contingencies, although we
believe the litigation will not have a material adverse impact on working
capital through the end of 2001.
We believe, based on the available cash balances, we have sufficient cash
resources to fund operations through at least the end of 2001. On a long-term
basis, however, we may require additional financing. There can be no assurance,
however, that such financing would be available when needed, if at all, or on
favorable terms and conditions.
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ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
WE HAVE A HISTORY OF LOSSES, EXPECT CONTINUING LOSSES AND MAY NEVER ACHIEVE
PROFITABILITY.
As of December 31, 2000, we had an accumulated deficit, including other
comprehensive income, of approximately $2.0 billion. We have not achieved
profitability in any period, and expect to continue to incur net losses in
accordance with generally accepted accounting principles for the foreseeable
future. We expect that our operating expenses w