Form 10-Q

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. þ Yes o No

As of October 31, 2001, the company had outstanding 75,496,491 shares of common stock, $0.001 par value per share.

The following Condensed Consolidated Financial Statements and Notes thereto of Critical Path, Inc. and discussions contain forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements regarding our future strategic plans, plans related to the sale of certain product lines, our plans to exit certain products and services, our plans to reduce costs through a reduction of personnel and a consolidation of office space, our anticipated charges and cost savings as a result of those plans and our belief in our ability to successfully emerge from the restructuring and refocusing of our operations. The words “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” and “estimate” and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, turnover of senior management, board of directors members and other key personnel, 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, difficulties in finalizing our strategic plan to exit certain non-core products and services, 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 an inability to maintain continued compliance with the Nasdaq National Market listing requirements, risks associated with our international operations, unplanned system interruptions and capacity constraints, software defects, and those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “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. The forward-looking statements speak only as of the date hereof. We expressly disclaim any 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.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Note 1 — Basis of Presentation and Summary of Significant Accounting Policies

Critical Path, Inc. was incorporated in California on February 19, 1997. In connection with the annual meeting of shareholders held in June 2000, the shareholders approved the re-incorporation of Critical Path, Inc. in Delaware, as well as an increase in the authorized shares of Common Stock from 150 million to 500 million. The Company amended its articles of incorporation to increase the authorized shares to 505 million; however the Company has not yet re-incorporated in Delaware. Critical Path, Inc. along with its subsidiaries (collectively referred to herein as the “Company”) provides messaging and directory communications solutions for corporate enterprises and service providers worldwide.

The unaudited Condensed Consolidated Financial Statements (“Financial Statements”) of Critical Path, Inc. and subsidiaries furnished herein have been reviewed by independent accountants, whose report is included herein. These financial statements reflect all adjustments that are, in the opinion of management, necessary to present fairly the financial position and results of operations for each interim period presented. All adjustments are normal recurring adjustments. The Financial Statements should be read in conjunction with the condensed consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, as amended. The results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the entire year.

With respect to the unaudited condensed consolidated financial information of the Company as of September 30, 2001 and for the three- and nine-month periods ended September 30, 2000 and 2001 included herein, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated November 7, 2001, appearing herein, states that they did not audit and they do not express an opinion on the unaudited condensed consolidated financial information. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited condensed consolidated financial information because that report is not a report or a part of this Form 10-Q prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Short-term and long-term investments are accounted for in accordance with Statement of Financial Accounting Standards No. 115 Accounting for Certain Investments in Debt and Equity Securities. This statement requires that securities be classified as “held to maturity,” “available-for-sale” or “trading,” and the securities in each classification be accounted for at either amortized cost or fair market value, depending upon their classification. The Company currently holds short-term investments of approximately $10.8 million in low risk government securities and corporate bonds and classifies these investments as available-for-sale. Available-for-sale securities are carried at fair market value, with the unrealized gains and losses, net of tax, reported as other comprehensive income, a separate component of stockholders’ equity. At the time of sale, any gains or losses will be recognized as a component of operating results.

The Company does not currently manage its business in a manner that requires it to report financial results on a segment basis. The Company currently operates in one segment, messaging and directory communications solutions, and management uses one measure of profitability. Revenue information on a product basis has been disclosed in our statement of operations. Included in software license revenue is InScribe Messaging revenue of approximately $2.5 million and $9.4 million for the three- and nine month periods ended September 30, 2001, respectively, and approximately $5.2 million and $22.4 million for the three- and nine month periods ended September 30, 2000, respectively.

Certain amounts previously reported have been reclassified to conform to the current period presentation.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This Statement supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement applies to all long-lived assets (including discontinued operations) and consequently amends APB Opinion No. 30, Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. This Statement develops one accounting model for long-lived assets that are to be disposed of by sale. This Statement requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, this Statement expands the scope of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in a disposal transaction. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of this Statement to have a significant impact on its financial statements.

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations. This Statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board (“APB”) Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001 and all business combinations accounted for under the purchase method for which the date of acquisition is July 1, 2001, or later. We have engaged in significant acquisition activity in the past, including business combinations. The provisions of this Statement would require all future business combinations to be accounted for using the purchase method.

In June 2001, the FASB also issued SFAS No. 142, Goodwill and Other Intangible Assets. This Statement addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) at acquisition and goodwill and other intangible assets subsequent to their acquisition. This Statement supersedes APB Opinion No. 17, Intangible Assets. Under the provisions of this Statement, if an intangible asset is determined to have an indefinite useful life, it shall not be amortized until its useful life is determined to be no longer indefinite. An intangible asset that is not subject to amortization shall be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill shall not be amortized. Goodwill shall be tested for impairment on an annual basis and between annual tests in certain circumstances at a level of reporting referred to as a reporting unit. This Statement is required to be applied starting with fiscal years beginning after December 15, 2001. Goodwill and intangible assets acquired after June 30, 2001 will be

subject immediately to the nonamortization and amortization provisions of this Statement. We anticipate that implementation of this Statement will not have a material impact on our financial results.

In April 2001, the Company announced a three part strategic restructuring plan that involved reorganizing Critical Path’s product and service offerings around a group of core communication solutions. The three elements of the plan include: (i) focusing on core communication solutions; (ii) workforce reduction; and (iii) facilities and operations consolidation. Additionally, the Company has implemented an aggressive expense management plan to further reduce operating costs while maintaining strong customer service for its core solutions. During the third quarter the Company substantially completed its restructuring plan, including the divestiture of many of its non-core products and services, a significant reduction in headcount and facilities and the implementation of other cost cutting measures, causing a significant reduction in overall operating expenses. As a result of these strategic initiatives, the Company anticipates that it will realize future annual cost savings of greater than $70.0 million. The non-core products and services comprised approximately 18% and 26% of total revenues in the three- and nine-month periods ended September 30, 2001 and approximately 22% and 25% of total revenues in the three- and nine-month periods ended September 30, 2000. It is expected that these products and services will be an insignificant part of the Company’s revenue stream by the fourth quarter of 2001.

Core communication solutions are our messaging and directory infrastructure platform, including mail, calendar, address book, file storage, secure delivery, directory and meta-directory, and access services supporting wireline and wireless users. Restructuring charges associated with this refocusing of our products and services consisted primarily of contract termination fees, gains and losses related to asset sales and dispositions, and lease termination fees. During the quarter, the Company sold or discontinued nearly all of its thirteen non-core products and services. The Company also completed the disposition of six of seven non-core products being sold, inclusive of the sales of the InJoin Trans, Batch and PATH/3270, the InJoin Broker product family, and the InLine Project Collaboration. Additionally, the Company has discontinued four of six non-core products and services that it has decided to exit and the remaining two are expected to be discontinued no later than the first quarter of 2002. As a result of these transactions a net gain of $2.7 million was recorded in the third quarter.

The Company further reduced its headcount from 1,011 at March 31, 2001 and 784 at June 30, 2001 to 564 employees at September 30, 2001, and continued to consolidate its facilities from 77 at March 31, 2001 and 44 at June 30, 2001 to the current level of 38, with approximately 15 additional facilities expected to close no later than the first quarter of 2002. Charges related to the headcount reduction consisted primarily of the payment of severance and fringe benefits, and aggregated approximately $5.3 million during the third quarter. Included in the third quarter was approximately $1.5 million related to the forgiveness of a note receivable to one of the Company’s former executives. Lease terminations and facility consolidation related charges consisted primarily of lease termination, future lease payments and related fees, and aggregated approximately $1.2 million during the third quarter. The Company anticipates that the remaining restructuring charges will be recorded in the fourth quarter and will amount to less than $1.5 million.

On March 30, 2000, the Company issued $300.0 million of five-year, 5.75% Convertible Subordinated Notes due April 1, 2005 (the “Notes”). In June 2001 the Company began a financial restructuring of its balance sheet, which included the repurchase of a portion of its outstanding Notes on an opportunistic basis. During the three- and nine-months ended September 30, 2001, the Company retired $192.0 million and $197.0 million in face value of Notes, respectively, which resulted in after-tax extraordinary gains of approximately $137.2 million and $141.0 million, respectively. As of September 30, 2001 $103.0 million of face value of its Notes remained outstanding. Also refer to Note 9 — Subsequent Events.

Securities Class Actions in Northern District of California. Beginning on February 2, 2001, a number of securities class action complaints were filed against the Company, certain of our current and former officers and directors 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 the Company’s common stock during a purported class period; the alleged class periods vary among the complaints. The complaints have been consolidated into a single action. The complaints generally allege that, during the period from September 26, 2000 to February 1, 2001, the Company and certain of its former officers made false or misleading statements of material fact about the Company’s financial statements, including its revenues, revenue recognition policies, business operations and prospects for the year 2000 and beyond. The complaints seek an unspecified amount in damages on behalf of persons who purchased Critical Path stock during certain periods, including those who acquired the Company’s stock in connection with the acquisition of Peerlogic. In addition, on September 24, 2001, certain former shareholders of Peerlogic filed a putative class action in the Superior Court of the State of California alleging that Critical Path breached representations and warranties made in connection with the acquisition of Peerlogic. The complaint seeks an unspecified amount in damages. We have removed the action to the United States District Court for the Northern District of California. On November 8, 2001, Critical Path announced that it had reached an agreement in principle to settle these cases and executed binding memoranda of understanding. Also refer to Note 9 — Subsequent Events.

Derivative Actions in Northern District of California. Beginning on February 5, 2001, Critical Path has been named as a nominal defendant in a number of derivative actions, purportedly brought on the Company’s behalf, filed in the Superior Court of the State of California and in the United States District Court for the Northern District of California. The derivative complaints allege that certain of Critical Path’s current and former officers and directors breached their fiduciary duties to the Company, engaged in abuses of their control of the Company, were unjustly enriched by their sales of the Company’s 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 the Company’s behalf from each of the defendants. Because of the nature of derivative litigation, any recovery in the action would inure to the Company’s benefit. Contemporaneously with settlement of the securities class action described above, an agreement in principle

has been reached to settle the derivative action and executed binding memoranda of understanding. Also refer to Note 9 — Subsequent Events.

Securities and Exchange Commission Investigation. In February 2001, the Securities and Exchange Commission (the “SEC”) issued a formal order of investigation of the Company and certain of the Company’s current and former officers and directors associated with the Company with respect to non-specified accounting matters, financial reports, other public disclosures and trading activity in the Company’s securities. While the Company does not know the current status of the investigation or any possible actions that may be taken against the Company as a result, any SEC action against Critical Path could harm the Company’s business.

Securities Class Action in Southern District of New York. Beginning on July 18, 2001, a number of securities class action complaints were filed against the Company, and certain of our current and former officers and directors and underwriters connected with our initial public offering of common stock in the United States District Court for the Southern District of New York. The complaints have been filed as purported class actions by individuals who allege that they purchased common stock at the initial public offering of common stock between March 26, 1999 and December 6, 2000. The complaints allege generally that the Prospectus under which such securities were sold contained false and misleading statements with respect to discounts and commissions received by the underwriters. The complaints have been consolidated into a single action. The complaints seek an unspecified amount in damages on behalf of persons who purchased Critical Path stock during the specified period

The uncertainty associated with various unresolved lawsuits and the SEC investigation could seriously harm the Company’s business and financial condition. In particular, the lawsuits or the investigation could harm its relationships with existing customers and its ability to obtain new customers. The continued defense of the lawsuits and conduct of the investigation could also result in the diversion of management’s time and attention away from business operations, which could harm the Company’s business. Negative developments with respect to the lawsuits or the investigation could cause the Company’s stock price to decline significantly. In addition, although the Company is unable to determine the amount, if any, that it 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 the Company’s financial condition.

In connection with the Company’s restructuring plan (Note 2 — Restructuring), an impairment assessment of certain of its long-lived assets was performed during the second quarter. The assessment was performed as a result of the determination by the Company to exit certain products and services that were determined to be non-core to the Company’s business strategy. The Company has reviewed the intangible assets related to these non-core products and services and, as a result of its assessment, in the second quarter of 2001 recorded a $14.2 million impairment charge to reduce these intangible assets to their estimated fair values or eliminate them, as appropriate.

Stock with an exercise price of $2.00 per share, issuable upon execution of the agreement. Using the Black-Scholes option-pricing model and assuming a term of three years, the term of the agreement, and expected volatility of 215%, the initial and final fair value of the warrant on the effective date of the agreement approximated $732,000, which was recognized upon the execution of the agreement in March 2001, as the relationship is terminable at any time. During the term of the agreement, we paid Vectis Group an aggregate of approximately $1.1 million in monthly retainer fees and expenses and approximately $3.1 million in transactional fees (including approximately $2.75 million in connection with the recent financing transaction). William McGlashan, Jr., a principal in Vectis Group, is a member of the Board of Directors of the Company, was appointed interim President and Chief Operating Officer in April, 2001 and has recently been appointed Vice Chairman and interim Chief Executive Officer. Effective September 30, 2001, the Company terminated its agreement with Vectis Group for consulting and other transactional services. In connection with the termination of the agreement, certain other employees of Vectis Group have become employees of Critical Path. Although the agreement terminated, certain obligations under the agreement survived, including the transaction fee paid in connection with the Company’s recent financing transaction and related indemnification obligations. Also refer to Note 9 — Subsequent Events.

In connection with each of their respective employment agreements, the Company made loans and held notes receivable from David C. Hayden, Executive Chairman, and Pierre Van Beneden, President, totaling $1.5 million and $350,000, respectively. Hayden’s full recourse note accrues interest at the rate of 6.75% per annum and shall be repaid by the achievement of performance-based milestones described in Mr. Hayden’s employment agreement and performance loan agreement. Mr. Van Beneden’s loan shall be interest free for the first year and shall be forgiven in monthly installments over the first year of Van Beneden’s employment. In the event of Mr. Van Beneden’s departure prior to one year from employment, the note shall be repayable and interest due in accordance with the terms of his employment agreement. Mr. Van Beneden’s employment agreement and loan was not effective until October 8, 2001.

Accumulated other comprehensive loss consists of unrealized gains (losses) on available-for-sale securities, net of tax, and cumulative translation adjustments.

For the nine-month periods ended September 30, 2000 and 2001 approximately 19.4 million and 31.7 million potential common shares, respectively, were excluded from the determination of diluted net loss per share, as the effect of such shares on a weighted average basis is anti-dilutive.

Equity Financing and Debt Retirement. On November 8, 2001, the Company closed a financing transaction with net cash proceeds of approximately $27 million and the retirement of $65 million of face value of 5 3/4% Convertible Subordinated Notes. In connection with the financing transaction, the Company will issue 4 million shares of convertible preferred stock (convertible into 52.4 million shares of common stock) and 2.5 million in warrants to purchase common stock. The financing transaction was led by General Atlantic Partners, LLC and affiliates, and also included Cheung Kong Limited and affiliates, Hutchison Whampoa Limited and affiliates and Vectis Group LLC. A portion of General Atlantic Partners’ participation in the transaction (representing 6.2% of ownership of the Company, on a pro forma basis after giving effect to the transaction and the conversion into shares of common stock), shall be held in a separate escrow pending either shareholder approval by majority vote or the approval of the Nasdaq Stock Market. The release of financing proceeds from escrow is contingent upon the execution of final settlement agreements with respect to the class action and shareholder derivative litigation.

Settlement of Litigation. On November 8, 2001, the Company announced that it executed binding memoranda of understanding with respect to the settlement of the securities class action and derivative shareholder litigation filed in the U.S. District Court for the Northern District of California. Settlement is subject to the execution of a definitive settlement agreement of the parties, notice to class members and shareholders and review and approval by the court.

Nasdaq Compliance. On October 30, 2001, the Company received a letter from the Nasdaq Listing Qualifications Board of the Nasdaq Stock Market indicating the Company’s compliance with the minimum equity requirements for continued listing on the Nasdaq National Market. In addition, the Company received confirmation of the application of the moratorium in place until January 1, 2002 with respect to compliance with the minimum bid requirements for continued listing on the Nasdaq National Market.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Condensed Consolidated Financial Statements and Notes thereto of Critical Path, Inc. and discussions contain forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements regarding our future strategic plans and financing strategies, plans related to our products and services and the market for such products and services, plans related to the sale of certain product lines, our plans to exit certain products and services, our plans to continue to reduce costs through a reduction of personnel and a consolidation of office space, our anticipated charges and cost savings as a result of those plans and our belief in our ability to successfully emerge from the restructuring and refocusing of our operations. The words “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” and “estimate” and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, turnover of senior management, board of directors members and other key personnel, 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, difficulties in finalizing our strategic plan to exit certain non-core products and services, 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 an inability to maintain continued compliance with the Nasdaq National Market listing requirements, risks associated with our international operations, unplanned system interruptions and capacity constraints, software defects, and those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “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. The forward-looking statements speak only as of the date hereof. We expressly disclaim any 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.

Critical Path, Inc. is a global leader in messaging and directory communications solutions. 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 and directory infrastructure to support customers’ new and existing eBusiness initiatives. Our primary sources of revenue come from providing a wide range of messaging and directory products and services. The Company was founded in 1997 and is headquartered in San Francisco, California with offices worldwide.

In view of the rapidly evolving nature of the our business, prior acquisitions, organizational restructuring, 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 September 30, 2001, we had 564 employees, in comparison with 1,041 employees at December 31, 2000 and 1,028 employees at September 30, 2000. Given those and other changes to our organizational structure, we do not believe that our historical trends for revenue, expenses, or personnel are indicative of future results.

Net Revenues. We derive most of our revenues through the sale of our messaging and directory communication solutions. These solutions include both licensed software products and hosted messaging services. In addition, we receive revenues from professional services and maintenance and support services. Software license revenue is derived from perpetual and term licenses for our messaging, directory and enterprise application integration technologies. Hosted messaging 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. Professional services revenue is derived from fees primarily related to training, installation and configuration

services and revenue is recognized as services are performed. Maintenance and support revenue is derived from fees related to post-contract customer support agreements associated with software product licenses and customer support agreements associated with hosted messaging customers, and revenue is recognized ratably over the term of the agreement.

Software License. We recognized $7.7 million and $22.2 million in software license revenues during the three-and nine-month periods ended September 30, 2001, respectively, as compared to $12.4 million and $37.3 million in software license revenues during the same periods in 2000, respectively. This significant decrease from revenues in the same period of 2000 was attributed to several factors that affected our operations during the first three quarters of 2001. Delays in information technology spending were experienced across many industries due to unfavorable macroeconomic conditions and these delays were exacerbated by circumstances at the Company. Many potential customers who were evaluating our products have delayed making decisions until they could gain a level of comfort in us as we emerge from our management transition and restructuring initiatives. Additionally, our sales organization was distracted by the termination and resignation of much of its leadership in the first quarter and its focus on rebuilding also has caused a reduction in effectiveness. During this rebuilding process, which is ongoing we did experience increases in software license sales from the first quarter, to the second quarter, however license sales decreased from the second quarter to the third quarter of 2001 and revenues are lower than the same periods of the prior year. The decrease in the third quarter was primarily due to our restructuring effort, but was at least to some extent further exacerbated as a result of the terrorist attacks of September 11, 2001. These tragic events significantly impacted the world economic markets and acted to delay certain of our licensed software sales with enterprise customers who operated in the affected area or whose operations were disrupted by these events. Additionally, in connection with our restructuring initiative, we identified certain non-core software license products, of which substantially all have either been exited or sold to third parties. Although we have recognized revenue during 2001 related to these non-core products, these initiatives have significantly reduced the revenue for these products offsetting increases in the revenues for our core solutions. We expect to see this trend in non-core revenue continue. Additionally, we anticipate non-core product revenues will not account for a significant portion of our revenues by the end of the year.

Hosted Messaging. We recognized $10.0 million and $35.6 million in hosted messaging revenues during the three- and nine-month periods ended September 30, 2001, respectively, as compared to $16.8 million and $40.1 million in hosted messaging revenues in the same periods in 2000, respectively. This decrease in the third quarter of 2001 as compared with the third quarter of 2000, resulted primarily from our restructuring initiative, as we identified certain non-core hosted messaging services, of which substantially all have either been exited or sold to third parties. Although we have recognized revenue during 2001 related to these non-core services, the restructuring initiative has significantly reduced the revenue derived from these non-core services and provide the primary reason for the decrease in revenue in the third quarter of 2001. We anticipate that non-core revenues will not account for a significant portion of our revenues by the end of the year.

Professional Services. We recognized $4.2 million and $10.5 million in professional service revenues during the three- and nine-month periods ended September 30, 2001, respectively, as compared to $3.6 million and $9.1 million in professional service revenues in the same periods in 2000, respectively. Professional service revenue increased in the final quarter of 2000 and the first half of 2001 as a result of the completion of the acquisition of PeerLogic, Inc. in September 2000. However these increases were offset in the second and third quarters of 2001 by the effects of our restructuring initiative and the exit of certain non-core products and services. Although we have recognized revenue during 2001, as a result of these non-core products and services, these restructuring initiatives have significantly reduced the professional services revenue surrounding these non-core products.

Maintenance and Support. We recognized $4.9 million and $12.7 million in maintenance and support revenues during the three- and nine-month periods ended September 30, 2001, respectively, as compared to $2.6 million and $6.9 million in maintenance and support revenues in the same periods in 2000, respectively. Maintenance and support revenue increased as a result of the completion of several acquisitions during 2000 and additional sales of software license products during 2000 and 2001. However these increases were offset in the second and third quarters of 2001 by the effects of our restructuring initiative and the exit of certain non-

core products and services. Although we have recognized revenue during 2001 as a result of these non-core products and services, these restructuring initiatives have reduced the maintenance and support revenue related to these non-core products.

Critical Path’s international operations accounted for approximately 45% and 40% of net revenues in the three-and nine-month periods ended September 30, 2001, respectively, as compared to approximately 39% and 40% of net revenues in the same periods of 2000, respectively. There was a decrease in the first quarter of 2001 in international revenues related primarily to a reduction in enterprise information technology spending, and the associated impact on the sales of our license products in our international markets. During the second quarter of 2001, international license product sales increased, resulting in an increase in international revenues, while during the third quarter of 2001, international license product sales decreased, as a result of our restructuring initiative and the exit of certain non-core products and services.

Software License. Cost of net software license revenues consists primarily of product media duplication, manuals and packaging materials, personnel and facility costs, and third-party royalties. The overall decrease in the cost of net software license revenue for the three- and nine-month periods ended September 30, 2001, respectively, were the result of the mix of software license revenue and the related royalties paid to third parties. During the third quarter of 2001 there was an increase in third party royalty expense.

Hosted Messaging. Cost of net hosted messaging 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, and other direct and allocated indirect costs. The decrease in the third quarter was the result of the sale and divestiture of several non-core services and the termination of employees through our restructuring initiative. Additionally, the implementation of certain other cost cutting measures further reduced cost of the net hosted messaging revenues during the third quarter of 2001.

Professional Service. Cost of net professional service revenues consists primarily of personnel costs including custom engineering, installation and training services for both hosted and licensed solutions, and other direct and allocated indirect costs. As a result of the acquisitions completed in 2000, additional costs were incurred during the first three quarters of 2001 on professional service resources in comparison with the same period of 2000.

Maintenance and Support. Cost of net maintenance and support revenues consists primarily of personnel costs related to the customer support functions for both hosted and licensed solutions, and other direct and allocated indirect costs. As a result of the acquisitions completed in 2000, additional costs were incurred during the first three quarters of 2001 on customer support resources in comparison with the same period of 2000.

Cost of net service revenues during the second half of 2000 and first half of 2001 were primarily impacted by the increased compensation and other personnel costs resulting from the additional headcount added through our acquisitions completed during 2000, and through our continued efforts to enhance our portfolio of messaging and directory communications solutions. During the second quarter of 2001, we initiated a strategic restructuring plan, which significantly reduced our workforce in addition to impacting several other aspects of our business. During the third quarter we substantially completed our restructuring plan, significantly reducing our cost of net service revenue through the divestiture of many of our non-core products and services and the successful reduction in our headcount. Operations, customer support, and professional services staff decreased to 197 employees at September 30, 2001 from 338 employees at September 30, 2000 and 340 employees at December 31, 2000.

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 the acquisitions completed during the first quarter and duration of 2000, resulted in the increase in sales and marketing expenses from the first half of 2000 through the first half of 2001. However, during the first quarter of 2001, the termination and resignation of several employees in the sales organization, the termination of certain strategic marketing relationships related to non-core services and certain other cost cutting measures in connection with our restructuring plan resulted in a significant reduction in sales and marketing expense in the second and third quarters of 2001, as compared to the same quarters of 2000. Sales and marketing staff decreased to 131 employees at September 30, 2001 from 298 employees at September 30, 2000 and 305 employees at December 31, 2000.

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. Research and development expenses increased during 2000 and the first quarter of 2001 primarily as a result of increased compensation and other personnel costs from the additional headcount added through the acquisitions completed during 2000. These increases caused an increase in research and development expense from the first half of 2000 to the first half of 2001. During the second and third quarters of 2001, we terminated several employees as well as certain contracts with outside consultants associated with research and development in connection with our restructuring initiative and implemented certain other cost cutting measures, which resulted in a reduction in research and development expense in the second and third quarters of 2001 as compared with the same quarters of 2000. Research and development staff decreased to 142 employees at September 30, 2001 from 239 employees at September 30, 2000 and 252 employees at December 31, 2000.

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. General and administrative expense increased during 2000 and the first quarter of 2001 primarily as a result of increased compensation and other personnel costs from the additional headcount added through the acquisitions completed during 2000. We have incurred higher fees for outside professional services in 2001, in particular significantly higher legal fees related to the SEC investigation and shareholder litigation and significantly higher accounting fees related to the extended audit performed for fiscal year 2000. These increases in general and administrative expenses have been offset by the termination of several employees in connection with our restructuring initiative and the implementation of certain other cost cutting measures, resulting in a decrease in general and administrative expense from the second quarter to the third quarter of 2001. However, these increases, net of reductions, resulted in an overall increase in general and administrative expense in the third quarter of 2001 as compared to the third quarter of 2000. General and administrative staff decreased to 94 employees at September 30, 2001 from 153 employees at September 30, 2000 and 144 employees at December 31, 2000.

In connection with acquisitions completed in 1999 and 2000, which were all accounted for using the purchase method of accounting, we recorded goodwill and other intangible assets, primarily for assembled workforce, customer base, and existing technology. During the fourth quarter of 2000, we recognized a $1.3 billion charge related to the impairment of certain goodwill and other intangible assets. As a result of this impairment charge, amortization expense decreased significantly from the first half of 2000 to the first half of 2001. Additionally, in connection with the Company’s restructuring plan announced in April 2001, an impairment assessment of certain of our long-lived assets was performed. As a result of this assessment, the Company has recorded an additional $14.2 million impairment charge to reduce these intangible assets to their revised estimated fair values or eliminate them, as appropriate, and further reduce amortization expense. Based on the types of identifiable intangibles acquired certain amounts of amortization expense were allocated

to cost of net revenues and the remaining amortization expense was allocated to operating expenses. There was an increase in amortization expense related to amounts allocated to cost of net revenues; this increase was the direct result of an acquisition completed in the third quarter of 2000, as certain of the intangible assets allocated to acquired existing technology have not been impaired.

In connection with the acquisitions completed in 1999 and 2000, we established certain retention bonus programs that in the aggregate amounted to approximately $20.7 million in incentives for certain former employees of the acquired companies to encourage their continued employment with Critical Path. The significant decrease in acquisition-related retention bonus expense from fiscal 2000 to fiscal 2001 resulted from the completion, during fiscal year 2000, of all but one of these bonus programs, which is expected to conclude in April 2002.

In April 2001, Critical Path announced a three part strategic restructuring plan that involved reorganizing Critical Path’s product and service offerings around a group of core communication solutions. The three elements of the plan include: (i) focusing on core communication solutions; (ii) workforce reduction; and (iii) facilities and operations consolidation. Additionally, we have implemented an aggressive expense management plan to further reduce operating costs while maintaining strong customer service for our core solutions. During the third quarter Critical Path substantially completed its restructuring plan, including the divestiture of many of its non-core products and services, a significant reduction in headcount and the implementation of other cost cutting measures, causing a significant reduction in overall operating expenses. As a result of these strategic initiatives, we anticipate that we will realize future annual cost savings of approximately $70.0 million. The non-core products and services comprised approximately 18% and 26% of total revenues in the three-and nine-month periods ended September 30, 2001 and approximately 22% and 25% of total revenues in the three- and nine-month periods ended September 30, 2000. We expect that these products and services will be an insignificant part of the Company’s revenue stream by the fourth quarter of 2001.

Refocusing on Core Communications Solutions. Core communication solutions consist of our messaging and directory infrastructure platform, including mail, calendar, address book, file storage, secure delivery, directory and meta-directory, and access services supporting wireline and wireless users. Restructuring charges associated with this refocusing of our products and services consisted primarily of contract termination fees, gains and losses related to asset sales and dispositions, and lease termination fees. During the quarter, we sold or discontinued nearly all of its thirteen non-core products and services. We also completed the disposition of six of seven non-core products being sold, inclusive of the sales of the InJoin Trans, Batch and PATH/3270 products, the InJoin Broker product family, and the InLine Project Collaboration. Additionally, we have discontinued four of six non-core products and services that we have decided to exit and the remaining two are expected to be discontinued no later than the first quarter of 2002. As a result of these transactions a net gain of $2.7 million was recorded in the third quarter.

Reduction of Workforce, Facility and Other Expenses. We further reduced our headcount from 1,011 at March 31, 2001 and 784 at June 30, 2001 to 564 employees at September 30, 2001, and continued to consolidate our facilities from 77 at March 31, 2001 and 44 at June 30, 2001 to the current level of 38, with approximately 15 additional facilities expected to close no later than the first quarter of 2002. Charges related to the headcount reduction consisted primarily of the payment of severance and fringe benefits, and aggregated approximately $5.3 million during the third quarter. Included in the third quarter was approximately $1.5 million related to the severance and forgiveness of a note payable to one of our former executives. Lease terminations and facility consolidation related charges consisted primarily of lease termination and related fees, and aggregated approximately $1.2 million during the third quarter. We anticipate that the remaining restructuring charges will be recorded in the fourth quarter and will amount to less than $1.5 million.

Warrants. During 1999 and 2000, we issued warrants to purchase shares of our preferred and common stock pursuant to certain strategic agreements with ICQ, Inc., Qwest Communications Corporation, Worldsport Network Ltd., one of our lessors, and a major telecommunications company. These issuances allowed the warrant holders to purchase an aggregate of 7.1 million shares of our common stock in exchange for services related increases, sub-branded advertising and various other services. During the three- and nine-months ended September 30, 2001, we recognized stock-based expenses related to these warrants of approximately $4.9 million and $14.6 million, respectively, compared to the three- and nine-months ended September 30, 2000, we recognized amounts of approximately $7.8 million and $19.3 million, respectively. We believe that these warrant agreements could have a significant current and future impact on our operating results.

In March 2001, the Company entered into certain agreements with Vectis Group, LLC (“Vectis Group”) to engage Vectis Group to act as an advisor to the Company with respect to various strategic alternatives the Company was exploring and to assist with other management related services. As part of the agreement, Vectis Group agreed to provide consulting services to the Company in exchange for a monthly retainer fee, potential transaction - based fees associated with certain strategic asset sales and investments in Critical Path and immediately exercisable warrants to purchase 500,000 shares of the Company’s Common Stock with an exercise price of $2.00 per share, issuable upon execution of the agreement. Using the Black-Scholes option-pricing model and assuming a term of three years, the term of the agreement, and expected volatility of 215%, the initial and final fair value of the warrant on the effective date of the agreement approximated $732,000, which was recognized upon the execution of the agreement in March 2001, as the relationship is terminable at any time. During the term of the agreement, we paid Vectis Group an aggregate of approximately of $1.1 million in monthly retainer fees and expenses and $3.1 million in transactional fees (including approximately $2.75 million in connection with the recent financing transaction). William McGlashan, Jr., a principal in Vectis Group, is a member of the Board of Directors of the Company, was appointed interim President and Chief Operating Officer in April, 2001 and has recently been appointed Vice Chairman and interim Chief Executive Officer. Effective September 30, 2001, the Company terminated its agreement with Vectis Group for consulting and other transactional services. In connection with the termination of the agreement certain other employees of Vectis Group have become employees of Critical Path. Although the agreement terminated, certain obligations under the agreement, including the transaction fee paid in connection with the Company’s recent financing transaction and related indemnification obligations. Also refer to Note 9 — Subsequent Events.

Interest and other income, net of expense, consists primarily of interest earnings on cash and cash equivalents as well as net realized gains (losses) on foreign exchange transactions. On March 30, 2000, we issued $300.0 million of five-year, 5.75% Convertible Subordinated Notes due April 1, 2005. As a result of this increase in cash available for investing, interest income increased significantly during the last three quarters of 2000. Our cash balance was significantly reduced between the third quarter of 2000 and the third quarter of 2001 as a result of cash used in operations and the repurchase of a portion of our convertible subordinated

notes, causing a significant decrease in interest income during 2001. Interest income amounted to $1.1 million and $5.0 million for the three- and nine-months ended September 30, 2001, respectively, and $4.0 million and $9.9 million for the three- and nine-months ended September 30, 2000, respectively. Also, associated with foreign currency transactions related to our international operations we recognized a $1.0 million net loss and $500,000 net gain for the three- and nine-months ended September 30, 2001, respectively, and $900,000 and $1.0 million net gains for the three- and nine-months ended September 30, 2000, respectively.

Interest expense consists primarily of the interest and amortization of debt issuance costs related to the convertible subordinated notes we issued in March 2000, and interest and stock-based charges on certain capital leases. We incurred approximately $3.1 million and $11.7 million in interest on these notes, and approximately $200,000 and $1.3 million related to amortization of debt issuance costs for the three- and nine-month periods ended September 30, 2001, respectively. Additionally, we incurred approximately $4.3 million and $8.6 million in interest on these notes for the three- and nine-month periods ended September 30, 2000, and approximately $540,000 and $1.1 million related to amortization of debt issuance costs, respectively. During the three- and nine-month periods ended September 30, 2001, amortization of stock-based charges was zero and $16,000, respectively, and interest charges on capital lease obligations amounted to $500,000 and $1.2 million, respectively. For the three-and nine-month periods ended September 30, 2000, amortization of stock-based charges was $16,000 and $48,000, respectively, and interest charges on capital lease obligations amounted to $327,000 and $974,000, respectively.

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 the three- and nine-month periods ended September 30, 2001, we recorded equity in net loss of joint venture of $346,000 and $1,519,000 million, respectively. During the three- and nine-month periods ended September 30, 2000, the Company recorded equity in net loss of joint venture of $640,000.

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 the three- and nine-month periods ended September 30, 2001 in the amounts of $2.2 million and $3.7 million, respectively, as certain of our European operations generated taxable income. During the three-and nine-month periods ended September 30, 2000, we recognized a provision for foreign income taxes in the amounts of $2.5 million and $4.3 million, respectively.

On March 30, 2000, Critical Path issued $300.0 million of five-year, 5.75% Convertible Subordinated Notes due April 1, 2005 (the “Notes”). In June 2001 we began a financial restructuring of our balance sheet, which included the repurchase of a portion of its outstanding Notes on an opportunistic basis. During the three-and nine-months ended September 30, 2001, Critical Path retired $192.0 million and $197.0 million of face value of its Notes, respectively, which resulted in after-tax extraordinary gains of approximately $137.2 million and $141.0 million, respectively. As of September 30, 2001 $103.0 million of face value of its Notes remained outstanding. On November 8, 2001, we closed a financing transaction with net cash proceeds of approximately $27 million and the retirement of $65 million of face value of the Notes. In connection with the financing transaction, we will also issue 4 million shares of convertible preferred stock (convertible into 52.4 million shares of common stock) and warrants to purchase 2.5 million shares of common stock. The

release of financing proceeds from escrow is contingent upon the execution of final settlement agreements with respect to the shareholder litigation.

During 2001 we have begun investing a portion of our cash in high grade, low risk investments with an average maturity of twelve months. As of September 30, 2001, our cash and short-term investments totaled approximately $65.4 million, comprised of $54.6 million in cash and cash equivalents and $10.8 million in short-term investments. Our working capital amounted to approximately $39.6 million. During the nine-months ended September 30, 2001, we used approximately $162.0 million in cash. After incurring restructuring charges and realizing the expected quarterly cost savings in connection with our strategic restructuring, implementing certain worldwide cost control policies and procedures, and the potential increase in revenue we hope to realize when we move beyond the issues experienced in the first quarter of 2001, we believe that we have sufficient cash to operate through March 2002.

We used $73.4 million in cash to fund operating activities during the nine-months ended September 30, 2001 primarily due to our net loss adjusted for non-cash charges, acquisition-related retention bonus payments and payments related to our restructuring plan. Our cash disbursements related primarily to compensation and other costs for our employees and various other operating costs, which are identified in the Results of Operations portion of this section.

We used $33.6 million in cash to fund investing activities during the nine-months ended September 30, 2001 to enter into certain short-term investments and to purchase property, equipment and other capital expenditures, however the cash used for those capital expenditures in 2001 has significantly reduced from capital expenditure levels in 2000. The primary use of cash during 2001 was related to the purchase of short-term investments of approximately $10.8 million, which is comprised primarily of low risk corporate bonds and government securities. Additionally we acquired the remaining outstanding equity interest in CP Italia, a consolidated subsidiary, paid an investment banking fee related to the ISOCOR acquisition and purchased additional network infrastructure equipment for our data centers.

We used $55.0 million in cash from financing activities during the nine-months ended September 30, 2001 to retire principal on capital lease obligations and our convertible subordinated notes. The primary use of cash during 2001 was $49.1 million to repurchase $197.0 million of our convertible subordinated notes. During 2000 we received net proceeds of $29.4 million from the sale of the Company’s common stock as well as from the exercise of employee stock options and the purchase of stock under our employee stock purchase plan. We received $289.2 million in net cash proceeds from financing activities during 2000 from the sale of $300.0 million in convertible subordinated notes. These cash proceeds were partially offset by payments to retire principal on capital lease obligations.

Due to our limited operating history, evolving business strategy and the nature of the messaging and directory infrastructure market, our future revenues are unpredictable, and our quarterly operating results may fluctuate.

We cannot accurately forecast our revenues as a result of our limited operating history, evolving business strategy and the emerging nature of the Internet messaging infrastructure market. Forecasting is further complicated by rapid changes in our business due to the ten acquisitions we completed in 1999 and 2000, our current strategic restructuring, as well as significant fluctuations in license revenues as a percentage of total revenues from an insignificant percentage in 1999, to 38% in 2000 and to 27% in the first nine months of 2001. Our revenues could fall short of expectations if we experience delays or cancellations of even a small number of orders. We often offer volume-based pricing, which may affect operating margins. A number of factors are likely to cause fluctuations in operating results, including, but not limited to:


	•	the use of messaging and directory infrastructure products and services in particular;

	•	demand for outsourced messaging services;


	•	demand for licensing of messaging, directory, and other products;

	•	our ability to attract and retain customers and maintain customer satisfaction;

	•	our ability to attract and retain qualified personnel with industry expertise, particularly sales personnel;

	•	the reaction of our customers and potential customers to integration of acquired businesses;

	•	the ability to upgrade, develop and maintain our systems and infrastructure;

	•	the budgeting cycles of our customers and potential customers;

	•	the amount and timing of operating costs and capital expenditures relating to expansion of business and infrastructure;

	•	our ability to effectively respond to the rapid technology change of the messaging and directory infrastructure market;

	•	technical difficulties or system outages; and

	•	the announcement or introduction of new or enhanced services by competitors.

In addition to the factors set forth above, operating results will be impacted by the extent to which we incur non-cash charges associated with stock-based arrangements with employees and non-employees. In particular, we have incurred and expect to continue to incur substantial non-cash charges associated with the grant of stock options to employees and non-employees and the grant of warrants to customers, investors and other parties with which we have business relationships. These grants of options and warrants also may be dilutive to existing shareholders.

Our operating results have been and could continue to be impacted by decisions to eliminate product or service offerings through termination, sale or other disposition or to sustain certain products and services at a minimum level where customer commitments prevent us from eliminating the offering altogether. Decisions to eliminate or limit our offering of a product or service will involve the expenditure of capital, the realization of losses, a reduction in our workforce, facility consolidation or the elimination of revenues along with the associated costs, any of which could harm our financial condition and operating results.

As a result of the foregoing, period-to-period comparisons of operating results are not a good indication of future performance. It is likely that operating results in some quarters will be below market expectations. In this event, the price of our common stock is likely to decline.

We depend on strategic relationships and other sales channels and the loss of any strategic relationships could harm our business and negatively affect our revenues.

We depend on strategic relationships to expand distribution channels and to undertake joint product development and marketing efforts. Our ability to increase revenues depends upon marketing services through new and existing strategic relationships. We depend on a broad acceptance of our software and outsourced messaging services on the part of potential resellers and partners and acceptance of our company as the supplier for these outsourced messaging solutions. We also depend on joint marketing and product development through strategic relationships to achieve market acceptance and brand recognition. Our agreements with strategic partners typically do not restrict them from introducing competing services. These agreements typically are for terms of one to three years, and automatically renew for additional one-year periods unless either party gives prior notice of its intention to terminate the agreement. In addition, these agreements are terminable by our partners without cause, and some agreements are terminable by us, upon 30-120 days’ notice. Most of the agreements also provide for the partial refund of fees paid or other monetary penalties in the event that our services fail to meet defined minimum performance standards. Distribution partners may choose not to renew existing arrangements on commercially acceptable terms, or at all. If we lose any strategic relationships, fail to renew these agreements or relationships or fail to develop new strategic relationships, our business will suffer. The loss of any key strategic relationships would have an adverse impact

on our current and future revenues. In addition to strategic relationships, we also depend on the ability of our customers to sell and market our services to their end-users.

We have experienced turnover of senior management and our current management team has been together for a limited time, which could harm our business and operations.

In the first half of 2001, we announced a series of changes in our management and board of directors. In the early part of the second quarter of 2001, we announced a series of additional changes in our management and board of directors. It is possible this high turnover at our senior management levels may continue. A majority of the current senior executives of the Company, joined us in the second and third quarters of 2001. Because of these recent changes and their recent recruitment, our management team has not worked together for a significant length of time and may not be able to work together effectively to successfully implement our strategy. If our management team is unable to accomplish our business objectives, our ability to grow our business could be severely impaired. We do not have long-term employment agreements with any of our executive officers. The loss of the services of one or more of our current senior executive officers could harm our business and affect our ability to successfully implement our business objectives.

We have a history of losses, expect continuing losses and may never achieve profitability.

As of September 30, 2001, 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 will decrease as a result of our strategic restructuring and other cost-cutting efforts. However, we will continue to spend resources on maintaining and strengthening our business, and this may have a negative effect on our operating results and our financial condition in the near term.

In past quarters, we have spent heavily on technology and infrastructure development. We may continue to spend substantial financial and other resources to develop and introduce new end-to-end messaging and directory infrastructure solutions, and improve our sales and marketing organizations, strategic relationships and operating infrastructure. In addition, in future periods we will continue to incur significant non-cash charges related to the ten acquisitions we completed in 1999 and 2000 and stock-based compensation. We expect that our cost of revenues, sales and marketing expenses, general and administrative expenses, operations and customer support expenses and depreciation and amortization expenses could continue to increase in absolute dollars and may increase as a percent of revenues. If revenues do not correspondingly increase, our operating results and financial condition could be harmed. If we continue to incur net losses in future periods, we may not be able to retain employees, or fund investments in capital equipment, sales and marketing programs, and research and development to successfully compete against our competitors. We may never obtain sufficient revenues to achieve profitability. If we do achieve profitability, we may not sustain or increase profitability in the future. This may, in turn, cause the price of our common stock to decline.

If we fail to improve sales and marketing activities, we may be unable to improve our business.

Our ability to increase revenues will depend on our ability to successfully recruit, train and retain sales and marketing personnel. Competition for qualified personnel is intense and we may not be able to hire and retain personnel with relevant experience. The complexity and implementation of our messaging and directory infrastructure products and services require highly trained sales and marketing personnel to educate prospective customers regarding the use and benefits of our services. Current and prospective customers, in turn, must be able to educate their end-users. Any delays or difficulties encountered in our staffing efforts would impair our ability to attract new customers and enhance our relationships with existing customers. This in turn would adversely impact the timing and extent of revenues. Because we have experienced turnover in our sales force and the majority of our current sales and marketing personnel have recently joined us and have limited experience working together, our sales and marketing organizations may not be able to compete successfully against the sales and marketing organizations of our competitors. If we do not successfully operate our sales and marketing activities, our business could suffer and the price of our common stock could decline.

A limited number of customers account for a high percentage of our revenues; if we lose a major customer or if we are unable to attract new customers, our operating results could be harmed.

We expect that sales of our services to a limited number of customers will continue to account for a high percentage of our revenue for the foreseeable future. Our future success depends on our ability to retain our current customers, and to attract new customers, in our target markets. The loss of a major customer could harm our business. Our agreements with our customers typically have terms of one to three years often with automatic one year renewals and can be terminated without cause upon 30-120 days’ notice. If our customers terminate their agreements before the end of the contract term, the loss of the customer could have an adverse impact on our current and future revenues. Also, if we are unable to attract and enter into agreements with new customers, our business will not grow and we will not generate additional revenues.

If we are unable to successfully compete in our product market, our operating results could be harmed.

Because we have a variety of messaging and directory infrastructure products and services, we encounter different competitors at each level of our products and services. Our competitors for corporate customers seeking outsourced hosted messaging solutions are email service providers, such as Commtouch, Easylink, USA.NET and application service providers offering hosted exchange services. Our competitors for service providers seeking insourced or outsourced product-based solutions are iPlanet and OpenWave. For secure delivery services, our competitors include Tumbleweed for product-based solutions and SlamDunk for service-based solutions. In the enterprise/ eBusiness directory category, we compete primarily with iPlanet, Microsoft and Novell, and our competitors in the meta-directory market are iPlanet, Microsoft, Novell and Siemens.

We believe that competitive factors affecting the market for messaging and directory 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.

We believe competition will increase as current competitors increase the sophistication of their offerings and as new participants enter the market. Many of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do and may enter into strategic or commercial relationships with larger, more established and better-financed companies. Any delay in our development and delivery of new services or enhancement of existing services would allow our competitors additional time to improve their service or product offerings, and provide time for new competitors to develop messaging and directory 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.

We may need to raise additional capital and to initiate other operational strategies that may dilute existing shareholders.

We believe that existing capital resources will enable us to maintain current and planned operations through March 31, 2001. However, additional capital may be required to continue operations and achieve profitability. In addition, we may be required to raise additional funds due to unforeseen circumstances. If our

capital requirements vary materially from those currently planned, we may require additional financing sooner than anticipated. Such financing may not be available in sufficient amounts or on terms acceptable to us and may be dilutive to existing shareholders. Additionally, we face a number of challenges in operating our business, including our highly leveraged capital structure and significant contingent liabilities associated with litigation. In the event that resolution of these or other operational matters involve issuance of stock, our existing shareholders may experience significant dilution.

We have had filed in recent years, a number of lawsuits against us, including securities class action and shareholder derivative litigation filed in February 2001, certain of our current and former officers and directors and some of our subsidiaries. While these lawsuits vary in the materiality of potential liability associated with them, the uncertainty associated with substantial unresolved lawsuits could seriously harm our business, financial condition and reputation, whether material individually or in the aggregate. In particular, this uncertainty could harm our relationships with existing customers and our ability to obtain new customers.

The continued defense of the lawsuits also could result in continued diversion of our management’s time and attention away from business operations, which could harm our business. Negative developments with respect to the lawsuits could cause the price of our common stock 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 by settlement or otherwise, the size of any such payments, individually or in the aggregate, could seriously harm our financial condition. Many of the complaints associated with these lawsuits do not specify the amount of damages that plaintiffs seek. As a result, we are unable to estimate the possible range of damages that might be incurred as a result of the lawsuits. We have not set aside any financial reserves relating to potential damages associated with any of these lawsuits.

Failure to complete settlement of pending securities class action and shareholder derivative action could materially harm our business.

Although the Company has executed binding memoranda of understanding in connection with the securities class action and shareholder derivative action pending in the U.S. District Court for the Northern District of California, we cannot provide assurance that a final settlement shall occur in accordance with such memoranda of understanding, or at all. The binding memoranda of understanding with respect to the litigation are subject to the negotiation and execution of definitive settlement agreements between the parties and other factors, such as court review and approval, before the subject actions are dismissed. In addition, even if definitive settlement agreements are entered into between the parties, such agreements are subject to notice to the putative class and of the shareholders of the Company, as well as review and approval by the court. There can be no assurance that the court will approve such agreements once they are executed. A failure to complete and finalize the settlement agreement between the parties could have a number of materially detrimental effects on the Company’s financial condition and business.

Should such definitive settlement agreements fail to be executed and the litigation continue, there can be no assurance that fees and expenses, and any ultimate settlement amount associated with such litigation, shall be within the coverage limits of our insurance and/or our ability to pay such amounts. Although the terms of the memoranda of understanding are within the coverage limits of the Company’s directors and officers insurance, should the current agreement in principle fail to be formalized in definitive settlement agreements there can be no assurance that the Company will be able to conclude such litigation on terms that coincide with the coverage limits of our insurance and/or ability to pay upon any final determination.

In addition the proceeds from the Company’s recent financing transaction are subject to an escrow agreement conditioning release of such funds on the execution of definitive settlement agreements with respect to the securities class action. Should such final settlement agreements fail to occur, such failure could cause the financing transaction to be unwound. If the Company were then otherwise unable to secure alternative financing, the business and operations of the Company would be materially adversely affected. A failure to complete the previously announced financing transaction could also cast doubt as to the prospects of the

In February 2001, the Securities and Exchange Commission, or SEC, issued a formal order of investigation of us and certain current and former officers associated with us. The investigation relates to non-specified accounting matters, financial reports, other public disclosures and trading activity in our stock. 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 negative developments with respect to the investigation or any SEC action against us could harm our business and cause the price of our common stock to continue decline significantly.

We may not be able to maintain our listing on The Nasdaq National Market and if we fail to do so, the price and liquidity of our common stock may decline.

The Nasdaq Stock Market has quantitative maintenance criteria for the continued listing of common stock on The Nasdaq National Market. The current requirements affecting us include (i) having net tangible assets of at least $4 million and (ii) maintaining a minimum bid price per share of $1. As of October 30, 2001 the Nasdaq Listings Qualifications Board has indicated our compliance with the minimum equity requirements. However, from July 12, 2001 through October 31, 2001, the closing bid price per share for our common stock was below $1. Although our bid price has been above $1 per share since November 1, 2001, if the bid price of our common stock price slips below $1 per share, our common stock may not remain listed on The Nasdaq National Market. Although the Nasdaq Stock Market instituted a moratorium on delisting proceedings through January 2, 2002, there can be no assurance that we will remain in compliance of the minimum bid price requirements for continued listing by that time. If we fail to maintain continued listing on the Nasdaq National Market, our business and its financial condition could be harmed.

The Nasdaq National Market’s Audit Committee Rules require audit committees to be comprised of at least three independent directors. We currently comply with this requirement, however, in the event that we are not able to comply with this or any of the other requirements in the future we may be delisted from The Nasdaq National Market. If we are delisted, it could have a material adverse effect on the market price of, and the liquidity of the trading market for, our common stock.

In addition, the SEC approved certain amendments to The Nasdaq Stock Market Marketplace Rules which are effective June 20, 2001, including but not limited to changing the current net tangible assets listing standard to an equity listing standard. The new equity standard requires net equity of at least $10 million. We may begin to qualify under this standard immediately, but compliance with the new equity listing standard is not required until November 1, 2002. If we do not comply with this standard by November 1, 2002 we may be delisted from The Nasdaq National Market. Such action may negatively affect our standing with The Nasdaq National Market, which in turn would harm our business and its financial condition.

Our stock price has declined during recent quarters and continued volatility in the stock market may cause fluctuations and/or further decline in our stock price.

The trading price of our common stock has been and may continue to experience volatility and wide fluctuations. For example, during the second quarter of 2001, the closing sale prices of our common stock on The Nasdaq National Market ranged from $0.26 on September 7, 2001 to $0.68 on September 26, 2001, and the closing sale price of our common stock on September 28, 2001 was $0.58. Our stock price may decline or fluctuate in response to any number of factors and events, such as technological innovations, strategic and sales relationships, new product and service offerings by us or our competitors, changes in financial estimates and recommendations of securities analysts, the operating and stock price performance of other companies that investors may deem comparable, news reports relating to trends in our markets and overall market conditions. In addition, the stock market in general, particularly with respect to technology stocks, has experienced extreme volatility and a significant cumulative decline in recent months. This volatility and decline has affected many companies, including our company, irrespective to the specific operating perform-

ance of such companies. These broad market influences and fluctuations may adversely affect the price of our stock, and our ability to remain listed on The Nasdaq National Market, regardless of our operating performance or other factors.

Limitations of our director and officer liability insurance may harm our business.

Our liability insurance for actions taken by officers and directors during the period from March 1999 to March 2001, the period during which events related to securities class action lawsuits against us and certain of our current and former executive officers are alleged to have occurred, provides only limited liability protection. If these policies do not adequately cover our expenses related to those lawsuits, our business and financial condition could be seriously harmed. Our current director and officer liability insurance, in place through March 2002, contains similar provisions.

Under California law, in connection with our charter documents and indemnification agreements we entered into with our executive officers and directors, we must indemnify our current and former officers and directors to the fullest extent permitted by law. The indemnification covers any expenses and liabilities reasonably incurred in connection with the investigation, defense, settlement or appeal of legal proceedings.

We may experience difficulty in attracting and retaining key personnel, which may negatively affect our ability to develop new services or retain and attract customers.

The loss of the services of key personnel could harm our business results. Our success also depends on our ability to recruit, retain and motivate highly skilled sales and marketing, operational, technical and managerial personnel. Competition for these people is intense and we may not be able to successfully recruit, train or retain qualified personnel. If we fail to do so, we may be unable to develop new services or continue to provide a high level of customer service, which could result in the loss of customers and revenues.

We do not have long-term employment agreements with any of our key personnel. In addition, we do not maintain key person life insurance on our employees and have no plans to do so. The loss of the services of one or more of our current key personnel could harm our business and affect our ability to successfully implement our business objectives.

Our failure to manage growth and expenses could cause our business to suffer.

In the past, the expansion of our operations has placed a significant strain on managerial, operational and financial resources. To manage any future growth, we may need to improve or replace our existing operational, customer service and financial systems, procedures and controls. Any failure to properly manage these systems and procedural transitions could impair our ability to attract and service customers, and could cause us to incur higher operating costs and delays in the execution of our business plan. We will also need to hire additional personnel including sales personnel. Our management may not be able to hire, train, retain, motivate and manage required personnel. In addition, our management may not be able to successfully identify, manage and exploit existing and potential market opportunities. If we cannot manage growth and expenses associated with strategic growth effectively, our business and operating results could suffer.

We have a strategic plan to exit certain non-core products and services; if we are not successful in implementing our plan, our business could be negatively impacted.

In the first quarter of 2001, we developed a strategic plan that involved reorganizing our product and service offerings around a group of core products deemed most imperative to our ability to serve the messaging and directory infrastructure market. In the second and third quarter of 2001, implementation of the plan commenced and, accordingly, products and services determined to be non-core to our strategy were strategically exited. Our strategic plan also includes an initiative to reduce operating costs through a reduction of approximately 450 personnel and a consolidation of approximately two-thirds of our office space in keeping with our increased focus on core messaging products and services. During the third quarter, we had a reduction in force of approximately an additional 220 personnel and were able to consolidate an additional 6 of

our facilities. We are continuing to implement and finalize these actions and we expect to incur some additional one-time charges in the fourth quarter. The non-core products and services comprised approximately 37% of total revenues in the first quarter of 2001, approximately 24% of revenues in the second quarter of 2001, approximately 18% in the third quarter, and 26% of total revenues during fiscal year 2000. It is expected that these products and services will not be a part of our revenue stream by the fourth quarter of 2001.

We will face technical, operational and strategic challenges that may prevent us from successfully continuing the integration of any businesses we have acquired.

Acquisitions involve risks related to the integration and management of acquired technology, operations and personnel. The integration of businesses that we have acquired into our business has been and will continue to be a complex, time consuming and expensive process, which may disrupt our business if not completed in a timely and efficient manner. We must operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls and human resources practices to be successful. In particular, we are currently evaluating, upgrading or replacing our financial information systems and establishing uniformity among the systems of the acquired businesses. We may encounter substantial difficulties, costs and delays involved in integrating the operations of our subsidiaries, including:


	•	potential incompatibility of business cultures;

	•	perceived adverse changes in business focus; and

	•	potential failure in effectively managing our rapid growth in personnel.

Consequently, we may not be successful in integrating acquired businesses or technologies and may not achieve anticipated revenues and cost benefits. We also cannot guarantee that these acquisitions will result in sufficient revenues or earnings to justify our investment in, or expenses related to, these acquisitions or that any synergies will develop. If we are not successful in integrating acquired businesses or if expected earnings or synergies do not materialize, we could be forced to attempt to resell or cease operations of acquired businesses. In either event, we would likely incur significant expenses as well as non-cash charges to write-off acquired assets, which could seriously harm our financial condition and operating results.

Further, due in part to the significant underperformance of some of our acquisitions relative to expectations, we have reviewed 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 offerings. As a result of this review, in 2001, we decided to eliminate certain acquired product or service offerings through termination, sale or other disposition or to sustain certain products and services at a minimum level where customer commitments prevent us from eliminating the offering altogether. Any decision, including our recent decisions, to eliminate or limit our offering of an acquired product or service could involve the expenditure of capital, the realization of losses, a reduction in workforce, facility consolidation, and/ or the elimination of revenues along with the associated costs, any of which could harm our financial condition and operating results.

We may need to license third-party technologies and we face risks in doing so.

We intend to continue to license certain technology from third parties, including web server and encryption technology. The market is evolving and we may need to license additional technologies to remain competitive. We may not be able to license these technologies on commercially reasonable terms or at all.

In addition, we may fail to successfully integrate any licensed technology into our services. These third-party in-licenses may expose us to increased risks, including risks related to the integration of new technology, the diversion of resources from the development of proprietary technology, and an inability to generate revenues from new technology sufficient to offset associated acquisition and maintenance costs. An inability to obtain any of these licenses could delay product and service development until equivalent technology can be

If our system security is breached, our business and reputation could suffer.

A fundamental requirement for online communications is the secure transmission of confidential information over public networks. Third parties may attempt to breach our security or that of our customers. If these attempts are successful, customers’ confidential information, including customers’ profiles, passwords, financial account information, credit card numbers or other personal information could be breached. We may be liable to our customers for any breach in security and a breach could harm our reputation. We rely on encryption technology licensed from third parties. Although we have implemented network security measures, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. We may be required to expend significant capital and other resources to license encryption technology and additional technologies to protect against security breaches or to alleviate problems caused by any breach. Failure to prevent security breaches may harm our business and operating results.

Unknown software defects could disrupt our services and harm our business and reputation.

Our software products are inherently complex. Additionally, our service offerings depend on complex software, both internally developed and licensed from third parties. Complex software often contains defects, particularly when first introduced or when new versions are released. We may not discover software defects in our products or that affect new or current services or enhancements until after they are deployed. Although we have not experienced any material software defects to date, it is possible that, despite testing, defects may occur in the software. These defects could cause service interruptions, which could damage our reputation or increase service costs, cause us to lose revenue, delay market acceptance or divert development resources, any of which could cause our business to suffer.

We may have liability for Internet content and we may not have adequate liability insurance.

As a provider of messaging and directory services, we face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials transmitted via our services. We do not and cannot screen all of the content generated by our users, and we could be exposed to liability with respect to this content. Furthermore, some foreign governments, such as Germany, have enforced laws and regulations related to content distributed over the Internet that are more strict than those currently in place in the United States.

Although we carry general liability and umbrella liability insurance, our insurance may not cover claims of these types or may not be adequate to indemnify us for all liability that may be imposed. There is a risk that a single claim or multiple claims, if successfully asserted against us, could exceed the total of our coverage limits. There also is a risk that a single claim or multiple claims asserted against us may not qualify for coverage under our insurance policies as a result of coverage exclusions that are contained within these policies. Should either of these risks occur, capital contributed by our shareholders may need to be used to settle claims. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage could harm our reputation and business and operating results, or could result in the imposition of criminal penalties.

Unplanned system interruptions and capacity constraints could reduce our ability to provide messaging services and could harm our business reputation.

Our customers have, in the past, experienced some interruptions in our messaging service. We believe that these interruptions will continue to occur from time to time. These interruptions are due to hardware failures, unsolicited bulk email, or “spam,” attacks and operating system failures. Our business will suffer if we experience frequent or long system interruptions that result in the unavailability or reduced performance of systems or networks or reduce our ability to provide email services. We expect to experience occasional

temporary capacity constraints due to sharply increased traffic, which may cause unanticipated system disruptions, slower response times, impaired quality and degradation in levels of customer service. If this were to continue to happen, our business and reputation could suffer dramatically.

We have entered into messaging agreements with some customers that require minimum performance standards, including standards regarding the availability and response time of messaging services. If we fail to meet these standards, our customers could terminate their relationships with us and we could be subject to contractual monetary penalties.

We rely on trademark, copyright and trade secret laws and contractual restrictions to protect our proprietary rights, and if these rights are not sufficiently protected, it could harm our ability to compete and generate revenue.

We also rely on a combination of trademark, copyright and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. Our ability to compete and grow our business could suffer if these rights are not adequately protected. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. We license our software pursuant to agreements which impose certain restrictions on the licensee’s ability to utilize the software. We also seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements. Our proprietary rights may not be adequately protected because:


	•	laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies; and

	•	policing unauthorized use of our products and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of this unauthorized use.

Also, the laws of other countries in which we market our products may offer little or no protection of our proprietary technologies. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for it, which would harm our competitive position and market share.

We may not be able to respond to the rapid technological change of the messaging and directory infrastructure industry.

The messaging directory infrastructure industry is characterized by rapid technological change, changes in user and customer requirements and preferences, and the emergence of new industry standards and practices that could render our existing services, proprietary technology and systems obsolete. We must continually improve the performance, features and reliability of our services, particularly in response to competitive offerings. Our success depends, in part, on our ability to enhance our existing email and messaging services and to develop new services, functionality and technology that address the increasingly sophisticated and varied needs of prospective customers. If we don’t properly identify the feature preferences of prospective customers, or if we fail to deliver email features which meet the standards of these customers, our ability to market our service successfully and to increase revenues could be impaired. The development of proprietary technology and necessary service enhancements entail significant technical and business risks and require substantial expenditures and lead-time. We may not be able to keep pace with the latest technological developments. We may also be unable to use new technologies effectively or adapt services to customer requirements or emerging industry standards.

We regard our copyrights, service marks, trademarks, trade secrets and similar intellectual property as critical to our success, and we rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with employees, customers and partners to protect proprietary rights. Despite these precautions, unauthorized third parties may infringe or copy portions of our services or reverse engineer or

obtain and use information that we regard as proprietary. End user license provisions protecting against unauthorized use, copying, transfer and disclosure of the licensed program may be unenforceable under the laws of certain jurisdictions and foreign countries.

The status of United States patent protection in the software industry is not well defined and will evolve as the U.S. Patent and Trademark Office grants additional patents. We have several patents pending in the United States and may seek additional patents in the future. We do not know if the patent application or any future patent application will be issued with the scope of the claims sought, if at all, or whether any patents received will be challenged or invalidated. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. Our means of protecting proprietary rights in the United States or abroad may not be adequate and competitors may independently develop similar technology. Additionally, although we have not received notice of any other alleged patent infringement, we cannot be certain that our products do not infringe issued patents that may relate to our products. In addition, because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to our software products.

If we do not successfully address the risks inherent in the expansion of our international operations, our business could suffer.

We derived 40% of our revenue from international sales in the first nine months of 2001 and 40% of our revenue from international sales in 2000. We intend to continue to operate in international markets and to spend significant financial and managerial resources to do so. If revenues from international operations do not exceed the expense of establishing and maintaining these operations, our business, financial condition and operating results will suffer. We have limited experience in international operations and may not be able to compete effectively in international markets. We face certain risks inherent in conducting business internationally, including:


	•	difficulties and costs of staffing and managing international operations;

	•	fluctuations in currency exchange rates and imposition of currency exchange controls;

	•	differing technology standards;

	•	difficulties in collecting accounts receivable and longer collection periods;

	•	unexpected changes in regulatory requirements, including U.S. export restrictions on encryption technologies;

	•	political and economic instability;

	•	potential adverse tax consequences; and

	•	reduced protection for intellectual property rights in some countries.

Any of these factors could harm our international operations and, consequently, our business and consolidated operating results. Specifically, failure to successfully manage international growth could result in higher operating costs than anticipated or could delay or preclude altogether our ability to generate revenues in key international markets.

We assume a certain level of credit risk with our customers in order to do business. Conditions affecting any of our customers could cause them to become unable or unwilling to pay us in a timely manner, or at all, for products or services we have already provided them. For example, if the current economic conditions continue to decline or if new or unanticipated government regulations are enacted which affect our customers, they may be unable to pay their bills. In the past, we have experienced significant collection delays from certain customers, and we cannot predict whether we will continue to experience similar or more severe delays in the future. In particular, a portion of our customers are suffering from the general weakness in the economy and among technology companies in particular. Although we have established reserves that we believe are

sufficient to cover losses due to delays in or inability to pay, there can be no assurance that such reserves will be sufficient to cover such losses. If losses due to delays or inability to pay are greater than our reserves, it could harm our business, operating results and financial condition.

We rely on a continuous power supply to conduct our operations, and California’s current energy crisis could disrupt our operations and increase our expenses.

California is in the midst of a serious energy crisis that may disrupt our operations and increase our expenses. In the event of an acute power shortage, that is, when power reserves for the State of California fall below 1.5%, California has on some occasions implemented, and may in the future continue to implement, rolling blackouts throughout the state. If blackouts interrupt our power supply or the power supply of any of our customers, we, or our customers, may be temporarily unable to operate. Any interruption in our ability to continue operations could delay the development or interfere with the sales of our products. Future interruptions could damage our reputation, harm our ability to retain existing customers and to obtain new customers, and could result in lost revenue, any of which could substantially harm our business and results of operations. Any interruption in the ability of our customers to continue operations could also harm our business. We do not carry sufficient business interruption insurance to compensate us for losses that may occur, and any losses or damages we incur could harm our business.

Furthermore, the deregulation of the energy industry instituted in 1996 by the California government and shortages in wholesale electricity supplies have caused power prices to increase. If wholesale prices continue to increase, our operating expenses will likely increase, as our headquarters and many employees are based in California.

Our articles of incorporation and bylaws contain provisions that could delay or prevent a change in control.

Our articles of incorporation and bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Some of these provisions:


	•	authorize the issuance of preferred stock that can be created and issued by our board of directors without prior shareholder approval, commonly referred to as “blank check” preferred stock, with rights senior to those of our common stock;

	•	prohibit shareholder action by written consent; and

	•	establish advance notice requirements for submitting nominations for election to our board of directors and for proposing matters that can be acted upon by shareholders at a meeting.

In March 2001, we adopted a shareholder rights plan or “poison pill.” This plan could cause the acquisition of our company by a party not approved by our board of directors to be prohibitively expensive.

The following supplemental pro forma financial information presents Critical Path’s condensed consolidated results of operations during the three-and nine-month periods of 2001 and 2000, excluding the impact of certain special charges consisting of (i) amortization of intangible assets associated with purchase business combinations, (ii) accruals for employee retention bonuses associated with purchase business combinations, (iii) stock-based compensation associated with outstanding options and warrants, (iv) one-time charges related to our restructuring initiative, (v) impairment of long-lived assets, and (vi) gain on the retirement of convertible subordinated debt. This supplemental presentation is for informational purposes only, and is not intended to replace the consolidated operating results prepared and presented in accordance with generally accepted accounting principles.

As of September 30, 2001, our investment portfolio consisted of available-for-sale securities, excluding those classified as cash equivalents, of $18.3 million. These securities consist of $7.5 million of strategic equity investments in corporate partners, certain of which are publicly traded and marketable and certain of which are privately held and $10.8 million of high grade low risk government securities and corporate bonds. These securities are subject to equity price risk. Critical Path’s long-term obligations consist of our $102.0 million five-year, 5.75% Convertible Subordinated Notes due April 2005, and certain fixed rate capital leases. We do not attempt to reduce or eliminate our market exposure on these securities.

A significant portion of our worldwide operations has a functional currency other than the United States dollar. Accordingly, we are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, and assets and liabilities of these operations. Fluctuations in exchange rates may harm our results of operations and could also result in exchange losses. The impact of future exchange rates fluctuations cannot be predicted adequately. To date, we have not sought to hedge the risks associated with fluctuations in exchange rates.

Information relating to quantitative and qualitative disclosure about market risk is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We have reviewed the accompanying condensed consolidated balance sheet of Critical Path, Inc. and its subsidiaries as of September 30, 2001, and the related condensed consolidated statement of operations for each of the three and nine-month periods ended September 30, 2000 and September 30, 2001 and the condensed consolidated statement of cash flows for each of the nine month periods ended September 30, 2000 and September 30, 2001. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2000, and the related consolidated statements of operations, of shareholders’ equity, and of cash flows for the year then ended (not presented herein), and in our report dated April 4, 2001 we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 2000, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

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.

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. The complaints have been consolidated into a single action. The complaints generally allege that, in the period from September 26, 1999 to February 1, 2001, we and certain of our current and former officers 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 2000 and beyond. The complaints seek an unspecified amount in damages on behalf of persons who purchased Critical Path stock during certain periods, including those who acquired our stock in connection with the acquisition of Peerlogic. In addition, on September 24, 2001, certain former shareholders of Peerlogic filed a putative class action in the Superior Court of the State of California alleging that Critical Path breached representations and warranties made in connection with the acquisition of Peerlogic. The complaint seeks an unspecified amount in damages. We have removed the action to the United States District Court for the Northern District of California.

On November 8, 2001, Critical Path announced that it had reached an agreement in principle to settle these cases and executed binding memoranda of understanding. Settlement is subject to the execution of a definitive settlement agreement by the parties, notice to class members and shareholders review and approval of the court.

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 and in the United States District Court for the Northern District of California. The derivative complaints allege that certain of Critical Path’s 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. Contemporaneously with settlement of the securities class action described above, we announced we reached an agreement in principle has been reached to settle the derivative actions and executed binding memoranda of understanding. Settlement is subject to the execution of a definitive settlement agreement by the parties, notice to class members and shareholders and review and approval of the court.

Beginning on July 18, 2001, a number of securities class action complaints were filed against the Company, and certain of our current and former officers and directors and underwriters connected with our initial public offering of common stock in the United States District Court for the Southern District of New York. The complaints have been filed as purported class actions by individuals who allege that they purchased common stock at the initial public offering of common stock between March 26, 1999 and December 6, 2000. The complaints allege generally that the Prospectus under which such securities were sold contained false and misleading statements with respect to discounts and commissions received by the underwriters. The

complaints have been consolidated into a single action. The complaints seek an unspecified amount in damages on behalf of persons who purchased Critical Path stock during the specified period.

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 these and other unresolved lawsuits and the SEC investigation could seriously harm the Company’s business and financial condition. In particular, the lawsuits or the investigation could harm its relationships with existing customers and its ability to obtain new customers. The continued defense of the lawsuits and conduct of the investigation could also result in the diversion of management’s time and attention away from business operations, which could harm the Company’s business. Negative developments with respect to the lawsuits or the investigation could cause the Company’s stock price to decline significantly. In addition, although the Company is unable to determine the amount, if any, that it 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 the Company’s financial condition.

On August 9, 2001, we filed a report on Form 8-K under Items 5 and 7 announcing the appointment of Larry Weber and Jeffrey T. Webber to vacancies on the Board of Directors left by the resignations of Kevin Harvey and George Zachary.

On August 21, 2001, we filed a report on Form 8-K under Items 5 and 7, announcing the appointment of Laureen DeBuono as Interim Chief Financial Officer, replacing Lawrence Reinhold as Chief Financial Officer, who resigned effective August 31, 2001.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	BY:	/s/ LAUREEN DEBUONO



	LAUREEN DEBUONO
	Interim Chief Financial Officer
	(Duly Authorized Officer and Principal
	Financial and Accounting Officer)


(1)	Incorporated by reference from Exhibits 3(i)(b) and 3(ii)(b) of Critical Path, Inc.’s Registration Statement on Form S-1 (File Number 333-71499) filed with the Securities and Exchange Commission on January 29, 1999.

(2)	Incorporated by reference from Exhibit 3.2 of Critical Path, Inc.’s Form 10-K for the year ended December 31, 2000.

(3)	Incorporated by reference from Exhibit 4.1 of Critical Path, Inc.’s Registration Statement on Form S-1, Amendment Number 1 (File Number 333-71499) filed with the Securities and Exchange Commission on February 24, 1999.

(4)	Incorporated by reference from Exhibit 4.5 of Critical Path, Inc.’s Form 8-A filed on May 7, 2001.

39 EX-10.1 3 f77135ex10-1.txt EXHIBIT 10.1 Exhibit 10.1 AGREEMENT This AGREEMENT, dated as of September 30, 2001 (this "Agreement"), is entered into by and between Critical Path, Inc. ("Critical Path") and Vectis Group, LLC ("Vectis Group"). WHEREAS, Critical Path and Vectis Group are parties to that certain (a) Advisory Services Letter Agreement, dated as of May 30, 2001 (the "Advisory Services Letter Agreement"), a copy of which is attached hereto as Exhibit A; (b) Strategic Analysis Letter Agreement, dated as of March 29, 2001 (the "Strategic Analysis Letter Agreement"), a copy of which is attached hereto as Exhibit B; and (c) Finder and Advisory Letter Agreement, dated as of March 29, 2001 (the "Finder and Advisory Letter Agreement" and, together with the Advisory Services Letter Agreement and the Strategic Analysis Letter Agreement, the "Letter Agreements"), a copy of which is attached hereto as Exhibit C. WHEREAS, Critical Path and Vectis Group are parties to that certain (a) Advisory Services Indemnification Agreement, dated as of May 30, 2001 (the "Advisory Services Indemnification Agreement"), a copy of which is attached hereto as Exhibit D; (b) Strategic Analysis Indemnification Agreement, dated as of March 29, 2001 (the "Strategic Analysis Indemnification Agreement"), a copy of which is attached hereto as Exhibit E; and (c) Finder and Advisory Indemnification Agreement, dated as of March 29, 2001 (the "Finder and Advisory Indemnification Agreement" and, together with the Advisory Services Indemnification Agreement and the Strategic Analysis Indemnification Agreement, the "Indemnification Agreements"), a copy of which is attached hereto as Exhibit F. WHEREAS, Critical Path and Vectis Group desire to, among other things, amend the Strategic Analysis Letter Agreement and to terminate each of the Letter Agreements. NOW, THEREFORE, the parties hereto hereby agree as follows: Section 1. Termination of the Letter Agreements 1A. Vectis Group hereby agrees to waive any and all notice provisions with respect to termination contained in each of the Letter Agreements. 1B. Critical Path and Vectis Group hereby agree that each of the Letter Agreements shall terminate effective as of September 30, 2001 in all respects, except that (i) Vectis shall be paid the Finder's Fee (as defined in the Finder and Advisory Letter Agreement) contemplated by the Finder and Advisory Letter Agreement in connection with the financing currently being negotiated (the "Contemplated Financing") among Critical Path and certain Qualified Prospective Purchasers (as defined in the Finder and Advisory Letter Agreement) including without limitation, General Atlantic Partners 74, L.P. and affiliated entities and Hutchison Whampoa and affiliate entities. Vectis Group shall also be paid a Finder's Fee upon exercise of any warrants issued in connection with the Contemplated Financing; (ii) Vectis shall be paid as contemplated under the Strategic Analysis Letter Agreement in connection with the previously closed Trans, IPC and Broker transactions; and (iii) Critical Path shall honor the terms of the Warrant previously issued to Vectis pursuant to the Strategic Analysis Letter Agreement. 1C. Notwithstanding the termination of each of the Letter Agreements pursuant to Section 1B hereof, each of the Indemnification Agreements is hereby ratified by Critical Path and Vectis Group and shall remain in full force and effect in accordance with its terms. For avoidance of doubt, Critical Path hereby agrees to indemnify and hold harmless the Indemnified Persons (as defined in the Finder and Advisory Indemnification Agreement) for any Losses (as defined in the Finder and Advisory Indemnification Agreement) in accordance with the terms and provisions of the Finder and Advisory Indemnification Agreement that relate to, arise out of, or are based upon the Contemplated Financing. Section 2. Miscellaneous. 2A. This Agreement embodies the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. 2B. No modification, amendment or waiver of any provision of this Agreement shall be effective against any either party hereto unless such modification, amendment or waiver is approved in writing by each party hereto. 2C. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same agreement. 2D. Section headings used in this Agreement are for convenience only and are not to affect the construction of, or to be taken into consideration in interpreting, such agreement. 2E. This Agreement shall be governed by and construed in accordance with the laws of the State of California, applicable to contracts made and to be performed therein (excluding the conflicts of laws rules). * * * * * 2 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. CRITICAL PATH, INC. By: /s/ Michael J. Zukerman ------------------------------------ Name: Michael J. Zukerman Title: SVP and General Counsel VECTIS GROUP, LLC By: /s/ Matthew T. Hobart ------------------------------------ Name: Matthew T. Hobart Title: Managing Director and Chief Financial Officer EXHIBIT A ADVISORY SERVICES LETTER AGREEMENT EXHIBIT B STRATEGIC ANALYSIS LETTER AGREEMENT EXHIBIT C FINDER AND ADVISORY LETTER AGREEMENT EXHIBIT D ADVISORY SERVICES INDEMNIFICATION AGREEMENT EXHIBIT E STRATEGIC ANALYSIS INDEMNIFICATION AGREEMENT EXHIBIT F FINDER AND ADVISORY INDEMNIFICATION AGREEMENT EX-10.2 4 f77135ex10-2.txt EXHIBIT 10.2 EXHIBIT 10.2 AGREEMENT THIS AGREEMENT (hereafter "Agreement"), entered into this 15th day of May, 2001, between LAWRENCE P. REINHOLD (the "Executive") and CRITICAL PATH, INC. (the "Company"), W I T N E S S E T H: WHEREAS, the Executive is an Executive Vice President and the Chief Financial Officer of the Company pursuant to a letter agreement dated December 4, 2000 (the "Employment Agreement"); and WHEREAS, the Executive and the Company have considered that Executive may presently be entitled to terminate his employment for Good Reason (as defined in the Employment Agreement) and receive the severance benefits described in paragraphs 2 and 3 of the Employment Agreement upon a termination for Good Reason; and WHEREAS, the Executive and the Company desire that the Executive remain in the employ of the Company at this time; and WHEREAS, the Executive and the Company wish to provide that upon a future resignation or other termination of employment the Executive be provided certain severance benefits asset forth herein: NOW, THEREFORE, in exchange for the good and valuable consideration set forth herein, the adequacy of which is specifically acknowledged, the Executive and the Company hereby agree as follows: 1. Continued Employment. (a) The Executive shall continue to provide services consistent with his current position until such time as the Executive or the Company elects to terminate such employment, which either party may do at any time for any reason. For so long as the Executive shall remain in such position, the Company covenants and agrees that: (i) The Company's Board of Directors and its executive management shall keep the Executive fully informed in all material respects as to all matters that impact his responsibilities as the Company's Chief Financial Officer, including, without limitation, matters relating to accounting, finance, financial reporting, disclosure, legal, forward guidance, SEC filings and SEC/NASDAQ compliance. The Executive may from time to time circulate a list summarizing such matters to the Company's Board of Directors and executive management, following which the Board of Directors and executive management will provide timely feedback as to the accuracy and completeness of the matters described in the list. -1- (ii) The Executive shall be assigned reasonable and lawful duties commensurate with his position as Chief Financial Officer of the Company. (iii) The Executive shall have responsibility for resolving any disputed issues of accounting, financial reporting and SEC reporting. (b) Notwithstanding anything to the contrary set forth in the Employment Agreement, in the event that (i) the Executive resigns his employment following August 15, 2001, or such earlier date as the Executive may select in the event of a breach of the Company's covenants set forth in paragraph 1(a) above, or (ii) the Company terminates the Executive's employment at any time (the date of such a resignation or termination being hereafter referred to as the "Resignation Date"), the Executive shall receive, upon his execution of a Release in the form set forth in Exhibit A, the benefits set forth in paragraph 2. 2. Severance Benefits. (a) On the Resignation Date, the Company shall pay to the Executive, in a lump sum less applicable taxes and withholding, his accrued wages through that date, all accrued, unused vacation, and a payment equal to six (6) months' current base salary. In addition, the Company shall pay the Executive a portion of the Annual Bonus (as defined below), less applicable taxes and withholdings. The Company shall determine the amount of the annual bonus in its discretion (the "Annual Bonus"); provided, however, that the Annual Bonus shall be no less than one hundred fifty thousand dollars ($150,000) and no more than two hundred twenty-five thousand dollars ($225,000); and further provided that if the Executive resigns prior to August 15, 2001 other than by reason of a breach by the Company of its obligations under paragraph 1 of this Agreement, then the Company may reduce the amount of the Annual Bonus paid to the Executive according to the following formula: .25 times the Annual Bonus times the number of days worked by the Executive after the date of this Agreement, divided by 90. If the Executive elects COBRA coverage, then the Company shall pay the Executive's COBRA premiums for a period of six (6) months following the Resignation Date. To the extent that there are other fringe benefits that continue to be provided both before and following the Resignation Date, such benefits will continue to be characterized as they have in the past. The Company shall also pay the reasonable cost of moving the contents of the Executive's apartment and vehicles from San Francisco, California to Naperville, Illinois, in an amount not to exceed ten thousand dollars ($10,000). (b) Effective as of the Resignation Date, all unamortized principal and interest on that certain loan in the principal amount of one million seven hundred thousand dollars ($1,700,000) from the Company to the Executive shall be forgiven. (c) Receipt of the benefits described in this paragraph 2 is conditioned on the Executive executing the Release in the form set forth in Exhibit A. (d) The Executive understands and agrees that he shall be responsible for the reporting and payment of taxes with respect to the amounts paid to him under set forth in paragraph 2 of this Agreement. -2- 3. Stock Options. Upon execution of this Agreement, and in lieu of the option grants provided for in paragraph 3 of the Employment Agreement, the Company shall issue to the Executive an option (the "Option") to purchase one hundred twenty-one thousand eight hundred seventy-five (121,875) shares of the Company's common stock (the "Option Shares") at an exercise price per share equal to the fair market value of the Company's common stock on the date of grant (based on the closing price per share on the grant date, as reported by the Nasdaq Stock Market). The Option shall be an incentive stock option to the fullest extent permitted by applicable law. Fifty percent (50%) of the Option Shares shall be fully vested upon grant and the remaining Option Shares shall vest upon the Resignation Date, provided however, that if the Executive resigns prior to August 15, 2001 other than by reason of a breach by the Company of its obligations under paragraph 1 of this Agreement, then the number of shares vested upon the Resignation Date shall be reduced by: .43 times the Option Shares, times the number of days worked by the Executive after the date of this Agreement, divided by 90. The Option shall remain exercisable for a period of six (6) months following the Resignation Date. 4. Attorney's Fees. The Company shall reimburse the Executive for all attorneys' fees and costs expended in the negotiation and drafting of this Agreement, in an amount not to exceed fifteen thousand dollars ($15,000). 5. Choice of Law. This Agreement shall in all respects be governed and construed in accordance with the laws of the State of California, including all matters of construction, validity and performance, without regard to conflicts of law principles. 6. Notices. All notices, demands or other communications regarding this Agreement shall be in writing and shall be sufficiently given if either personally delivered or sent by registered or certified mail, return receipt requested, postage paid, addressed as follows: (a) If to the Company: Critical Path, Inc. 532 Folsom Street San Francisco, CA 94105 Attn: Chief Executive Officer (b) If to the Executive: Mr. Lawrence P. Reinhold 3207 Plantation Court Naperville, IL 60564 Either party may change the address at which it is to receive notice by informing the other party of the change in writing. 7. Severability. Except as otherwise specified below, should any portion of this Agreement be found void or unenforceable for any reason by an arbitrator or by a court of competent jurisdiction, the parties intend that such provision be limited or modified so as to make it enforceable in a manner most closely adhering to the parties' intent, and if such provision cannot be modified to be enforceable, the unenforceable portion shall be deemed severed from the remaining portions of this Agreement, which shall otherwise remain in full force and effect. If any portion of this Agreement is so found to be void or unenforceable for any reason in -3- regard to any one or more persons, entities, or subject matters, such portion shall remain in full force and effect with respect to all other persons, entities, and subject matters. 8. Understanding and Authority. The parties understand and agree that all terms of this Agreement are contractual and are not a mere recital, and represent and warrant that they are competent to covenant and agree as herein provided. 9. Entire Agreement. This Agreement contains the entire agreement of the parties regarding the subject matter of this Agreement, and supersedes all prior oral and written agreements, understandings, commitments, and practices between them. Notwithstanding the generality of the foregoing, the parties agree that the Option and the Option Shares shall, in all respects not specifically addressed herein, remain subject to all provisions of the 1998 Stock Plan, and that the continuing obligation provisions of the Company's Proprietary Information and Invention Assignment Agreement remain in effect. No oral modification, express or implied, may alter or vary the terms of this Agreement. No amendments to this Agreement may be made except by an express written agreement signed by both the Executive and the Chairman of the Board of the Company. To the extent that any provisions of this Agreement conflict with the provisions of the Employment Agreement, the provisions of this Agreement shall control. The parties have carefully read this Agreement in its entirety; fully understand and agree to its terms and provisions; and intend and agree that it is final and binding on all parties. IN WITNESS WHEREOF, and intending to be legally bound, the parties have executed the foregoing on the dates shown below. CRITICAL PATH, INC. /s/ Lawrence P Reinhold By /s/ David Hayden - ---------------------------- Lawrence P. Reinhold Name David Hayden Title Executive Chairman -4- EXHIBIT A RELEASE OF CLAIMS This Release of Claims (hereafter "Agreement") is entered into this 17th day of August, 2001, between Lawrence P. Reinhold (the "Executive") and Critical Path, Inc. (the "Company"). WHEREAS, the Executive and the Company are parties to an agreement dated May 15, 2001 to the Executive's December 4, 2000 employment agreement (the "Supplemental Agreement"); and WHEREAS, the Executive and the Company agree to a mutual separation of the Executive's employment as of August 31, 2001 and desire to execute this Agreement pursuant to paragraph 2(c) of the Supplemental Agreement in order to document the termination of their employment relationship and fully and finally to resolve all matters between them; THEREFORE, in exchange for the good and valuable consideration set forth herein, the adequacy of which is specifically acknowledged, the Executive and the Company hereby agree as follows: 1. General Release of Claims by the Executive. (a) Except for the obligations set forth in this Agreement, the Executive, on behalf of himself and his executors, heirs, representatives and assigns, hereby agrees to release and forever discharge the Company and its investors, predecessors, successors and their respective parent corporations, affiliates, related, and/or subsidiary entities, and all of their past and present directors, shareholders, officers, general or limited partners, employees, agents, and attorneys, and agents and representatives of such entities, and employee benefit plans in which the Executive is or has been a participant by virtue of his employment with Company, from any and all claims, debts, demands, accounts, judgments, rights, causes of action, equitable relief, damages, costs, charges, complaints, obligations, promises, agreements, controversies, suits, expenses, compensation, responsibility and liability of every kind and character whatsoever (including attorneys' fees and costs), whether in law or equity, known or unknown, asserted or unasserted, suspected or unsuspected (collectively "Claims"), which the Executive has or may have had against such entities based on any events or circumstances arising or occurring on or prior to the date hereof or on or prior to the Resignation Date, arising directly or indirectly out of, relating to, or in any other way involving in any manner whatsoever the Executive's employment by the Company or the separation thereof, and any and all claims arising under federal, state, or local laws relating to employment. This release specifically includes, but is not limited to, any and all claims for wrongful discharge or demotion, breach of express or implied contract, breach of the implied covenant of good faith and fair dealing, inducement of breach, termination in violation of public policy, retaliation, fraud, intentional or negligent misrepresentation, defamation, conspiracy, tortious denial of contract, intentional or negligent infliction of emotional distress, assault, battery, false imprisonment, interference with proprietary interests, failure to pay wages, bonuses, commissions, benefits, vacation pay, severance pay, or other compensation of any sort, negligence, negligent retention, unlawful efforts to prevent employment, violation of federal or state constitutional rights, discrimination or harassment on the basis of race, color, sex, A-1 religion, national origin, age, ancestry, marital status, family status, sexual orientation, physical disability, mental disability, or medical condition and/or any statutes, rules, regulations or ordinances, whether federal, state or local, including, but not limited to, any claims arising under Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Older Workers Benefit Protection Act, the Fair Labor Standards Act, the Employee Retirement Income Security Act, the Family and Medical Leave Act, the California Fair Employment and Housing Act, the California Family Rights Act, claims for wages under the California Labor Code, and any and all similar federal, state or local statutes, ordinances, and regulations. Notwithstanding the generality of the foregoing, the Executive does not release his right to a defense and indemnity from the Company pursuant to the Indemnity Agreement entered into between the parties or as provided by law. (b) In accordance with the Older Workers Benefit Protection Act of 1990, the Executive acknowledges that he is aware of the following: (i) That he is waiving and releasing any and all rights he has or may have to make claims against the Company for age discrimination under the federal Age Discrimination in Employment Act (ADEA); (ii) That he is not waiving or releasing any rights under the ADEA that may arise after the date he signs this Agreement; (iii) That he should consult with an attorney regarding this Agreement before accepting this Agreement; (iv) That he has twenty-one (21) days from the date this Agreement is presented to him in which to consider this Agreement and whether he will enter into it, although he may, in the exercise of his own discretion, sign or reject it at any time before the twenty-one (21) day period expires (v) That, at any time within seven (7) days after executing this Agreement, Executive may revoke this Agreement; and (vi) That this Agreement is not enforceable until the revocation period has passed. 2. General Release of Claims by the Company. The Company hereby agrees to release and forever discharge the Executive and his executors, heirs, representatives and assigns, from any and all claims, debts, demands, accounts, judgments, rights, causes of action, equitable relief, damages, costs, charges, complaints, obligations, promises, agreements, controversies, suits, expenses, compensation, responsibility and liability of every kind and character whatsoever (including attorneys' fees and costs), whether in law or equity, known or unknown, asserted or unasserted, suspected or unsuspected (collectively, "Claims"), which the Company has or may have against the Executive based on any events or circumstances arising or occurring on or prior to the date hereof or on or prior to the Resignation Date. 3. Waiver of California Civil Code Section 1542. The Executive and the Company understand and agree that each is hereby giving a full and final release covering all unknown and A-2 unanticipated injuries, debts, claims, or damages which may have arisen, or may arise, in connection with any act or omission by the parties released herein before and including the date of execution of this Agreement. For that reason, Executive and the Company hereby waive any and all rights or benefits which either may have under the terms of California Civil Code section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH, IF KNOWN BY HIM, MIGHT HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. 4. Nondisparagement. The Executive agrees that neither he, nor anyone acting by, through, or in concert with him, shall disparage or otherwise communicate negative statements or opinions about the Company, its Board members, investors, officers, employees or business. The Company agrees that neither it, nor anyone acting by, through, or in concert with it, shall disparage or otherwise communicate negative statements or opinions about the Executive. 5. Agreed Statements. The Company and the Executive shall jointly approve all press releases or other public statements made concerning the reason for the Executive's separation from the Company and all statements provided by the Company in response to any employment reference inquiries regarding the Executive. 6. Cooperation. (a) The Executive agrees to give reasonable cooperation to the Company in any pending or future litigation or arbitration brought by or against the Company and in any investigation the Company may conduct. The Company shall compensate the Executive for all time spent giving cooperation to the Company pursuant to this paragraph 5 at the rate of two hundred fifty dollars ($250) per hour, including travel time, and shall reimburse the Executive for all travel and other expenses incurred in compliance with his duty of cooperation. (b) The Executive shall have the right to choose his own legal counsel to represent him in any litigation in which the Executive is named as a party, or investigation, arising out of the Executive's employment by the Company. In all such matters, the Company shall bear all reasonable costs of the Executive's defense in accordance with the terms of the Executive's Indemnification Agreement with the Company, and shall permit the Executive's legal counsel to be actively involved in the litigation or investigation as either shadow counsel or counsel of record. The Company shall provide full access to the Executive and his legal counsel to documents relevant to any investigation, or litigation in which the Executive is named. 7. Confidential Information; Return of Company Property. (a) The Executive executed the Company's Proprietary Information and Invention Assignment Agreement, the commitments of which extend beyond termination of employment. Except as may be required by law, the Executive shall maintain in confidence and shall not directly, indirectly or otherwise, use, disseminate, disclose or publish, or use for his benefit or the benefit of any person, firm, corporation or other entity, any confidential or proprietary informa- A-3 tion of or relating to the Company, including, without limitation, confidential or proprietary information or trade secrets with respect to the Company's operations, processes, products, inventions, business practices, finances, principals, vendors, suppliers, customers, potential customers, marketing methods, costs, prices, contractual relationships, regulatory status, compensation paid to employees or other terms of employment, or deliver to any person, firm, corporation or other entity any document, record, notebook, computer program or similar repository of or containing any such information. The parties hereby stipulate and agree that as between them the foregoing matters are important, material and confidential proprietary information or trade secrets and affect the successful conduct of the businesses of the Company and any successor or assignee of the Company. (b) The Executive shall deliver to the Company on or before the Resignation Date all originals and copies of correspondence, drawings, manuals, letters, notes, notebooks, reports, programs, plans, proposals, financial documents, or any other documents concerning the Company's customers, business plans, marketing strategies, products, processes or business of any kind and/or which contain proprietary information or trade secrets which are in the possession or control of the Executive or his agents. (c) The Executive shall return to the Company on or before the Resignation Date all property of the Company in his possession or control. 8. In the Event of a Claimed Breach. All controversies, claims and disputes arising out of or relating to this Agreement, including without limitation any alleged violation of its terms, shall be resolved by final and binding arbitration before a single neutral arbitrator in San Francisco County, California in accordance with the dispute resolution rules of the American Arbitration Association ("AAA"). The arbitration shall be commenced by filing a demand for arbitration with the AAA, or by a judge mutually agreed upon by the parties. The arbitrator may award the prevailing party attorneys' fees, as well as the costs and expenses of the arbitration, including expert fees, if any. The arbitration award may be enforced in any court of competent jurisdiction. 9. Choice of Law. This Agreement shall in all respects be governed and construed in accordance with the laws of the State of California, including all matters of construction, validity and performance, without regard to conflicts of law principles. 10. Notices. All notices, demands or other communications regarding this Agreement shall be in writing and shall be sufficiently given if either personally delivered or sent by registered or certified mail, return receipt requested, postage paid, addressed as follows: (a) If to the Company: Critical Path, Inc. 532 Folsom Street San Francisco, CA 94105 Attn: Chief Executive Officer A-4 (b) If to the Executive: Mr. Lawrence P. Reinhold 3207 Plantation Court Naperville, IL 60564 Either party may change the address at which it is to receive notice by informing the other party of the change in writing. 11. Severability. Except as otherwise specified below, should any portion of this Agreement be found void or unenforceable for any reason by an arbitrator or by a court of competent jurisdiction, the parties intend that such provision be limited or modified so as to make it enforceable in a manner most closely adhering to the parties' intent, and if such provision cannot be modified to be enforceable, the unenforceable portion shall be deemed severed from the remaining portions of this Agreement, which shall otherwise remain in full force and effect. If any portion of this Agreement is so found to be void or unenforceable for any reason in regard to any one or more persons, entities, or subject matters, such portion shall remain in full force and effect with respect to all other persons, entities, and subject matters. 12. Understanding and Authority. The parties understand and agree that all terms of this Agreement are contractual and are not a mere recital, and represent and warrant that they are competent to covenant and agree as herein provided. 13. Entire Agreement. This Agreement, together with the Supplemental Agreement contains the entire agreement of the parties regarding the subject matter of this Agreement, and supersedes all prior oral and written agreements, understandings, commitments, and practices between them. No oral modification, express or implied, may alter or vary the terms of this Agreement. No amendments to this Agreement may be made except by an express written agreement signed by both the Executive and the Chairman of the Board of the Company. The parties have carefully read this Agreement in its entirety; fully understand and agree to its terms and provisions; and intend and agree that it is final and binding on all parties. IN WITNESS WHEREOF, and intending to be legally bound, the parties have executed the foregoing on the dates shown below. MR. LAWRENCE P. REINHOLD CRITICAL PATH, INC. By: /s/ Lawrence P. Reinhold By: /s/ David Hayden Title: Executive Chairman Date 8/17/01 Date 8/17/01 A-5 EX-10.3 5 f77135ex10-3.txt EXHIBIT 10.3 EXHIBIT 10.3 August 1, 2001 David C. Hayden 2510 Jackson Street San Francisco, California 94115 Dear David: This letter agreement (the "Agreement") sets forth the terms and conditions of your employment with Critical Path, Inc., a California corporation (the "Company"). All of such terms are conditioned on your having signed and delivered a copy of this Agreement to the Company. This Agreement has an effective date of August 1, 2001 (the "Effective Date"). Provided you are still an employee of the Company, the employment terms contained in this Agreement shall be reviewed by the Compensation Committee of the Company's Board of Directors (the "Board") in July 2002. In consideration of the mutual covenants and promises made in this Agreement, you and the Company agree as follows: 1. Position, Responsibilities and Term. (a) Position and Responsibilities. As of the Effective Date, you will continue to serve in the position of Executive Chairman with appropriate responsibilities for such role. As Executive Chairman, you shall report directly to the Board. You shall also serve as Chairman of the Board of Directors. Your office will be located in San Francisco, California and your duties shall primarily be performed there. (b) At-Will Relationship. Subject to the terms and conditions of this Agreement, your employment at the Company is "at will" and you or the Company are free to terminate the employment relationship at any time, with or without Cause (as defined in Section 7) in each case subject to the terms and provisions of Section 7. 2. Salary. You will earn a base salary of $1.00 per year ("Base Salary"), which shall cover all hours worked, payable in the time and manner that salary is paid by the Company to employees generally, and subject to customary tax deductions. Your Base Salary will be reviewed annually and any adjustments will be within the discretion of the Board consistent with the Company's policies and based on your performance and/or contributions to the Company. 3. Bonus. You will be eligible to receive performance bonuses (each a "Bonus" or collectively "Bonuses") as described in this Section 3 and provided that you remain an employee of the Company until the applicable performance goal is achieved. The Compensation Committee of the Board must certify in writing that the Bonus performance goals have been accomplished before any Bonus is paid out. Additionally, so long as there is any outstanding principal or interest, or unsatisfied withholding on the Performance Loan specified in Section 6(a), then any such Bonus payment shall first be applied to the Performance Loan obligations as provided under Section 6(a). (a) Hiring of New CEO. You will earn a Bonus of $500,000 upon the starting date of employment for a new permanent CEO that you have hired to serve as CEO. You will be considered to have hired a permanent CEO for purposes of this Agreement and the Bonus if a permanent CEO is hired by the Company while you are Executive Chairman and you do not refuse to consent to the hiring. You will not receive this Bonus if you resign your employment for Good Reason as provided under Section 7(b). (b) Positive Earnings Before Interest Taxes Depreciation and Amortization ("EBITDA"). You will earn a Bonus of $500,000 upon the Company's attainment of positive EBITDA for any fiscal quarter provided such positive EBITDA occurs for a fiscal quarter in or before the end of the second fiscal quarter of 2002. EBITDA will be determined by the Company's independent public accountants using the Company's financial statements as reported in filings with the Securities and Exchange Commission ("SEC"). Earnings, for EBITDA determination purposes, will include revenue from only normal business operations and will not include any extraordinary or nonrecurring income or revenue items. (c) Trading Price. You will earn a Bonus of $500,000 if the daily closing sales prices of the Company (as reported by NASDAQ) exceed an average of $5.00 per share (or as adjusted for any future stock splits, stock dividends, recapitalization, or similar events) for at least 22 consecutive trading days provided this goal is completely achieved by July 1, 2002. 4. Equity. You received a grant under the Company's Amended and Restated 1998 Stock Plan (the "Plan") on July 31, 2001 of 5,000,000 time-and performance-based nonstatutory stock options to purchase shares of the Company's common stock (the "Options") as described in this Section 4 and in your Amended and Restated Option Agreement (attached as Exhibit C) which must be executed and returned to the Company in order to receive your Option grant. The Options shall have an exercise price equal to the Company's fair market value on the date of grant as determined under the Plan. The Options will vest pursuant to the below schedule. Continued vesting will be subject to your continued employment or service as a Board member. All Option vesting shall cease upon your voluntary resignation of employment without Good Reason.

The above performance-based acceleration triggers will cease to be applicable upon your prior cessation of employment for any reason. The Compensation Committee of the Board must certify in writing that the performance goals have been satisfied before any Option vesting will be accelerated pursuant to attainment of performance goals. Prior to any Change in Control of the Company, the shares acquired under the Options can be sold or transferred only pursuant to an SEC Rule 10b5-1 trading plan that is pre-approved by the Board's Compensation Committee. 5. Benefits and Reimbursements. (a) Benefits. During your employment with the Company, you will be eligible to participate in all Company employee benefit plans and programs at the time or thereafter made available to all of the Company's salaried employees and officers. You will be covered under the Company's directors and officer insurance program and will be indemnified to the fullest extent permitted by applicable law for your actions taken on behalf of the Company. (b) Business Expense Reimbursement. During your employment with the Company, you will be reimbursed for all reasonable and approved business expenses (including, but without limitation, travel and automobile expenses) upon the submission of requisite properly completed forms and receipts to the Company in accordance with its business expense reimbursement and travel policies. Such reimbursements shall be in compliance with applicable rules and regulations promulgated by the Internal Revenue Service. 6. Loans. ----- (a) Performance Loan. The Company has made a one-time loan to you of $1,500,000 (the "Performance Loan"). The Performance Loan shall accrue interest at the greater of the Prime rate or Applicable Federal Rate ("AFR"), payable on each anniversary of the Performance Loan. The loan, however, will not be defaulted for any failure to pay interest annually or before the expiration of the loan term. The Performance Loan is a full recourse loan with a three (3) year term and is evidenced by the Performance Loan Agreement and Promissory Note that are attached as Exhibits A and B, respectively. Upon the Compensation Committee's written certification that a performance goal under Section 3(a), 3(b) or 3(c) has been successfully achieved, then an amount of principal under the Performance Loan that equals the amount of the otherwise applicable Bonus payment shall be forgiven provided you satisfy all applicable withholding obligations at the time of loan forgiveness. You will have until July 15, 2002 to satisfy such withholding obligations and any Performance Loan forgiveness in lieu of the bonus payment shall be deferred until such withholding is satisfied (and interest shall continue to accrue on all outstanding principal and interest). On July 16, 2002, if you have not previously satisfied the withholding obligations, then any unpaid earned Bonus amounts shall be applied (less withholding on the Bonus amounts) to repay any outstanding Performance Loan principal and/or interest. Any unpaid principal and interest remains a full recourse obligation for you and may be repaid by you during or at the end of the Performance Loan term without any prepayment penalty. If you timely achieve all of the Section 3(a), 3(b) and 3(c) performance objectives (as determined by the Compensation Committee in writing), then you must fully pay off all interest and withholding obligations in order to receive full Performance Loan principal forgiveness. (b) Stock Option Loans. You may exercise the vested portion of the Options granted to you under Section 4 through loans from the Company ("Stock Option Loans"). The principal of such Stock Option Loans shall not exceed $2,500,000 in the aggregate and shall be full recourse loans with a three (3) year term and the underlying shares shall be pledged to secure such loan and held in an escrow account until repayment of the loan. Interest, payable on an annual basis, shall accrue at the greater of the Prime rate or AFR. The loan, however, will not be defaulted for any failure to pay interest annually or before the expiration of the loan term. The form of Stock Option Loan promissory note, security agreement and assignment separate from certificate are attached as Exhibit D. The other terms and conditions of any Stock Option Loans shall be as provided under this Agreement, the Plan and your Amended and Restated Option agreement. 7. Consequences of Termination of Employment. (a) For Cause. For purposes of this Agreement, you may be terminated for "Cause" as a result of the occurrence of one of the following: (i) your commission of a felony, an act involving moral turpitude, or an act constituting common law fraud, and which has a material adverse effect on the business or affairs of the Company or its affiliates or stockholders; (ii) your intentional or willful misconduct or refusal to follow the lawful instructions of the Board; or (iii) your intentional breach of Company confidential information obligations which has an adverse effect on the Company or its affiliates or stockholders. For these purposes, no act or failure to act shall be considered "intentional or willful" unless it is done, or omitted to be done, in bad faith without reasonable belief that the action or omission was in the best interest of the Company. In the event your employment or Board service is terminated for Cause you will be entitled to any accrued and unpaid salary due you pursuant to Section 2 above through the date of termination and to any earned, unused vacation and unreimbursed expenses owed you. You will be entitled to no other compensation from the Company. All of your outstanding stock options and any shares acquired pursuant to the exercise of stock options within six (6) months prior to your termination date shall be immediately forfeited, along with any gains from the sale of such shares. In addition, such forfeitures will also occur if your employment has been terminated for some reason other than for Cause but it is then subsequently determined that you committed an act which would have caused your employment to have been terminated for Cause had such act been discovered during your employment with the Company. Any outstanding loans under Section 6 shall also become immediately due and payable. (b) Termination Without Cause or For Good Reason. The Company may terminate your employment without "Cause" or you may resign for "Good Reason." For purposes of this Agreement, you will have been terminated for Good Reason if you resign from the Company within sixty (60) days after the date that the Company has hired a new CEO without your consent if such hiring occurs prior to July 2002. If your employment with the Company is terminated without Cause or for Good Reason, then you will be entitled to all of the following: (i) Severance. $350,000 (less withholding) will be paid out to you over twelve (12) months in the time and manner that salary is paid by the Company to employees generally, and subject to customary tax deductions. You will also be paid for any accrued vacation and unreimbursed expenses owed you at the time of termination of employment. (ii) Equity. If the stock options granted under Section 4(iii) have not previously vested, then such stock options shall vest in full. If the Section 4(iii) options were previously vested, then the stock options granted under Section 4(ii) shall instead vest in full. (iii) Loans. The due date for final repayment of any outstanding loans issued to you under Section 6 shall be extended by two (2) years. Subject to your compliance with Section 7(e), you shall not be required to mitigate the amount of any payment or benefit contemplated by this Section 7(b), nor shall any such payment or benefit be reduced by any earnings or benefits that you may receive from any other source. (c) Voluntary Termination, Death or Disability. In the event you terminate your employment with the Company of your own volition without Good Reason or as a result of death or disability such termination will have the same consequences as a termination for Cause under Section 7(a) (except for the provisions relating to loan acceleration and forfeiture of stock options/shares). For purposes of this Agreement, "disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment. (d) Release of Claims. As a condition to the receipt of the payments and benefits described in this Section 7 and any other post-termination benefits, including but not limited to any acceleration of vesting of your Options and extension of the time periods to repay any outstanding loans to the Company, you shall be required to execute a release of all claims arising out of your employment or the termination thereof including, but not limited to, any claim of discrimination under state or federal law, but excluding claims for indemnification from the Company under any indemnification agreement with the Company, its articles of incorporation and by-laws or applicable law or claims for directors and officers' insurance coverage. (e) Other Conditions. In order for you to receive (or continue to receive) any of the payments and benefits provided by this Section 7, you will not at any time during and subsequent to your period of employment with the Company make any disparaging statements (oral or written) about the Company or any of its officers or directors that could have a material adverse effect on the Company or any of the Company's products or work-in-progress. (f) Offset. Any severance or other payments or benefits made to you under this Agreement may be reduced by any amounts you owe to the Company. With respect to amounts loaned to you by the Company, the right of offset shall apply only with respect to any loan amount for which re-payment is presently due or past due. 8. Change in Control. (a) Definition. For purposes of this Agreement, a "Change in Control" of the Company shall be defined as the occurrence of any one of the following: (i) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entity's securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not shareholders of the Company immediately prior to such merger, consolidation or other reorganization; (ii) The sale, transfer or other disposition of all or substantially all of the Company's assets; (iii) The dissolution, liquidation or winding up of the Company; (iv) Any transaction as a result of which any person is the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing at least 20% of the total voting power represented by the Company's then outstanding voting securities. For purposes of this Paragraph (iv), the term "person" shall have the same meaning as when used in sections 13(d) and 14(d) of the Securities Exchange Act but shall exclude: (A) A trustee or other fiduciary holding securities under an employee benefit plan of the Company or a subsidiary of the Company; (B) A corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of the common stock of the Company; and (C) The Company. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transactions. (b) Equity Vesting. In the event of a Change in Control of the Company, 50% of your then-unvested Options (meaning 50% of your unvested Options that are otherwise scheduled to vest under Sections 4(ii), (iii) and (iv) on each vesting date had a Change in Control not occurred) shall become vested provided that you are employed by the Company on the date the negotiations or communications began (as determined by the Board in good faith) which lead to the Change in Control provided, however, that all of your then-unvested Options shall become vested if the Change in Control consideration received by Company shareholders is at least $10.00 per share (with such share price adjusted for any future stock splits, stock dividends, recapitalization, or similar events). (c) Loan Forgiveness. In the event of a Change in Control of the Company, any outstanding principal on the Performance Loan shall be forgiven. You shall still be responsible to pay for any related taxes, withholding and accrued interest related to the Performance Loan. 9. Limitation on Payments. In the event that the severance and other benefits provided for in this Agreement or otherwise payable to you (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986 as amended (the "Code"), and (ii) would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then your benefits under this Agreement shall be either (a) delivered in full, or (b) delivered as to such lesser extent which would result in no portion of such benefits being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by you on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code. Unless the Company and you otherwise agree in writing, any determination required under this Section shall be made in writing by the Company's independent public accountants (the "Accountants"), whose determination shall be conclusive and binding upon the you and the Company for all purposes. For purposes of making the calculations required by this Section 9, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the you shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 9. The Company shall bear all costs that the Accountants may reasonably incur in connection with any calculations contemplated by this Section 9. 10. Assignability; Binding Nature. Commencing on the Effective Date, this Agreement will be binding upon you and the Company and your respective successors, heirs, and assigns. This Agreement may not be assigned by you except that your rights to compensation and benefits hereunder, subject to the limitations of this Agreement, may be transferred by will or operation of law. No rights or obligations of the Company under this Agreement may be assigned or transferred except by operation of law in the event of a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and assumes the Company's obligations under this Agreement contractually or as a matter of law. 11. Governing Law; Arbitration. This Agreement will be deemed a contract made under, and for all purposes shall be construed in accordance with, the laws of California. Any controversy or claim relating to this Agreement any breach thereof, and any claims you may have against the Company or any officer, director or employee of the Company or arising from or relating to your employment with the Company, will be settled solely and finally by arbitration in San Francisco, California in accordance with the rules of the American Arbitration Association ("AAA") then in effect in the State of California, and judgment upon such award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof, provided that this Section 11 shall not be construed to eliminate or reduce any right you or the Company may otherwise have to obtain a temporary restraining order or a preliminary or permanent injunction to enforce the confidential information obligations before the matter can be heard in arbitration. The arbitrator may provide that the cost of the arbitration (including reasonable legal fees) incurred by you or the Company will be borne by the non-prevailing party. 12. Withholding. Anything to the contrary notwithstanding, all payments made by the Company hereunder to you or your estate or beneficiaries will be subject to tax withholding pursuant to any applicable laws or regulations. In lieu of withholding, the Company may, in its sole discretion, accept other provisions for payment of taxes as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold such taxes have been satisfied. 13. Entire Agreement. Except as otherwise specifically provided in this Agreement, this Agreement contains all the legally binding understandings and agreements between you and the Company pertaining to the subject matter of this Agreement and supersedes all such agreements including, but not limited to, any employment or change of control agreements, whether oral or in writing, previously entered into between the parties. 14. Miscellaneous. No provision of this Agreement may be amended or waived unless such amendment or waiver is agreed to by you and the Company in writing. No waiver by you or the Company of the breach of any condition or provision of this Agreement will be deemed a waiver of a similar or dissimilar provision or condition at the same or any prior or subsequent time. In the event any portion of this Agreement is determined to be invalid or unenforceable for any reason, the remaining portions shall be unaffected thereby and will remain in full force and effect to the fullest extent permitted by law. If the terms of this Agreement are acceptable to you, please execute the enclosed copy of this letter and return it to the undersigned. Very truly yours, CRITICAL PATH, INC. By: /s/ William McGlashan Its: Interim CEO AGREED TO AND ACCEPTED BY: /s/ David Hayden - ------------------------------- David C. Hayden 10/19/01 - ------------------------------- Date Signed CRITICAL PATH, INC. PERFORMANCE LOAN AGREEMENT This Loan Agreement (the "Agreement") is made as of August 13, 2001 by and between Critical Path, Inc., a California corporation (the "Company") and David C. Hayden ("Borrower"). RECITALS Borrower desires to borrow, and the Company desires to lend to Borrower up to an aggregate of $1,500,000 (the "Borrowed Amount") pursuant to a promissory note on the terms and conditions contained herein and in the promissory note and in the employment agreement between the Company and Borrower dated August 1, 2001 (the "Employment Agreement"). AGREEMENT In consideration of the foregoing, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. AGREEMENT TO LEND. Subject to the terms and conditions contained in this Agreement and the Employment Agreement, the Company agrees to issue to Borrower a check or other readily available funds in the Borrowed Amount upon the date of this Agreement. 2. PROMISSORY NOTE. In consideration of the Company's delivery of the Borrowed Amount, Borrower will execute the Note in the principal amount of such Borrowed Amount and bearing interest at a rate of 6.75% per annum, compounded annually. 3. DEFAULT. Borrower shall be deemed to be in default of the Note and of this Agreement in the event: (a) Payment of principal or interest on the Note shall be delinquent for a period of ten (10) days or more after the Note's due date; or (b) Borrower fails to perform any of the covenants contained in this Agreement for a period of ten (10) days after written notice thereof from the Company. 4. REMEDIES IN THE EVENT OF DEFAULT. In the case of an event of default, as set forth above, the Company shall have the right to accelerate payment of the Note upon notice to Borrower, and shall thereafter be entitled to pursue any or all of its remedies under applicable law, including, without limitation, offsetting from Borrower's salary, bonuses, vacation pay or other cash payments due to Borrower from the Company, any amount due and payable by Borrower under the Note. 5. NO EMPLOYMENT RIGHTS. Nothing in this Agreement or the Note is intended or shall be construed to confer upon Borrower any right to employment or continued employment with the Company, or shall alter in any way the nature of Borrower's employment with the Company. 6. MISCELLANEOUS. (a) SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. (b) GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. (c) NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier or confirmed facsimile, or 48 hours after being deposited in the U.S. mail as certified or registered mail with postage prepaid, if such notice is addressed to the party to be notified at such party's address or facsimile number as set forth below, or as subsequently modified by written notice. (d) SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms. (e) ENTIRE AGREEMENT. This Agreement, and the documents referred to herein constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and any and all other written or oral agreements relating to the subject matter hereof existing between the parties are expressly canceled. (f) ADVICE OF LEGAL COUNSEL. Each party acknowledges and represents that, in executing this Agreement, it has had the opportunity to seek advice as to its legal rights from legal counsel and that the person signing on its behalf has read and understood all of the terms and provisions of this Agreement. This Agreement shall not be construed against any party by reason of the drafting or preparation thereof. (g) DELAYS. No delay by the Company in exercising any power or right hereunder shall operate as a waiver of any power or right. The parties hereto have executed this Agreement as of the day and year first above written. DAVID C. HAYDEN /s/ David Hayden -------------------------------------- (Signature) Address: ------------------------------ -------------------------------------- Facsimile: ---------------------------- CRITICAL PATH, INC. By:/s/ William McGlashan ----------------------------------- Title: Interim CEO -------------------------------- Address: ------------------------------ -------------------------------------- attn. to: ----------------------------- FULL RECOURSE PROMISSORY NOTE $1,500,000 San Francisco, California August 13, 2001 For value received, the undersigned promises to pay Critical Path, Inc., a California corporation (the "Company"), at its principal office the principal sum of $1,500,000 with interest from the date hereof at a rate of 6.75% per annum, compounded annually, on the unpaid balance of such principal sum. Such principal and interest shall be due and payable on August 13, 2004, and interest shall be due and payable annually before August 13th of each year until paid in full. Such due date shall be extended by two years if he undersigned's employment with the Company is terminated either without Cause or for Good Reason (as defined in the undersigned's employment agreement with the Company). If the undersigned's employment or directorship with the Company is terminated for Cause prior to payment in full of this Note, this Note shall be immediately due and payable. Principal and interest are payable in lawful money of the United States of America. PRINCIPAL AMOUNTS DUE UNDER THIS NOTE MAY BE PREPAID WITHOUT PENALTY. Should suit be commenced to collect any sums due under this Note, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The makers and endorsers have severally waived presentment for payment, protest, notice of protest, and notice of nonpayment of this Note. This Note is a full recourse note. /s/ David Hayden David C. Hayden CRITICAL PATH, INC. 1998 STOCK PLAN AMENDED AND RESTATED NONSTATUTORY STOCK OPTION AGREEMENT Critical Path, Inc., a California corporation (the "Company"), granted an Option on July 31, 2001 to purchase shares of its common stock (the "Shares") to the Optionee named below. The terms and conditions of that Option grant, as amended and restated, are set forth in this cover sheet, the attachment, the Company's 1998 Stock Plan (the "Plan") and in the Optionee's employment agreement with the Company dated August 1, 2001. Date of Option Grant: July 31, 2001 ----------------------------- Name of Optionee: David C. Hayden --------------------------------- Optionee's Social Security Number: ###-##-#### ---------------- Number of Shares Covered by Option: 5,000,000 --------------- Exercise Price per Share: $.36 ------------------------- Vesting Start Date: January 1, 2001 ------------------------------- BY SIGNING THIS COVER SHEET, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED IN THE ATTACHED AGREEMENT AND IN THE PLAN, A COPY OF WHICH IS ALSO ENCLOSED. Optionee: --------------------------------------------------------------------- (Signature) Company: --------------------------------------------------------------------- (Signature) Title: -------------------------------------------------------------- Attachment C-2 CRITICAL PATH, INC. 1998 STOCK PLAN AMENDED AND RESTATED NONSTATUTORY STOCK OPTION AGREEMENT NONSTATUTORY STOCK This option is not intended to be an incentive stock OPTION option under section 422 of the Internal Revenue Code and will be interpreted accordingly. VESTING The Shares under this option will vest in accordance with the vesting schedule indicated below: NUMBER OF OPTIONS VESTING EVENT (i) 2,000,000 Vested upon date of option grant. (ii) 1,000,000 Monthly vesting on a pro-rata basis between January 1, 2001 and December 31, 2004 with earlier full vesting if the daily closing sales prices of the Company (as reported by NASDAQ) exceed an average of $5.00 per share (or as adjusted for any future stock splits, stock dividends, recapitalization, or similar events) for at least 22 consecutive trading days provided this goal is completely achieved by July 1, 2002. (iii) 1,000,000 Monthly vesting on a pro-rata basis between January 1, 2001 and December 31, 2004 with earlier full vesting upon the retention of six (6) months employment of the new CEO (as CEO) who was hired by you pursuant to Section 3(a) in your employment agreement with the Company. (iv) 1,000,000 Vested on December 31, 2004 with earlier full vesting upon the Company's attainment of positive Earnings Before Interest Taxes Depreciation and Amortization ("EBITDA") for any fiscal quarter provided such positive EBITDA occurs for a fiscal quarter in or before the end of the second fiscal quarter of 2002. EBITDA will be determined by the Company's independent public accountants using the Company's financial statements as reported in filings with the Securities and Exchange Commission ("SEC"). Earnings, for EBITDA determination purposes, will include revenue from only normal business operations and will not include any extraordinary or nonrecurring income or revenue items. C-3 Your option vesting will cease in the event that your employment and service as a Company director both terminate for any reason. Your option vesting will also cease upon your voluntary resignation of employment without Good Reason or upon a termination for Cause (as such terms are defined in your employment agreement with the Company). A leave of absence, regardless of the reason, shall be deemed to constitute the cessation of your employment unless such leave is authorized by the Company, and you return within the time specified in such authorization. The above performance-based acceleration triggers will cease to be applicable upon your prior cessation of employment for any reason. The Compensation Committee of the Board of Directors must certify in writing that the performance goals have been satisfied before any Option vesting will be accelerated pursuant to attainment of performance goals. In the event of a Change in Control of the Company, 50% of your then-unvested Options (meaning 50% of your unvested Options that are otherwise scheduled to vest under (ii), (iii) and (iv) above on each vesting date had a Change in Control not occurred) shall become vested provided that you are employed by the Company on the date the negotiations or communications began (as determined by the Board in good faith) which lead to the Change in Control provided, however, that all of your then-unvested Options shall become vested if the Change in Control consideration received by Company shareholders is at least $10.00 per share (with such share price adjusted for any future stock splits, stock dividends, recapitalization, or similar events). TERM Your option will expire in any event at the close of business at Company headquarters on the day before the 10th anniversary of the Date of Grant, as shown on the cover sheet. It will expire earlier if your employment and your service as a Company director terminate, as described below. REGULAR If your employment and your service as a Company director TERMINATION terminate for any reason except Cause, death or Disability, then your option will expire at the close of business at Company headquarters on the 90th day after your termination date. CAUSE If your employment or service as a Company director terminates on account of Cause, then your option will expire immediately. C-4 DEATH In the event of your death during the period of your employment or service as a Company director, your option will expire at the close of business at Company headquarters on the date six months after the date of death. During that six-month period, your estate or heirs may exercise your option. DISABILITY If your employment and service as a Company director terminate because of your Disability, then your option will expire at the close of business at Company headquarters on the date six months after your termination date. "Disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment. LEAVES OF ABSENCE For purposes of this option, your employment does not terminate when you go on a bona fide leave of absence, that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. Your employment terminates in any event when the approved leave ends if you fail or refuse to return to active service. Consistent with the terms of this Agreement and your Employment Agreement, the Company determines which leaves count for this purpose, and when your employment terminates for all purposes under the Plan. RESTRICTIONS ON The Company will not permit you to exercise this option if EXERCISE the issuance of Shares at that time would violate any law or regulation. NOTICE OF EXERCISE When you wish to exercise this option, you must notify the Company by filing the proper "Notice of Exercise" form at the address given on the form. Your notice must specify how many Shares you wish to purchase. Your notice must also specify how your Shares should be registered (in your name only or in your and your spouse's names as community property or as joint tenants with right of survivorship). The notice will be effective when received by the Company. If someone else wants to exercise this option after your death, that person must prove to the Company's satisfaction that he or she is entitled to do so. FORM OF PAYMENT When you submit your notice of exercise, you must include payment of the option price for the Shares you are purchasing. Payment may be made in one (or a combination) of the following C-5 forms: - Your personal check, a cashier's check or a money order. - By delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price. - Payment may be made all or in part with a full recourse promissory note executed by you. The interest rate and other terms and conditions of such note shall be determined in your employment agreement with the Company. The Company will require that you pledge your Shares to the Company for the purpose of securing the payment of such note. WITHHOLDING TAXES You will not be allowed to exercise this option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the option exercise or the sale of the Shares acquired upon exercise of this option. RESTRICTIONS ON By signing this Agreement, you agree not to sell any RESALE option Shares at a time when applicable laws or regulations or Company or underwriter trading policies prohibit a sale. You represent and agree that the Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof. In the event that the sale of Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, you shall represent and agree at the time of exercise to make such representations as are deemed necessary or appropriate by the Company and its counsel. Prior to any Change in Control of the Company, the shares acquired under this option can be sold or transferred only pursuant to an SEC Rule 10b5-1 trading plan that is pre-approved by the Board of Director's Compensation Committee. TRANSFER OF OPTION Prior to your death, only you may exercise this option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will. C-6 Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your spouse or former spouse, nor is the Company obligated to recognize such individual's interest in your option in any other way. NO RETENTION RIGHTS Your option or this Agreement do not give you the right to be retained by the Company (or any subsidiaries) in any capacity. The Company (and any subsidiaries) reserves the right to terminate your Service at any time and for any reason. SHAREHOLDER RIGHTS You, or your estate or heirs, have no rights as a shareholder of the Company until a certificate for your option Shares has been issued. No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued, except as described in the Plan. ADJUSTMENTS In the event of a stock split, a stock dividend or a similar change in the Company stock, the number of Shares covered by this option and the exercise price per share may be adjusted pursuant to the Plan. Your option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity, except to the extent the foregoing conflict with or are in any way inconsistent with Section 8 of your employment agreement. C-7 FORFEITURE If, at any time within one year after termination of employment, you engage in any of the following: (i) your commission of a felony, an act involving moral turpitude, or an act constituting common law fraud, in each case having a material adverse effect on the business or affairs of the Company or its affiliates or stockholders; (ii) your willful or intentional breach of Company confidential information obligations, in each case having a material adverse effect on the business or affairs of the Company or its affiliates or stockholders; or (iii) your unreasonable refusal to comply with lawful requests for cooperation made by the Board of Directors, then (1) this option shall terminate and be forfeited effective the date on which you enter into such activity, unless terminated or forfeited sooner by operation of another term or condition of this option or the Plan, (2) any stock acquired by you pursuant to the exercise of this option during the Forfeiture Period (as defined below) shall be forfeited, and (3) any gain realized by you from the sale of stock acquired through the exercise of this option during the Forfeiture Period shall be paid by you to the Company. The "Forfeiture Period" shall mean the period commencing six months prior to your termination of employment and ending one year from your termination of employment. RIGHT OF SET OFF By accepting this Agreement, you consent to a deduction from any amounts the Company owes you from time to time, to the extent of the amounts you owe the Company under the paragraph above. If the Company does not recover by means of set-off the full amount you owe it, calculated as set forth above, you agree to pay immediately the unpaid balance to the Company upon the Company's demand. LEGENDS All certificates representing the Shares issued upon exercise of this option shall have endorsed thereon the applicable legends. APPLICABLE LAW This Agreement will be interpreted and enforced under the laws of the State of California. THE PLAN AND OTHER The text of the Plan and your employment agreement are AGREEMENTS incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan or your employment agreement. C-8 This Agreement, the Plan and your employment agreement with the Company dated August 1, 2001 constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN, EXCEPT TO THE EXTENT MODIFIED BY YOUR EMPLOYMENT AGREEMENT. C-9 EX-10.4 6 f77135ex10-4.txt EXHIBIT 10.4 EXHIBIT 10.4 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into effective as of August 1, 2001 between Critical Path ("Critical Path" or the "Company") and William McGlashan ("McGlashan") (or collectively referred to as the "Parties"). The Company desires to employ McGlashan to have the benefits of his expertise and knowledge. McGlashan, in turn, desires employment with the Company. The Parties, therefore, enter into this Agreement to establish the terms and conditions of McGlashan's employment with the Company. In consideration of the mutual covenants and representations contained in this Agreement, the Company and McGlashan agree as follows: 1. EMPLOYMENT OF MCGLASHAN; DUTIES. The Company agrees to employ McGlashan, and McGlashan agrees to be employed by the Company, as the President and Chief Operating Officer of the Company and the President of the Company's subsidiary to be formed, Critical Path International ("CPI"). As the President and Chief Operating Officer of the Company and the President of CPI, McGlashan's key duties will include the normal and customary duties of such positions and such other duties as the Company shall determine from time to time. In the event that the Company hires a President, McGlashan will become interim Chief Executive Officer. McGlashan will use his specialized expertise, independent judgment and discretion in executing his job duties. McGlashan shall devote any and all time, interest and efforts reasonably necessary to the fulfillment of his duties and responsibilities under this Agreement. Consistent with the offices of President and Chief Operating Officer, or interim Chief Executive Officer, as the case may be, and the duties typically attendant thereto, the Company reserves the right to change McGlashan's job duties and responsibilities in its sole discretion at any time upon reasonable notice, based on the needs of the Company and McGlashan's expertise and skills. 2. EMPLOYMENT PERIOD. Subject to earlier termination, as provided Section 11 below, the Employment Period shall begin on August 1, 2001 and shall continue for a maximum period of one year. 3. PLACE OF EMPLOYMENT. McGlashan and the Company agree that during the Employment Period, his services will be performed at the Company's principal offices in San Francisco, California, subject to any necessary travel requirements of his position and duties hereunder. 4. BASE SALARY. During the Employment Period, the Company shall pay McGlashan at the rate of Three Hundred Thousand Dollars ($300,000.00) per year, to be paid twice per month, subject to applicable withholding. 5. BONUS COMPENSATION. So long as McGlashan has not been terminated for Cause, as defined in Section 11.2 below, McGlashan will be eligible for bonus compensation, subject to the following terms and conditions: (a) McGlashan shall receive a bonus of Three Hundred and Fifty Thousand Dollars ($350,000.00) if the Company attains a positive EBITDA from operations for any fiscal quarter provided such positive EBITDA occurs for a fiscal quarter on or before the end of the second fiscal quarter of 2002. EBITDA will be determined by the Company's independent public accountants using the Company's financial statements as reported in filings with the Securities and Exchange Commission ("SEC"). EBITDA will include revenue from only normal business operations and will not include any extraordinary or nonrecurring income items. Such bonus will be paid promptly following the filing of the 10-K or 10-Q which indicates such EBITDA goal has been attained. (b) McGlashan shall receive a bonus of Three Hundred and Fifty Thousand Dollars ($350,000.00) if the closing share price of the Company's stock exceeds an average price of at least Five Dollars ($5.00) for at least twenty-two (22) consecutive trading days by July 1, 2002. Such bonus will be paid promptly after such average stock price is achieved. 6. EQUITY COMPENSATION. McGlashan has been granted stock options to purchase 1.5 million shares of the Company's Common Stock for $.41/share pursuant to the Critical Path Amended and Restated 1998 Stock Plan in accordance with the terms of the Stock Option Agreement attached hereto. Subject to McGlashan's continued employment by the Company at each vesting date, the vesting schedule for such options is as follows: 500,000 shares on the first date of employment; 500,000 shares 12 months from execution of this Agreement and 500,000 shares on 12/31/04; provided, however, that if the Company achieves a positive EBITDA on an operating basis, as provided in paragraph 5(a) above, the final 500,000 shares will vest in full at the same time as the bonus provided for in paragraph 5(a) is paid or as soon as possible thereafter consistent with the terms of the Stock Option Agreement. 7. EMPLOYEE BENEFITS. (a) For so long as McGlashan is employed by the Company, McGlashan will be entitled to participate in the same employee benefits plans generally available to the Company's other executive and managerial employees, subject to the terms of the applicable plans, including: (i) all health insurance benefits provided to the Company's exempt employees; (ii) paid vacation in accordance with the Company's policies and procedures in effect with respect to the Company's other senior officers (for which the days selected for McGlashan's vacation shall be scheduled at a mutually agreeable time for the Company and McGlashan); and (iii) eligibility to participate in any profit sharing or other retirement plan maintained by the Company for its executive employees. (b) The Company shall make reasonable efforts to obtain coverage for McGlashan under any director and officer insurance policy during the term of his employment that is equal to or comparable to the same coverage provided to the Company's other executive officers. 2 8. INDEMNIFICATION BY THE COMPANY. To the fullest extent required by law, the Company agrees to indemnify and hold McGlashan harmless for any actions made in good faith while performing his duties as President and Chief Operating Officer of the Company and President of CPI. 9. NON-DISCLOSURE OF CONFIDENTIAL AND PROPRIETARY INFORMATION. McGlashan acknowledges and agrees that during his employment with the Company, he will have access to, or become acquainted with the Company's "Confidential and Proprietary Information." "Confidential and Proprietary Information" includes, but is not limited to: (a) The Company's trade secrets; (b) Information developed by or on behalf of the Company such as financial information, billing information, marketing strategies, price lists, research, pending products and proposals, and proprietary materials; or (c) Information of or concerning third parties including customers, suppliers and business partners, customer lists, supplier lists, as well as financial and billing information, and information about employees of the Company, including salaries and personnel data. McGlashan agrees that at all times during his employment and after his employment ends, he will protect the confidentiality of Confidential and Proprietary Information and will not directly use or disclose any Confidential and Proprietary Information except as may be necessary in connection with the services McGlashan provides to the Company. McGlashan further agrees that all the Company property and documents provided to him, including Confidential and Proprietary Information produced by him or others in connection with his employment with the Company, including copies thereof, shall remain the sole property of the Company and shall be returned promptly to the Company upon request or when he leaves the employment of the Company, including but not limited to, internal, proprietary, financial, technical, employee, sales, and marketing information. 10. DEVELOPED INFORMATION. McGlashan agrees to promptly disclose and assign to the Company, the rights to all ideas, improvements, inventions, programs, surveys, trade secrets, know-how and data, whether or not patentable or registrable under copyright or similar statutes that McGlashan makes, conceives, reduces to practice or learn during McGlashan's employment which (a) are within the scope of his employment and are related to or useful in the business of the Company or its actual or demonstrably anticipated activities, or (b) result from tasks assigned to McGlashan by the Company, or (c) are funded by the Company, or (d) result from use of premises owned, leased or contracted for by the Company (hereinafter "Developed Information"). Such disclosure shall continue for one (1) year after termination of McGlashan's employment with respect to anything that would be Developed Information if made, conceived, reduced to practice or learned during the term of this Agreement. This Agreement does not require assignment of any invention which qualifies fully for protection under California Labor Code section 2870 (hereinafter "Section 2870"). 3 McGlashan understand that he bears the full burden of proving to the Company that Developed Information qualifies fully under Section 2870. 11. TERMINATION. 11.1 AT-WILL EMPLOYMENT. McGlashan's employment pursuant to this Agreement is "at-will." As such, either the Company or McGlashan shall have right to terminate McGlashan's employment under this Agreement at any time, for any reason, with or without notice. If neither party terminates McGlashan's employment before the expiration of the Employment Period, McGlashan's employment will automatically terminate as of August 1, 2002. 11.2 SEVERANCE; TERMINATION FOR "CAUSE". If McGlashan's employment is terminated prior to August 1, 2002 other than for "Cause," then McGlashan shall be offered, in exchange for a release of all claims, a lump sum severance payment equal to six months salary under this Agreement or salary from the date of termination to August 1, 2002 whichever is less. For purposes of this Agreement, "Cause" means: (a) Commission of a felony, an act involving moral turpitude, or an act constituting common law fraud, and which has a material adverse effect on the business or affairs of the Company or its affiliates or stockholders; (b) Intentional or willful misconduct or refusal to follow the lawful instructions of the Board of Directors; or (c) Intentional breach of company confidential information obligations which has an adverse effect on the Company or its affiliates or stockholders. For these purposes, no act or failure to act shall be considered "intentional or willful" unless it is done, or omitted to be done, in bad faith without a reasonable belief that the action or omission is in the best interests of the Company. 11.3 CONTINUED AFFILIATION WITH THE COMPANY. McGlashan's stock options granted pursuant to this Agreement shall continue to vest for so long as McGlashan is affiliated with the Company as an employee or Board member. 11.4 EFFECT OF TERMINATION FOR "CAUSE." Upon any termination of this Agreement for Cause, the Company will have no further obligation to make any payment to McGlashan, under this Agreement or otherwise, except for the monthly base salary accrued as of the date of termination. In addition, McGlashan's entitlement to participate in any Company benefit plans shall immediately cease as of the date of termination, except as otherwise required by law. 11.5 COOPERATION WITH COMPANY AT TERMINATION OF EMPLOYMENT. Upon termination of this Agreement by either party, McGlashan shall cooperate fully with Company in providing an orderly transition of all McGlashan's pending work. Upon the mutual agreement of the Parties, McGlashan also may provide such full-time or part-time services as Company may reasonably require during all or any part of the period following any notice of termination given by either party. 4 11.6 RETURN OF COMPANY PROPERTY UPON TERMINATION. Upon termination of McGlashan's employment, McGlashan shall return all originals and copies of the Company's property in McGlashan's possession or control, including equipment, devices, vehicles, keys, computers, and including materials, memoranda, records, reports, recordings, customer lists or other documents, and specifically including any documents or computer disks or records containing confidential information, trade secrets or other proprietary information 12. NATURE OF EMPLOYMENT. McGlashan represents to the Company that he has no other outstanding commitments inconsistent with any of the terms of this Agreement or the services to be provided in accordance with this Agreement. In addition, while employed with the Company, McGlashan shall not, whether for compensation or otherwise, directly or indirectly perform any services or acts for any person or entity who is in competition with any business, services or products being offered for sale or produced by the Company. McGlashan shall not own an interest in, participate in or be connected as an officer, employee, agent, independent contractor, partner, shareholder or principal, of any corporation, partnership, proprietorship, firm, association, person, or other entity that directly or indirectly compete with the services and business of Company. The parties understand and agree that McGlashan will devote a portion of his business time and attention to the activities of Vectis Group, LLC, and its portfolio concerns, provided however, that McGlashan will not seek or accept employment with any other entity, other than Vectis Group, LLC, during the course of his one year term of employment under this Agreement. 13. NONSOLICITATION UPON TERMINATION OF EMPLOYMENT. 13.1 NONSOLICITATION OF CLIENTS. McGlashan agrees all customers or clients of the Company for which McGlashan provides services during McGlashan's employment are solely the clients of the Company and not of McGlashan. McGlashan agrees that both while employed and for a period of one (1) year after the termination of this Agreement for any reason, McGlashan shall not, either directly or indirectly, solicit business, as to products or services competitive with those of the Company, from any of the Company's clients or prospective clients. 13.2 NONSOLICITATION OF EMPLOYEES. McGlashan agrees the Company has invested substantial time and effort and resources in assembling, training and managing its present staff of personnel, which constitutes a significant asset of the Company. Accordingly, McGlashan agrees that both while employed and for a period of one (1) year after the termination of this Agreement for any reason, McGlashan will not directly or indirectly induce or solicit or encourage any of the Company's employees to leave their employment with the Company. 14. NOTICES. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to McGlashan at the last address he has filed in writing with the Company or, in the case of the Company, to the General Counsel at the Company's principal executive offices. 5 15. BINDING AGREEMENT. This Agreement shall be binding upon McGlashan and the Company on and after the date of this Agreement. The rights and obligations of the Company under this Agreement shall inure to the benefit of the Company and any successor of the Company. The Company may assign this Agreement to any subsidiary, parent or affiliate, without the consent of McGlashan, and such assignment shall not, in and of itself, constitute a termination of employment under this Agreement. 16. INTEGRATION. This Agreement constitutes the entire understanding of McGlashan and the Company with respect to the subject matter herein and supersedes and voids any and all prior agreements or understandings, written or oral, regarding the subject matter hereof. This Agreement may not be changed, modified, or discharged orally, but only by an instrument in writing signed by the Parties. 17. CONSTRUCTION. Each party has reviewed this Agreement. Therefore the normal rule of construction that any ambiguity or uncertainty in any writing shall be interpreted against the party drafting the writing shall not apply to any action on this Agreement. 18. GOVERNING LAW. This Agreement shall be governed by the laws of the State of California, and the invalidity or unenforceability of any provisions hereof shall in no way affect the validity or enforceability of any other provision. 19. SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable by any court of competent jurisdiction will immediately become null and void, leaving the remainder of this Agreement in full force and effect. Any such prohibition or unenforceability in any court of competent jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 20. MANDATORY ARBITRATION. The Parties agree that any future controversy, claim or dispute arising out of or related to McGlashan's employment or the termination of his employment shall be resolved by binding arbitration, except where the law specifically forbids the use of arbitration as a final and binding remedy, or where Section 20(e) below specifically allows a different remedy. (a) The Parties agree that the dispute shall be resolved by binding arbitration in San Francisco, California. If the Parties are unable to jointly select an arbitrator, they will obtain a list from the Federal Mediation and Conciliation Service and select an arbitrator by striking names from that list. (b) The arbitrator shall have the authority to determine whether the conduct complained of violates the complainant's rights and, if so, to grant any relief authorized by law; subject to the exclusions of Section 20(e) below. The arbitrator shall not have the authority to modify, change, or refuse to enforce the terms of this Employment Agreement. (c) The Company shall bear the costs of the arbitration, except that McGlashan may be required to pay costs not to exceed the amount of the then-current filing fee for a civil action filed in the court of general jurisdiction in the State of California. Each party shall pay its own attorneys' fees, unless the arbitrator orders otherwise, pursuant to applicable law. 6 (d) Arbitration shall be the exclusive final remedy for any dispute between the Parties including but not limited to any disputes or claims for discrimination or harassment (such as claims under the Fair Employment and Housing Act, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, or the Age Discrimination in Employment Act), wrongful termination, breach of contract, breach of public policy, physical or mental harm or distress, or any other disputes. (e) Notwithstanding the arbitration provisions set forth herein, the Parties reserve their right to seek an injunction or other equitable relief from a court with applicable authority. McGlashan acknowledges that in the event of any breach of any provision of Sections 9, 10, 12 or 13 of this Agreement, the Company would be irreparably and immediately harmed and could not be made whole by monetary damages. It is accordingly agreed that the Company shall be entitled to an injunction to prevent breach of this Agreement and to compel specific performance of this Agreement, in addition to any other remedy to which it may be entitled in law or equity. To the extent any portion of Sections 9, 10, 12 or 13 of this Agreement is deemed by the court to be overly restrictive as to time, scope or geographical area, the Parties agree that the court shall have the authority to reform the unlawful provision to be in conformance with the law, with the Parties' agreement that Sections 9, 10, 12 and 13 are to be given the fullest force and effect permissible by law. (f) The arbitrator shall issue a written arbitration decision stating the arbitrator's essential findings and conclusions upon which any award is based. A party's right to review of the decision is limited to the grounds provided under applicable law. The Parties agree that the arbitration award shall be enforceable in any court having jurisdiction to enforce this Agreement. IN WITNESS WHEREOF, the Parties have executed and delivered this Agreement as of the date first above written. CRITICAL PATH Dated: By: /s/ David Hayden --------------------------- ----------------------------------- DAVID HAYDEN Executive Chairman Dated: By: /s/ William McGlashan --------------------------- ----------------------------------- William McGlashan, Personally 7 EX-10.5 7 f77135ex10-5.txt EXHIBIT 10.5 Exhibit 10.5 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into effective as of October 8, 2001 between Critical Path ("Critical Path" or the "Company") Pierre Van Beneden ("Van Beneden") (or collectively referred to as the "Parties"). The Company desires to employ Van Beneden to have the benefits of his expertise and knowledge. Van Beneden, in turn, desires employment with the Company. The Parties, therefore, enter into this Agreement to establish the terms and conditions of Van Beneden's employment with the Company. In consideration of the mutual covenants and representations contained in this Agreement, the Company and Van Beneden agree as follows: 1. EMPLOYMENT OF VAN BENEDEN; DUTIES. The Company agrees to employ Van Beneden, and Van Beneden agrees to be employed by the Company, as the President of the Company, reporting to the Chief Executive Officer. Van Beneden will commence his employment prior to November 1, 2001. Van Beneden's key duties will include oversight and responsibility for all areas of the company's business directly or indirectly involved in revenue production including, without limitation, sales, marketing, customer service, professional services and such other duties as the Company shall determine from time to time. Van Beneden will be required to use his specialized expertise, independent judgment and discretion in executing his job duties. Van Beneden shall devote any and all time, interest and efforts reasonably necessary to the fulfillment of his duties and responsibilities under this Agreement. The Company understands that Van Beneden will reside and work out of Paris, France, although Van Beneden will travel to the United States to the extent necessary to carry out his duties (which is presently anticipated to be one week per month). Van Beneden is required to follow office policies and procedures adopted from time to time by the Company and to take such general direction consistent with his position within the Company as he may be given from time to time from the Chief Executive Officer. The Company reserves the right to change these policies and procedures at any time upon reasonable notice. The Company also reserves the right to change Van Beneden's job duties, responsibilities and reporting relationships with the reasonable consent of Van Beneden at any time upon reasonable notice, based on the needs of the Company and Van Beneden's expertise and skills. Van Beneden represents to the Company that he has no other outstanding commitments inconsistent with any of the terms of this Agreement or the services to be provided in accordance with this Agreement. In addition, while employed with the Company, Van Beneden shall not, whether for compensation or otherwise, directly or indirectly perform any services or acts for any person or entity who is in competition with any business, services or products being offered for sale or produced by the Company. While employed by the Company, Van Beneden shall not own an interest in, participate in or be connected as an officer, employee, agent, independent contractor, partner, shareholder or principal, of any corporation, partnership, proprietorship, firm, association, person, or other entity that directly or indirectly compete with the services and 1 business of Company, provided, however, that Van Beneden may hold shares of stock in a publicly traded company (or options to purchase such shares, provided such options were issued prior to the date of this Agreement) so long as such shares held by (including shares issuable to Van Beneden upon the exercise of such options) do not exceed 1% of the outstanding shares of such company. The Company understands that Van Beneden intends, on his own time, to translate a book he has written in French into English, and that Van Beneden will receive revenues therefrom. 2. COMPENSATION (a) BASE SALARY. The Company shall pay Van Beneden at the initial rate of Four Hundred Fifty Thousand Dollars ($450,000.00) per year, to be paid twice per month. The Company shall have the right, to the fullest extent permitted by law, to withhold from any payment of any kind due to Van Beneden under this Agreement to satisfy the tax withholding obligations of the Company under applicable law. (b) BONUS COMPENSATION. Van Beneden will be eligible for bonus compensation for his first year of employment in the amount of One Hundred Fifty Thousand Dollars ($150,000.00) per quarter if the Company attains an EBITDA target for each such quarter, to be set by the Company within 30 days of the commencement of Van Beneden's employment. The EBITDA target shall be established by the Chief Executive Officer and shall be mutually acceptable to Van Beneden. Such bonus will be paid out as soon as practicable following the filing of the 10-K or 10-Q which indicates such EBITDA goal has been attained. In the event of a change in control of the Company prior to termination of the period fixed to measure EBITDA for purposes of calculating Van Beneden's bonus, Van Beneden will be paid the full bonus amount. In the event that Van Beneden is terminated without cause prior to termination of the period fixed to measure EBITDA for purposes of calculating Van Beneden's bonus, Van Beneden will be paid a pro-rata share of the bonus to which Van Beneden would have been entitled had he been employed for all of such period. (c) EQUITY COMPENSATION. Van Beneden will be granted an option to purchase 2,000,000 shares of the Company's Common Stock on the date his employment commences in accordance with the terms of the form of Stock Option Agreement attached hereto (except as modified by this Agreement). Except as provided below and in Section 5, the shares will have an exercise price equal to the closing price of the Company's Common Stock on the date of option grant (or, if such date is not a trading day, as of the most recently ended trading day) and will vest in equal monthly installments over the three years following the execution of this Agreement. In the event Van Beneden is terminated without cause at any time, or if Van Beneden has not been offered the position of CEO, at the time of his one-year anniversary, an additional 333,333 (equal to six months vesting) shall immediately become vested and exercisable. (d) EMPLOYEE BENEFITS. (i) Van Beneden will be entitled to participate in the same employee benefits plans generally available to the Company's other executive and managerial employees, 2 subject to the terms of the applicable plans, including: (a) all health insurance benefits provided to Van Beneden and all other benefits applicable to the Company's exempt employees; (b) paid vacation in accordance with the Company's policies and procedures in effect with respect to the Company's other senior officers (for which the days selected for Van Beneden's vacation shall be scheduled at a mutually agreeable time for the Company and Van Beneden); and (c) eligibility to participate in any profit sharing or other retirement plan maintained by the Company for its executive employees. These benefits may change from time to time. Van Beneden will be covered by workers' compensation insurance and State Disability Insurance, as required by California state law. (i) The Company shall maintain its present director and officer insurance policy during the term of Van Beneden's employment, which shall cover Van Beneden to the same extent as the Company's other executive officers. (b) LOAN. The Company will provide Van Beneden with a signing bonus of $350,000 in the form of a loan which shall be interest-free for a period of one year, or until Van Beneden leaves the Company voluntarily or is terminated for cause, whichever occurs first. The loan will be forgiven in the amount of $29,166.67 per month during the first year of Van Beneden's employment, subject to the following: (1) If Van Beneden has been terminated for cause during the first year of his employment, the entire principal balance plus interest at the prime rate calculated from the date of the loan shall be due and payable in full upon Van Beneden's termination; (2) If Van Beneden has resigned during the first six (6) months of his employment, the entire principal balance plus interest at the prime rate calculated from the date of the loan shall be due and payable in full within ninety (90) days of Van Beneden's last day of employment; and (3) If Van Beneden has resigned after the first six (6) months of his employment, the remaining, not yet forgiven principal balance of the loan shall be repayable in full within ninety (90) days of Van Beneden's last day of employment. In the event of a Change in Control (as defined herein), the loan will be completely forgiven. Van Beneden agrees to execute a promissory note reflecting these terms in the form of Exhibit A. (c) INDEMNIFICATION BY THE COMPANY. The Company and Van Beneden will execute the indemnification agreement in the form of Exhibit B. (d) CHANGES IN COMPENSATION. The Company expects to consider Van Beneden for the position of Chief Executive Officer within the twelve months following execution of this Agreement. In the event that he is offered the position of Chief Executive Officer, his future compensation will be determined by subsequent agreement of the parties. If he remains in his current position, his base salary may be changed from time to time on reasonable notice provided, that the base salary may not be reduced below the amount set forth on Section 2(a) unless it is proportionately reduced pursuant to a reduction made applicable to all of the Company's executive officers. 3 (e) APARTMENT; AUTOMOBILE. The Company will, at its expense, rent an apartment for Van Beneden in San Francisco, and will rent an automobile for Van Beneden in Paris, France. 2. OWNERSHIP NON-DISCLOSURE OF CONFIDENTIAL AND PROPRIETARY INFORMATION. Van Beneden will be required to execute the Company's Standard Confidentiality Agreement ("the Confidentiality Agreement") in the form of Exhibit C. Van Beneden represents and warrants to the Company that the performance of his duties will not violate any agreements with or trade secrets of any other person or entity. 3. IMMIGRATION DOCUMENTATION. Van Beneden's employment is contingent on his ability to prove identity and authorization to work in the U.S. for the Company. Van Beneden must comply with the Immigration and Naturalization Service's employment verification requirements requested by the Company. 4. TERMINATION. (a) AT-WILL EMPLOYMENT. Van Beneden's employment pursuant to this Agreement is "at-will." As such, either the Company or Van Beneden shall have right to terminate Van Beneden's employment under this Agreement at any time, for any reason, with or without notice. (b) SEVERANCE. Upon termination without Cause or if Van Beneden elects to resign after a Change of Control, Van Beneden will be offered, in exchange for executing a release in the form of Exhibit D (the "RELEASE"), and does not withdraw or rescind such Release during any period that he is permitted to do so by law, severance as follows: (i) Upon termination without Cause or if Van Beneden elects to resign after a Change in Control, Van Beneden will be offered nine (9) months of then-current base salary plus nine (9) months' continuation of then-current benefits from the Company. (ii) Upon a Change in Control, the vesting of the stock options provided for in paragraph 2(c) shall be fully accelerated. (iii) "Change of Control" shall mean the consummation of one of the following: The acquisition by a person of beneficial ownership (within the meaning of Rule13d-3 of the Securities Exchange Act of 1934, as amended to date); of 50% or more of the outstanding stock of the Company; A merger, reverse merger, consolidation or other reorganization of the Company (other than a reincorporation of the Company), if after giving effect to such merger, consolidation or other reorganization of the Company, the shareholders of the Company immediately prior to such merger, reverse merger, consolidation or other reorganization do not represent a majority in interest of the holders of voting securities (on a fully diluted basis) with 4 the ordinary voting power to elect directors of the surviving or resulting entity after such merger, consolidation or other reorganization; The sale of all or substantially all of the assets of the Company to a third party who immediately prior to such sale did not have at least 50% of its voting securities directly or indirectly owned by the Company; or The dissolution of the Company pursuant to action validly taken by the stockholders of the Company in accordance with applicable state law. (iv) "Cause" shall mean (a) fraud, (b) conviction of a felony; (c) an act by Van Beneden which constitutes gross misconduct; (d) material breach by Van Beneden of his obligations under Section 3 of this Agreement; or (e) Van Beneden's material breach of the Company's Confidentiality Agreement, including without limitation, Van Beneden's theft or other misappropriation of the Company's proprietary information. (c) COOPERATION WITH COMPANY AT TERMINATION OF EMPLOYMENT. Upon termination of this Agreement by either party, Van Beneden shall cooperate fully with Company in providing an orderly transition of all Van Beneden's pending work. Upon the mutual agreement of the Parties, Van Beneden also may provide such full-time or part-time services as Company may reasonably require during all or any part of the period following any notice of termination given by either party. 5. NONSOLICITATION AND CONFIDENTIALITY UPON TERMINATION OF EMPLOYMENT. (a) NONSOLICITATION OF CLIENTS. Van Beneden agrees all customers or clients of the Company for which Van Beneden provides services during Van Beneden's employment are solely the clients of the Company and not of Van Beneden. Van Beneden agrees that both while employed and for a period of one (1) year after the termination of this Agreement for any reason, Van Beneden shall not, on behalf of a direct competitor in the messaging market either directly or indirectly, solicit business, as to products or services competitive with those of the Company, from any of the Company's clients or prospective clients. (b) NONSOLICITATION OF EMPLOYEES. Van Beneden agrees the Company has invested substantial time and effort and resources in assembling, training and managing its present staff of personnel, which constitutes a significant asset of the Company. Accordingly, Van Beneden agrees that both while employed and for a period of one (1) year after the termination of this Agreement for any reason, Van Beneden will not directly or indirectly induce or solicit or encourage any of the Company's employees to leave their employment with the Company, provided that such restrictions shall not apply to newspaper or similar advertisements. (c) CONFIDENTIALITY. Van Beneden understands and agrees that because of his position with the Company, comments by him concerning the Company, its plans, its prospects, its personnel or any other aspect of the Company's past or future performance could be understood as being based on substantial information not available to the public. Accordingly, Van Beneden agrees not to comment on such aspects of the Company after leaving the Company 5 except that he may describe his accomplishments at the Company to prospective employers for the purpose of establishing his credentials. 6. NOTICES. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to Van Beneden at the last address he has filed in writing with the Company or, in the case of the Company, to the General Counsel at the Company's principal executive offices. 7. BINDING AGREEMENT. This Agreement shall be binding upon Van Beneden and the Company on and after the date of this Agreement. The rights and obligations of the Company under this Agreement shall inure to the benefit of the Company and any successor of the Company. The Company may assign this Agreement to any subsidiary, parent or affiliate, without the consent of Van Beneden (provided that such entity is at least as credit-worthy as the Company, or the Company guarantees the full performance of this Agreement), and such assignment shall not, in and of itself, constitute a termination of employment under this Agreement. 8. INTEGRATION. This Agreement constitutes the entire understanding of Van Beneden and the Company with respect to the subject matter herein and supersedes and voids any and all prior agreements, understandings, promises or representations, written or oral, regarding the subject matter hereof. This Agreement may not be changed, modified, or discharged orally, but only by an instrument in writing signed by the Parties. 9. CONSTRUCTION. Each party has reviewed this Agreement. Therefore the normal rule of construction that any ambiguity or uncertainty in any writing shall be interpreted against the party drafting the writing shall not apply to any action on this Agreement. 10. GOVERNING LAW. This Agreement shall be governed by the laws of the State of California, and the invalidity or unenforceability of any provisions hereof shall in no way affect the validity or enforceability of any other provision. 11. SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable by any court of competent jurisdiction will immediately become null and void, leaving the remainder of this Agreement in full force and effect. Any such prohibition or unenforceability in any court of competent jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 12. DISPUTE RESOLUTION. The Parties agree that any future controversy, claim or dispute arising out of or related to Van Beneden's employment or the termination of his employment shall be resolved as follows, except where the law specifically forbids the use of arbitration as a final and binding remedy, or where Section 13(g) below specifically allows a different remedy. (a) The claiming party shall furnish to the other written statement of the actions complained of, and shall identify witnesses and documents that support the claim and the relief requested. 6 (b) The responding party shall specify the relief, if any, that it is willing to provide and shall identify the witnesses and documents that support its position. (c) If the Parties are unable to jointly select an arbitrator, they will obtain a list from the Federal Mediation and Conciliation Service and select an arbitrator by striking names from that list. (d) The arbitrator shall have the authority to determine whether the conduct complained of in paragraph (a) violates the complainant's rights and, if so, to grant any relief authorized by law; subject to the exclusions of Section 13(g) below. The arbitrator shall not have the authority to modify, change, or refuse to enforce the lawful terms of this Employment Agreement. (e) The Company shall bear the costs of the arbitration, except that Van Beneden may be required to pay costs to the same extent as in a civil action filed in the court of general jurisdiction in the State of California. Each party shall pay its own attorneys' fees, unless the arbitrator orders otherwise, pursuant to applicable law. (f) Arbitration shall be the exclusive final remedy for any dispute between the Parties including but not limited to any disputes or claims for discrimination or harassment (such as claims under the Fair Employment and Housing Act, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, or the Age Discrimination in Employment Act), wrongful termination, breach of contract, breach of public policy, physical or mental harm or distress, or any other disputes. (g) Notwithstanding the arbitration provisions set forth herein, the Parties reserve their right to seek an injunction or other equitable relief from a court with applicable authority in order to prevent irreparable injury or to preserve the status quo. (h) The arbitrator shall issue a written arbitration decision stating the arbitrator's essential findings and conclusions upon which any award is based. A party's right to review of the decision is limited to the grounds provided under applicable law. The Parties agree that the arbitration award shall be enforceable in any court having jurisdiction to enforce this Agreement. 13. COUNSEL FEES. The Company shall pay for Van Beneden's legal and immigration fees in connection with entering into this Agreement and becoming an employee of the Company. IN WITNESS WHEREOF, the Parties have executed and delivered this Agreement as of the date first above written. CRITICAL PATH Dated: By: /s/William McGlahsan ------------------------ ---------------------------------- 7 WILLIAM McGLASHAN PIERRE Van Beneden Dated: By: /s/ Pierre Van Beneden ------------------------ ---------------------------------- Pierre Van Beneden 8 EX-15.1 8 f77135ex15-1.txt EXHIBIT 15.1 EXHIBIT 15.1 November 13, 2001 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Commissioners: We are aware that our report dated November 9, 2001 on our review of interim financial information of Critical Path, Inc. (the "Company') as of and for the period ended September 30, 2001 and included in the Company's quarterly report on Form 10-Q for the quarter then ended is incorporated by reference in the Company's Registration Statements on Form S-8 (Nos. 333-63080, 333-51504, 333-44418, 333-40476, 333-36228, 333-95933, 333-95279, 333-87553) and on Form S-3 (Nos. 333-39958, 333-38006, 333-38000, 333-36382). Very truly yours, /s/ PricewaterhouseCoopers, LLP -----END PRIVACY-ENHANCED MESSAGE-----


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2001

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to .


PART I
	Item 1. Condensed Consolidated Financial Statements (Unaudited)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
REPORT OF INDEPENDENT ACCOUNTANTS
PART II
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
INDEX TO EXHIBITS
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 15.1


		Page

PART I
Item 1.	Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of December 31, 2000 and September 30, 2001		3
	Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2000 and 2001		4
	Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2000 and 2001		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
	Supplemental Pro Forma Financial Data (Unaudited)		33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		34
	Report of Independent Accountants		35
PART II
Item 1.	Legal Proceedings		36
Item 4.	Submission of Matters to a Vote of Security Holders		37
Item 6.	Exhibits and Reports on Form 8-K		37


				December 31,			September 30,
				2000			2001


				(Unaudited)
ASSETS
Current assets
	Cash and cash equivalents			$	216,542		$	54,604
	Short-term investments				—			10,752
	Restricted cash				215			1,104
	Accounts receivable, net				38,938			31,598
	Other current assets				10,252			6,478

			Total current assets		265,947			104,536
Long-term investments					10,610			7,535
Property and equipment, net					85,304			61,318
Intangible assets, net					77,339			36,843
Other assets					11,655			5,945

			Total assets	$	450,855		$	216,177

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
	Accounts payable			$	43,710		$	35,659
	Accrued expenses				10,377			7,205
	Deferred revenue				15,720			15,913
	Capital lease and other obligations, current				9,363			6,130

			Total current liabilities		79,170			64,907
Convertible subordinated notes payable					300,000			102,990
Capital lease and other obligations, long-term					4,687			1,866

			Total liabilities		383,857			169,763

Commitments and contingencies
Minority interest in consolidated subsidiary					649			—

Shareholders’ Equity
	Preferred stock and paid-in-capital, $0.001 par value
		Shares authorized: 5,000
		Shares issued and outstanding: none			—			—
	Common stock and paid-in-capital, $0.001 par value
		Shares authorized: 150,000 and 500,000, respectively
		Shares issued and outstanding: 74,135 and 75,490, respectively			2,130,329			2,135,817
	Notes receivable from shareholders				(1,205	)		(1,209	)
	Unearned compensation				(80,760	)		(40,890	)
	Accumulated deficit, including other comprehensive income				(1,982,015	)		(2,047,304	)

			Total shareholders’ equity		66,349			46,414

			Total liabilities and shareholders’ equity	$	450,855		$	216,177



			Three Months Ended						Nine Months Ended

			September 30,			September 30,			September 30,			September 30,
			2000			2001			2000			2001


			(Unaudited)
Net revenues
	Software license		$	12,365		$	7,724		$	37,332		$	22,187
	Hosted messaging			16,759			10,000			40,074			35,580
	Professional service			3,609			4,206			9,132			10,523
	Maintenance and support			2,609			4,857			6,852			12,725

		Total net revenues		35,342			26,787			93,390			81,015

Cost of net revenues
	Software license			634			517			2,378			934
	Hosted messaging			15,552			13,982			40,970			49,360
	Professional service			1,317			2,565			3,761			8,125
	Maintenance and support			2,207			2,837			5,423			7,837
	Amortization of purchased technology			4,434			4,970			10,969			16,314
	Acquisition-related retention bonuses			260			—			1,040			—
	Stock-based expense — Hosted messaging			381			339			1,257			1,165
	Stock-based expense — Professional service			—			161			—			1,182
	Stock-based expense — Maintenance and support			—			131			—			1,056
	Impairment of long-lived assets			—			—			—			4,207

		Total cost of net revenues		24,785			25,502			65,798			90,180

Gross profit (loss)				10,557			1,285			27,592			(9,165	)

Operating expenses
	Sales and marketing			16,128			11,018			47,075			45,424
	Research and development			7,853			7,322			23,389			25,589
	General and administrative			6,568			9,447			20,666			34,485
	Amortization of intangible assets			94,160			2,485			230,845			10,730
	Acquisition-related retention bonuses			1,028			92			7,400			1,055
	Stock-based expense — Sales and marketing			8,719			5,841			22,416			19,122
	Stock-based expense — Research and development			323			531			3,125			2,857
	Stock-based expense — General and administrative			1,346			4,914			3,492			19,981
	Restructuring expense, net			10,195			3,779			10,195			12,260
	Impairment of long-lived assets			—			—			—			9,991

		Total operating expenses		146,320			45,429			368,603			181,494

Loss from operations				(135,763	)		(44,144	)		(341,011	)		(190,659	)
Interest and other income, net				4,905			178			10,860			4,796
Interest expense				(5,214	)		(3,829	)		(10,748	)		(14,211	)
Minority interest in net income of consolidated subsidiary				(201	)		—			(526	)		—
Equity in net loss of joint venture				(640	)		(346	)		(640	)		(1,519	)

Loss before extraordinary item and income taxes				(136,913	)		(48,141	)		(342,065	)		(201,593	)
Provision for income taxes				(2,534	)		(2,180	)		(4,333	)		(3,673	)

Loss before extraordinary item				(139,447	)		(50,321	)		(346,398	)		(205,266	)
Gain on retirement of convertible subordinated notes, net				—			137,222			—			141,040

Net income (loss)			$	(139,447	)	$	86,901		$	(346,398	)	$	(64,226	)

Net income (loss) per common share — Basic and diluted
Loss before extraordinary item			$	(2.26	)	$	(0.68	)	$	(6.09	)	$	(2.79	)
Gain on retirement of convertible subordinated notes				—			1.84			—			1.92

Net income (loss)			$	(2.26	)	$	1.17		$	(6.09	)	$	(0.87	)

Weighted average common shares outstanding				61,614			74,492			56,925			73,472

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A California Corporation		I.R.S. Employer No. 91-1788300


	Total			Noncash		Cash			Liabilities at
	Charge			Charges		Payments			September 30, 2001

Workforce reduction	$	10.3		$	1.3	$	7.5		$	1.4
Facility and operations consolidation and other charges		3.3			1.0		1.1			1.3
Non-core product and service sales and divestitures		(1.3	)		0.9		(3.4	)		1.2

Total	$	12.3		$	3.2	$	5.2		$	3.9


	3.1*			Amended and Restated Articles of Incorporation.
	3.2*			Amendment to the Articles of Incorporation.
	3.3*			Amended and Restated Bylaws.
	4.1*			Form of Common Stock Certificate.
	4.2*			Preferred Stock Rights Agreement, dated as of March 29, 2001 between Critical Path, Inc. and Computershare, including the Certificate of Determination, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B and C, respectively.
	4.3			Warrant to Purchase Common Stock of Critical Path, Inc. issued to Vectis Group, LLC.
	10.1			Termination Agreement with Vectis Group LLC dated as of September 30, 2001
	10.2			Agreement between Critical Path, Inc. and Lawrence Reinhold dated as of May 15, 2001
	10.3			Agreement between Critical Path, Inc. and David Hayden dated as of August 1, 2001
	10.4			Agreement between Critical Path, Inc. and William McGlashan, Jr. dated as of August 1, 2001
	10.5			Agreement between Critical Path, Inc. and Pierre Van Beneden dated as of October 8, 2001
	15.1			Letter of PricewaterhouseCoopers LLP on Unaudited Interim Financial Information.


*	See Exhibit Index attached hereto, which is incorporated herein by reference.


Exhibit
Number		Exhibit Description

	3.1(1)	Amended and Restated Articles of Incorporation.
	3.2(2)	Amendment to the Articles of Incorporation.
	3.3(1)	Amended and Restated Bylaws.
	4.1(3)	Form of Common Stock Certificate.
	4.2(4)	Preferred Stock Rights Agreement, dated as of March 29, 2001 between Critical Path, Inc. and Computershare, including the Certificate of Determination, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B and C, respectively.
	4.3	Warrant to Purchase Common Stock of Critical Path, Inc. issued to Vectis Group, LLC.
	10.1	Termination Agreement with Vectis Group LLC dated as of September 30, 2001
	10.2	Agreement between Critical Path, Inc. and Lawrence Reinhold dated as of May 15, 2001
	10.3	Agreement between Critical Path, Inc. and David Hayden dated as of August 13, 2001
	10.4	Agreement between Critical Path, Inc. and William McGlashan, Jr. dated as of August 1, 2001
	10.5	Agreement between Critical Path, Inc. and Pierre Van Beneden dated as of October 8, 2001
	15.1	Letter of PricewaterhouseCoopers LLP on Unaudited Interim Financial Information.