e10-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 April 30, 2002, the company had outstanding 77,646,645 shares of common stock, $0.001 par value per share.

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. Critical Path, along with its subsidiaries (collectively referred to herein as the “Company”), provides messaging and collaboration solutions, from wireless, secure and unified messaging to basic email and personal information management, as well as identity management solutions that simplify user profile management and strengthen information security. The Company’s customers are corporate enterprises, carriers and service providers, postal authorities and government agencies. The unaudited condensed consolidated financial statements (“Financial Statements”) of Critical Path, Inc. and Subsidiaries furnished herein 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 audited 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 2001 Annual Report on Form 10-K. The results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the entire year.

The condensed consolidated financial statements include the accounts of the Company, and its wholly-owned and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The equity method is used to account for investments in unconsolidated entities if the Company has the ability to exercise significant influence over financial and operating matters, but does not have the ability to control such entities. The cost method is used to account for equity investments in unconsolidated entities where the Company does not have the ability to exercise significant influence over financial and operating matters.

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: Internet messaging and communication products and services and management uses one measure of profitability. Revenue information on a product basis has been disclosed in our statement of operations.

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

In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections. SFAS No. 145 is effective for financial statements issued on or after May 15, 2002 and rescinds both SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and the amendment to SFAS No. 4, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. Through this rescission, SFAS No. 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect.

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. This Statement addressed 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. Goodwill and intangible assets acquired after June 30, 2001 will be subject immediately to the nonamortization and amortization provisions of this Statement. The Company adopted the new rules on accounting for goodwill and other intangible assets in the first quarter of fiscal 2002. Adoption resulted in approximately $5.5 million related to acquired workforce and goodwill that will no longer be amortized, however we will annually test them for impairment, if not on a more frequent basis.

The gross carrying value related to these assets totaled $12.3 million and $10.9 million as of March 31, 2001 and March 31, 2002, respectively, and accumulated amortization totaled $1.3 million and $5.4 million. The aggregate amortization expense related to these assets during the first quarter of 2001 and 2002 totaled $1.3 million and zero. The estimated total amortization expense related to all intangible assets is $43.1 million for the year ended 2002, at which time all amortizable intangible assets will be fully amortized.

The following table presents net loss attributable to common shares and net loss per share attributable to common basic and diluted, as if the acquired workforce and goodwill had not been amortized during the periods presented (in thousands, except per share amounts):

We are a party to lawsuits in the normal course of our business. Litigation in general, and securities and intellectual property litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Other than as described below, we are not a party to any other material legal proceedings.

Securities Class Actions in Northern District of California. Beginning on February 2, 2001, a number of securities class action complaints were filed against the Company and certain of our current and former officers and directors in the United States District Court for the Northern District of California. The complaints were filed as purported class actions by individuals who allege that they purchased the Company’s common stock during a purported class period and sought an unspecified amount in damages; the alleged class periods vary among the complaints. The complaints were consolidated into a single action which alleged 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. In addition, on September 24, 2001, certain former shareholders of PeerLogic, Inc. 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 sought an unspecified amount in damages. We subsequently removed the PeerLogic 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. In February 2002, the Court gave preliminary approval to the settlement of the class action litigation. The Court also set the hearing date for final approval of the settlement agreement for May 23, 2002.

On April 30, 2002, MBCP PeerLogic LLC and other named plaintiffs filed suit in the U.S. District Court for the Southern District of New York against Critical Path and certain of its former officers. The plaintiff shareholders opted out of the shareholder litigation settlement currently pending in the U.S. District Court for the Northern District of California. The complaint, which has not been served on the Company, alleges breach of contract, unjust enrichment, common law fraud and violations of federal securities laws and seeks compensatory and punitive damages in an unnamed amount but in excess of $200 million.

Derivative Actions in Northern District of California. Beginning on February 5, 2001, Critical Path was 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 alleged 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 sought 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.

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. The Company fully cooperated with the SEC in its investigation. The SEC’s investigation was concluded against the Company in January 2002 with no imposition of fines or penalties against the Company. The Company consented, without admitting or denying liability, to an administrative order that the Company violated certain non-fraud provisions of the federal securities laws and to a cease and desist order. The investigation has thus far resulted with charges being filed against two former executive officers of the Company. The investigation of former executive officers and directors of the Company is continuing and while the Company is fully cooperating with such investigation we do not know the status of the investigation with respect to many of such former officers.

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 purported class action complaints were filed 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.

Lease Dispute. In July 2000, PeerLogic, an acquired subsidiary of Critical Path, signed a lease for office space at 292 Ivy Street in San Francisco, CA. The landlord and PeerLogic had begun construction work to build out the space, when Critical Path acquired PeerLogic in December 2000. After reviewing its obligations under the lease, Critical Path noted that local zoning laws likely prohibited a business like Critical Path or PeerLogic from occupying the leased premises, and promptly sought a zoning determination from the San Francisco Zoning Administrator to resolve the matter. The preliminary zoning determination stated that Critical Path’s proposed use of the leased premises was not permitted. The landlord appealed this determination and prevailed before the San Francisco Board of Appeals. Critical Path appealed that determination but upon rehearing the Board of Appeals confirmed its decision. As anticipated, thereafter the landlord filed suit for back rent and breach of contract against Critical Path on April 30, 2002. The complaint seeks $7 million in compensatory damages and an unspecified amount of punitive damages. The Company intends to vigorously defend its rights but there can be no assurance as to the outcome of this litigation.

The uncertainty associated with these and other unresolved or threatened lawsuits could seriously harm the Company’s business and financial condition. In particular, the lawsuits or the continued effects of the SEC investigation could harm our relationships with existing customers and our ability to obtain new customers. The continued defense of the lawsuits could also result in the diversion of management’s time and attention away from business operations, which could harm the Company’s business. Although some of the named lawsuits are in the final stages of settlement, there can be no assurance that the applicable courts will accept the final settlement as executed, or at all. Negative developments with respect to the settlements or the lawsuits 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 payments could seriously harm the Company’s financial condition.

During 2001 and in connection with his employment agreement, the Company made a loan and held a note receivable from David Hayden, Executive Chairman, in the amount of $1.5 million. The full recourse note accrues interest at the rate of 6.75% per annum and could be repaid by the achievement of performance-based milestones described in Mr. Hayden’s employment agreement and performance loan agreement. The loan was also subject to forgiveness upon certain change of control events. In February 2002, the Board approved an amendment of Mr. Hayden’s employment agreement which eliminated the original performance-based milestones in favor of a single performance-based milestone tied to a change of control event. In addition, the Board increased the amount available under the loan agreement by an additional $450,000, which Mr. Hayden borrowed in March 2002. The loan amount is secured by a first priority security interest in all of Mr. Hayden’s shares and options in the Company, with all other terms of the loan and other agreements unchanged.

In December 2001, the Board approved a fully secured loan to William McGlashan, Jr., the Company’s Chief Executive Officer, of up to $4.0 million in connection with the purchase of a principal residence in the San Francisco Bay Area. In May 2002, the Compensation Committee of the Board and Mr. McGlashan agreed to amend the agreement in order to reduce the amount of the loan commitment to $1.5 million. In connection with the reduction of the loan commitment, Mr. McGlashan was granted additional options to purchase shares of the Company’s Common Stock. As of May 14, 2002, no portion of the loan commitment had been funded.

During 2001, the Company announced a strategic restructuring plan that involved reorganizing Critical Path’s product and service offerings around a group of core communications solutions, a reduction in the Company’s workforce, and the consolidation of facilities and operations. Total restructuring charges amounted to $18.3 million, all of which was recognized during 2001. As of December 31, 2001 a $2.2 million accrual remained as a component of accounts payable. During the first quarter of 2002, approximately $400,000 was charged against this accrual, primarily cash paid related to facilities and operations consolidation restructuring activities, leaving a remaining restructuring accrual of $1.8 million as of March 31, 2002, which is expected to be paid over the next 12 months.

Accumulated other comprehensive loss consists of unrealized gains (losses) on available-for-sale securities, net of tax, and cumulative translation adjustments, as presented on the accompanying consolidated balance sheet.


	Net loss per share is calculated as follows: (In thousands, except per share amounts)

For the three months ended March 31, 2002, approximately 91,603,266 million potential common shares were excluded from the determination of diluted net loss per share, as the effect of such shares on a weighted average basis was anti-dilutive.

This report on Form 10-Q contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended and in effect from time to time. The words “anticipates,” “expects,” “intends,” “plans,” “believes,” “seek,” and “estimate” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements regarding our future strategic, operational and financial plans, anticipated or projected revenues, expenses and operational growth, markets and potential customers for our products and services, plans related to sales strategies and global sales efforts, the anticipated benefits of our relationships with strategic partners, growth of our competition, our ability to compete, investments in product development, the adequacy of our current facilities and our ability to obtain additional space, our litigation strategy, use of future earnings, the feature, benefits and performance of our current and future products and services, plans to reduce operating costs through continued expense reduction, anticipated effects of restructuring and retirement of debt, and our belief as to our ability to successfully emerge from the restructuring and refocusing of our operations. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, difficulties of forecasting future results due to our limited operating history, failure to meet sales and revenue forecasts, evolving business strategy and the emerging nature of the market for our products and services, finalization of pending litigation and the settlement of the continuing SEC investigation against former executives and directors, turnover within and integration of senior management, board of directors members and other key personnel, difficulties in our strategic plans to exit certain products and services offerings, failure to expand our sales and marketing activities, potential difficulties associated with strategic relationships, investments and uncollected bills, general economic conditions in markets in which the Company does business, risks associated with our international operations, foreign currency fluctuations, unplanned system interruptions and capacity constraints, software defects, and 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.

All references to “Critical Path,” “we,” “our,” or the “Company” mean Critical Path, Inc. and its subsidiaries, except where it is clear from the context that such terms means only the parent company and excludes subsidiaries.

This Quarterly Report on Form 10-Q includes numerous trademarks and registered trademarks of Critical Path. Products or service names of other companies mentioned in this Quarterly Report on Form 10-Q may be trademarks or registered trademarks of their respective owners.

Critical Path, Inc., a global leader in Internet communications, delivers software and services that are designed to maximize the value of Internet communications. We provide messaging and collaboration solutions from wireless, secure and unified messaging to basic email and personal information management, as well as identity management solutions that simplify user profile management and strengthen information

security. Our standards-based Critical Path Communications Platform, built to perform reliably at the scale of public networks, delivers the industry’s lowest total cost of ownership for messaging solutions and lays a solid foundation for next-generation communications services.

Our primary sources of revenue come from providing a wide range of messaging and directory products and services. Critical Path’s customers are corporate enterprises, carriers and service providers, postal authorities and government agencies. Critical Path was founded in 1997 and is headquartered in San Francisco, California with offices worldwide.

In view of the rapidly evolving nature of 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 March 31, 2002, we had 583 employees, in comparison with 562 employees at December 31, 2001 and 1,011 employees at March 31, 2001. We do not believe that our historical growth rates for revenue, expenses, or personnel are indicative of future results.

We derive most of our revenues through the sale of our messaging and directory communications 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 revenues are derived from perpetual and term licenses for our messaging, directory, collaborative and enterprise application integration technologies. Hosted messaging revenues relates to fees for our hosted messaging and collaboration services. These fees are primarily based upon monthly contractual per unit rates for the services involved, and are recognized as revenue on a ratable monthly basis over the term of the contract. Professional services revenues are 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. Maintenance and support revenues are recognized ratably over the term of the agreement.

Software License. We recognized $10.9 million in software license revenues during the first quarter of 2002, compared to $5.6 million in the same quarter in 2001. The significant increase in software license revenues over the prior year was due primarily to the uncertainty surrounding Critical Path during the first quarter of 2001, which caused a number of current and potential customers to delay making purchase decisions. This uncertainty was created by the Company’s restatement of certain previously released financial results for the third quarter of 2000, significant turnover within the senior management group and the termination and resignation of much of the leadership within our sales organization. Even with the higher license revenues levels during the first quarter of 2002, our business activities continue to be impacted by the difficult worldwide business climate, which has resulted in lower and delayed information technology spending across the enterprise software market.

Hosted Messaging. We recognized $7.0 million in hosted messaging revenues during the first quarter of 2002, compared to $14.4 million in the same quarter in 2001. This decrease in 2002 hosted messaging revenues resulted primarily from the Company having either exited or sold, as part of its 2001 restructuring initiatives, certain non-core hosted messaging services during the second half of 2001. These non-core services accounted for a significant portion of first quarter 2001 hosted messaging revenues.

Professional Services. We recognized $1.9 million in professional services revenues during the first quarter of 2002, compared to $3.4 million in the same quarter in 2001. This decrease in 2002 was due primarily to higher first quarter 2001 professional services revenues directly resulting from the Company’s September 2000 acquisition of PeerLogic, Inc. In addition, the Company’s 2001 restructuring initiatives eliminated certain non-core products, reducing the professional services revenues derived from these products.

Maintenance and Support. We recognized $3.9 million in maintenance and support revenues during the first quarter of 2002, compared to $3.7 million for the same quarter in 2001. This increase in 2002 resulted primarily from the higher software license revenues levels compared to the first quarter of 2001, partially offset by the loss of maintenance and support revenues from the elimination of certain non-core products and services as part of the Company’s 2001 restructuring initiatives.

Critical Path’s international operations accounted for approximately 52% of net revenues in the first quarter of 2002. Revenues from international operations accounted for approximately 30% of net revenues in the first quarter of 2001. This significant increase in the percentage of international revenues related primarily to a dramatic reduction in enterprise information technology spending during the first quarter of 2001, as it impacted the sale of our license products in international markets.

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 cost of net software license revenues for the first quarter of 2002 was comparable to the year ago period.

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 cost of net hosted messaging revenues were significantly lower in the first quarter of 2002 compared to the prior year primarily due to the Company’s restructuring initiatives undertaken in the second half of 2001. As a result of these initiatives, the costs associated with the Company’s hosted messaging revenues were reduced through the sale or exit of several non-core services, the termination of employees and reduction in employee-related costs, the retirement of surplus network infrastructure equipment and software, and the consolidation of data centers.

Professional Services. Cost of net professional services revenues consist 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 Company’s 2001 restructuring initiatives, personnel and certain overhead costs were reduced, resulting in lower professional services cost of net revenues in the first quarter of 2002, in comparison to the same period in the prior year.

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. The cost of net maintenance and support revenues was lower in the first quarter of 2002 in comparison to the year ago period, due primarily to a decrease in staffing levels and a reduction in employee-related costs.

Operations, customer support, and professional services staff decreased to 192 employees at March 31, 2002 from 349 employees at March 31, 2001.

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. Sales and marketing expenses for the first quarter of 2002 decreased significantly over the prior year’s first quarter due primarily to cost savings generated from the Company’s 2001 restructuring initiatives. With actions taken as part of the restructuring, sales and marketing staffing levels were reduced to 143 employees at March 31, 2002 from 286 employees at March 31, 2001. The savings in personnel and personnel-related costs together with the termination of certain strategic marketing relationships related to non-core services accounts for the reduction in sales and marketing expenses from the first quarter of 2001 to the same quarter of 2002.

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. This significant decrease in first quarter 2002 research and development expenses resulted primarily from a reduction in headcount and related personnel costs as part of the Company’s 2001 restructuring initiatives. These actions have contributed to a decrease in research and development staffing to 156 employees at March 31, 2002, from 244 employees at March 31, 2001. In addition, savings realized from the termination of certain outside consulting arrangements and consolidation of facilities also contributed to this decrease in research and development expenses.

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. The significant decrease in first quarter 2002 general and administrative expenses in comparison to the same period in the prior year was due primarily to cost savings realized from the Company’s 2001 restructuring initiatives. Savings were realized from a decrease in general and administrative staffing levels to 92 employees at March 31, 2002 from 132 employees at March 31, 2001, as well as lower facilities costs resulting from the Company’s reduction in facilities from 77 at December 31, 2000 to 27 at March 31, 2002. In addition, as a result of the restatement of certain previously released 2000 financial results, the Company incurred higher fees for outside professional services in the first quarter of 2001, in particular higher legal and accounting fees related to the SEC investigation and extended outside audit work.

In connection with the acquisitions we 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 2000 and 2001, we recorded charges of $1.3 billion and $26.6 million, respectively, related to the impairment of certain long-lived assets, including intangible assets. In addition, with the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, in the beginning of 2002, approximately $5.5 million of the Company’s intangible assets related to acquired workforce and goodwill will no longer be subject to amortization, but instead will be periodically tested for impairment. As a result of the 2001 impairment charge and the adoption of SFAS No. 142, first quarter 2002 amortization expense decreased significantly from the first quarter of 2001. Based upon the types of identifiable intangibles acquired, first quarter 2002 amortization expense of $4.6 million was allocated to cost of net revenues and the remaining amortization expense of $6.1 million was allocated to operating expenses.

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

Stock-based expenses are comprised of charges related to certain stock options and warrants granted to employees, directors and consultants from 1998 through 2001 and common stock issued to certain employees, directors and advisors in 1998 and 1999. The decline in stock-based expenses in the first quarter of 2002 in comparison to the first quarter of 2001 was primarily the result of certain stock-based charges related to 1998 grant activity becoming fully amortized in the second-half of 2001.

Interest and other income (expense) consists primarily of interest earnings on cash and cash equivalents as well as net realized gains (losses) on foreign exchange transactions. Interest income amounted to $336,000 and $2.3 million in the first quarters of 2002 and 2001, respectively. Interest income was lower for the first quarter of 2002 compared to the same period in the prior year due to lower cash balances available for investing. Cash balances declined during the twelve months ended March 31, 2002, due primarily to the funding of the Company’s net losses and cash utilized in 2001 to retire a significant portion of the Company’s convertible debt obligations. Also included in interest and other income (expense) were net gains recognized from foreign currency transactions associated with our international operations in the amounts of $202,000 and $136,000 for the first quarter of 2002 and 2001, respectively.

Interest expense consists primarily of the interest, amortization of related issuance costs associated with the Convertible Subordinated Notes we issued in March 2000, and interest on certain capital leases. Because of the retirement of a significant portion of our convertible subordinated notes and capital leases during 2001, interest expense for the first quarter of 2002 declined to $783,000 from $5.1 million for the first quarter of 2001. For the first quarter of 2002, we incurred approximately $552,000 in interest expense on the Convertible Subordinated Notes, and approximately $69,000 from the amortization of debt issuance costs. We incurred approximately $4.3 million in interest expense on the Convertible Subordinated Notes, and approximately $538,000 related to amortization of debt issuance costs during the first quarter of 2001. The amortization of the issuance costs associated with the redeemable convertible preferred shares which the Company issued in the fourth quarter of 2001 totalled $139,000 for the first quarter of 2002 and is also reported as a component of interest expense. Interest on capital leases and other long-term obligations amounted to approximately $23,000 for the first quarter of 2002 and $264,000 during the first quarter of 2001.

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 first quarter of 2002, we recorded equity in net loss of joint venture of approximately $403,000, compared to a net loss of $776,000 recorded in the first quarter of 2001.

An $800,000 benefit for U.S. federal income taxes was recorded during the first quarter of 2002 due to the repeal of the federal corporate alternative minimum tax. No current provision 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. As a partial offset to the U.S. tax benefit we recorded, we recognized a provision for foreign income taxes during the first quarter of 2002 as certain of our European operations generated income taxable in certain European jurisdictions.

As of March 31, 2002, our cash, cash equivalents and short-term investments totaled $63.5 million, comprised of $52.2 million in cash and cash equivalents and $11.3 million in short-term investments. Our working capital amounted to approximately $52.2 million. During the first quarter of 2002, we used approximately $7.0 million in cash.

We used cash of $3.1 million to fund operating activities during the first quarter of 2002 primarily due to our net loss, adjusted for non-cash charges, as operating costs, primarily employee and employee related costs,

exceeded the related sales of our software products and services. In addition, we used cash to make certain insurance, and software and hardware support and maintenance renewal payments during the quarter, accounting for the $3.2 million in cash used for other assets. These uses of cash to fund operating activities were partially offset by the growth in our accounts payable balances by $5.4 million.

We used cash in investing activities during the first quarter of 2002 totaling $2.7 million. Cash was primarily used to purchase additional short-term investments of $1.6 million and $1.3 million was used to purchase additional network infrastructure equipment and to fund a portion of the tenant improvements in the Company’s new San Francisco office.

We used cash from financing activities during the first quarter of 2002 of $1.2 million. Cash was principally used to retire $3.1 million in principal on capital lease obligations. This use of cash was partially offset by proceeds the Company received from the repayment of notes receivable from former officers and shareholders totaling $1.2 million and $677,000 from the sale of the Company’s common stock.

Our primary sources of capital have come from both debt and equity financings, that have been completed by Critical Path over the past three years. Revenues generated from the sale of our products and services may not increase to a level that exceeds our operating expenses or could fluctuate significantly as a result of changes in customer demand or acceptance of future products. We also expect to experience increased operating expenses, including moderate increases in strategic areas, such as sales and marketing, and we anticipate that operating expenses and capital expenditures will constitute a material use of our cash. Accordingly, our cash flow from operations may continue to be negatively impacted. We believe that our cash, cash equivalents and anticipated cash from operations will be sufficient to maintain current and planned operations for at least the next twelve months.

Additionally, we have no present understandings, commitments or agreements for any material acquisitions of, or investments in, other complementary businesses, products or technologies. We continually evaluate potential acquisitions of, or investments in, other businesses, products and technologies, and may in the future utilize our cash resources or may require additional equity or debt financing to accomplish any acquisitions or investments. Currently, we are considering several alternatives to expend our presence in the Asian markets and potentially other international markets. These alternatives could increase liquidity through the infusion of investment capital by third-party investors or decrease our liquidity as a result of Critical Path seeking to fund expansion into these markets. Such expansions might also cause an increase in capital expenditures and operating expenses.

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 integration of acquisitions we completed in 1999 and 2000, our recent strategic and operational 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, 30% in 2001 and 46% for the first quarter of 2002. Our revenues have in some quarters and could continue to 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 demand for outsourced messaging services generally and the use of messaging and directory infrastructure products and services in particular;

	•	the demand for licensed solutions for 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 ability to upgrade, develop and maintain our systems and infrastructure and to effectively respond to the rapid technology change of the messaging and directory infrastructure market;

	•	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 quickly handle and alleviate technical difficulties or system outages;

	•	the announcement or introduction of new or enhanced services by competitors; and

	•	general economic and market conditions and their affect on our operations and that of our customers.

In addition to the factors set forth above, operating results have been and will continue to 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.

Although we have largely exited non-core product lines, 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 any other offerings of a product or service would involve other factors affecting operational results including the expenditure of capital, the realization of losses, further reductions 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, we do not believe that period-to-period comparisons of operating results are 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 prove volatile and/or decline.

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 aggressively marketing our 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 our acceptance as a supplier of outsourced messaging solutions. We also depend on joint marketing and product development through strategic relationships to achieve further 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. In addition to strategic relationships, we also depend on the ability of our customers to aggressively sell and market our services to their end-users. If we lose any strategic relationships, fail to renew these agreements or relationships, fail to fully exploit our relationships, or fail to develop new strategic relationships, our business and financial results will suffer. The loss of any key strategic relationships would have an adverse impact on our current and future revenues.

In the first quarter of 2001, in response to the restatement of our financial results, we announced a series of changes in our management that included the departure of many senior executives. In the second quarter of 2001, we announced a series of additional changes in our management and board of directors that also included the departures of senior executives and board members. 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 and successfully meet operational challenges could be severely impaired. We do not have long-term employment agreements with any of our executive officers. It is possible this high turnover at our senior management levels may also continue for a variety of reasons. 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.

As of March 31, 2002, we had an accumulated deficit, including other comprehensive income, of approximately $2.1 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 do expect that our operating expenses will continue to decrease as a result of our strategic and operational restructuring and other cost-cutting efforts. However, we will continue to spend resources on maintaining and strengthening our business, and this may, in the near term, have a negative effect on our operating results and our financial condition.

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 to 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 related 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 also, in turn, cause the price of our common stock to demonstrate volatility and/or to decline.

Our ability to increase revenues will depend on our ability to successfully recruit, train and retain experienced and effective 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, and ultimately, grow revenues. This would also adversely impact the timing and extent of our 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 organiza-

tions of our competitors. If we do not successfully operate and grow our sales and marketing activities, our business could suffer and the price of our common stock could decline.

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. In addition, a number of our technology industry customers have also suffered from falling revenue, job losses, restructuring and decreased technology spending in the recent economic downturn. If our customers terminate their agreements for any reason 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 enter into agreements with new customers, our business will not grow and we will not generate additional revenues.

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 who offer hosted exchange services. Our primary 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;

	•	scalability, reliability and performance, and 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; and

	•	total cost of ownership and operation.

We believe competition will continue to be fierce and further 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 and market 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.

Because we sell complex and sophisticated technology, our sales cycle can be long and unpredictable, often taking between two to twelve months. Because of the nature of our product and service offerings it can take many months of customer education and product evaluation before a purchase decision is made. In addition, many factors can influence the decision to purchase our product and service offerings including budgetary restraints and decreases in capital expenditures, quarterly fluctuations in operating results of customers and potential customers, the emerging and evolving nature of the internet-based services and wireless services markets. Furthermore, general global economic conditions, and a slowdown in technology spending in particular, have further lengthened and affected our sales cycle, leading to delays and postponements in purchasing decisions. Any delay or cancellation in sales of our products or services could cause our operating results to differ from those projected and cause our stock price to decline.

We believe that existing capital resources will enable us to maintain current and planned operations through March 31, 2003. 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 but not limited to the resources to maintain worldwide operations, our 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 or other derivative instruments, 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 and August 2001, and certain of our current and former officers and directors and some of our subsidiaries, as well as other lawsuits related to acquisitions, employee terminations and copyright infringement. While these lawsuits vary greatly 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, our ability to obtain new customers and our ability to operate certain aspects of our business.

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. While we maintain customary business insurance coverage, we have not set aside any financial reserves relating to potential damages associated with any of these lawsuits.

Although the Company has reached settlement agreements in connection with the securities class action pending in the U.S. District Court for the Northern District of California, we cannot provide assurance that a

final settlement shall be approved in accordance with the settlement agreement, or at all. The approval of the definitive settlement agreements between the parties is subject to other factors, such as court review and approval, before the subject actions are dismissed. In addition, the definitive settlement agreements entered into between the parties are also 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 the settlement. If the settlement were not given final approval, it could have a number of materially detrimental effects on the Company’s financial condition and business.

Should the Court fail to approve the settlement, and the litigation continue, there can be no assurance that fees and expenses, and any ultimate resolution 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 settlement agreement are within the coverage limits of the Company’s directors and officers insurance, should the current agreement in principle fail to be approved by the court, 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. A failure to complete the settlement could also cast doubt as to the prospects of the Company in the eyes of our customers, potential customers and investors, and cause the Company’s stock price to decline.

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. In February 2002, the SEC announced the conclusion of the investigation as to the Company. Although the SEC did not impose any penalties against the Company, we consented without admitting or denying liability, to an administrative order that the Company violated certain non-fraud provisions of the federal securities laws and to a cease and desist order. In addition, the SEC and the Department of Justice charged two former employees of the Company with various violations of the securities laws. Despite the conclusion of the investigation of the Company, lingering concerns about the actions leading up to the restatement of financials for the third quarter of 2000 has nevertheless cast doubt on the future of the Company in the eyes of customers and investors and could continue to harm our business and cause the price of our common stock to continue to fluctuate and/or decline significantly.

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 March 31, 2002 we were in compliance with all Nasdaq National Market listing requirements. However, there were periods in the second and third quarters of 2001 when the closing bid price per share for our common stock was well 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 again slips below $1 per share for more than 60 days, our common stock may not remain listed on The Nasdaq National Market. Also effective November 1, 2002, we will need to comply with the Nasdaq National Market’s revised quantitative maintenance criteria including a new minimum requirement of $10.0 million in stockholders’ equity. The Nasdaq National Market’s Audit Committee Rules require that our audit committee be comprised of at least three independent members. We believe that we currently comply with this requirement. However, there can be no assurance that we will be able to comply with the quantitative maintenance criteria or any of the Nasdaq National Market’s rules in the future. If we fail to maintain continued listing on the Nasdaq National Market and must move to a market with less liquidity, our financial condition could be harmed and our stock price would likely decline. 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.

The trading price of our common stock has been and may continue to experience volatility and wide fluctuations. For example, during the fourth quarter of 2001, the closing sale prices of our common stock on the Nasdaq National Market ranged from $0.51 on October 1, 2001 to $2.74 on December 31, 2001, and the closing price of our stock on March 28, 2002 was $2.16 per share. Our stock price may further fluctuate or decline in response to any number of factors and events, such as announcements related to litigation, technological innovations, strategic and sales relationships, new product and service offerings by us or our competitors, changes in senior management, 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 quarters. This volatility and decline has affected many companies, including our company, irrespective of the specific operating performance 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.

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 director and officer liability insurance, that was in place through March 2002, and our current insurance that was renewed through March 2003, contain 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. The Company has made payments in connection with the indemnification of officers and directors in connection with currently pending lawsuits and has reserved for estimated future amounts to be paid in connection with legal expenses and others costs of defense of pending lawsuits.

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.

In the past, our management of operational expenses and the growth of our business have contributed to our history of losses. In addition, the expansion of our operations 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 effectively, our business and operating results could suffer.

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 quarters of 2001, implementation of the plan occurred and, accordingly, products and services determined to be non-core to our strategy were exited. As a result, revenue from non-core products and services comprising approximately 37% of total revenues in the first quarter of 2001, had declined to approximately 24% of total revenues in the second quarter of 2001, approximately 18% of total revenues in the third quarter of 2001, and approximately 3% of total revenues in the fourth quarter of 2001 and none in 2002. Our strategic plan also included initiatives aimed at reducing operating costs through headcount reduction and consolidation of approximately two-thirds of our office space and related contracts and leases, all in keeping with our increased focus on core messaging products and services. During the fourth quarter of 2001 we incurred additional charges in connection with previously announced reductions in force and were able to finalize the consolidation of additional facilities and related contracts and expenses associated with those facilities.

Acquisitions involve risks related to the integration and management of acquired technology, operations and personnel. In addition, in connection with our strategic restructuring, the Company elected to divest or discontinue many of the acquired businesses. Both the integration and divestiture of acquired businesses have been and will continue to be complex, time consuming and expensive processes, which may disrupt and distract our management from its core business. With respect to integration, 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. With divestitures, the timing and transition of those businesses and their customers to other entities has required and will continue to require resources from our legal, finance and corporate development teams as well as expenses associated with the conclusion of those transactions.

Consequently, we may not be successful or efficient in integrating or divesting acquired businesses or technologies and may not achieve anticipated revenues and benefits and/or cost reductions. 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 be realized. In addition, if we are not successful in divesting non-core acquired businesses, we will incur costs associated with the cessation of operations or wind up of acquired businesses. In either event, we will likely further 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. Such decisions to eliminate or limit our offering of an acquired product or service involved and could continue to include the expenditure of capital,

the realization of losses, further 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 intend to continue to license certain technologies from third parties and incorporate such technologies into our products and services, including web server technology, virus and anti-spam solutions 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. To the extent we cannot license needed technologies or solutions, we may have to devote Company resources to the development of such technologies which could materially harm our business and operations.

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, potential patent and copyright infringement issues, 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. In addition, an inability to obtain needed licenses could delay product and service development until equivalent technology can be identified, licensed and integrated. Any delays in services or integration problems could cause our business and operating results to 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 remain 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.

Few laws currently apply directly to activity on the Internet and the messaging business, however new laws are proposed and other laws made applicable to Internet communications every year. In particular, the Company faces risks associated with privacy, confidentiality of user data and communications, consumer protection, taxation, content, copyright, trade secrets, trademarks, antitrust, defamation and other legal issues. In particular, legal concerns with respect to communication of confidential data have affected our financial services and health care customers due to newly enacted federal legislation. The growth of the industry and the proliferation of Internet-based messaging devices and services may prompt further legislative attention to our industry and thus invite more regulatory control of our business. The imposition of more stringent protections and/or new regulations and application of laws to our business could burden our company and those with which we do business. Further, the adoption of additional laws and regulations could limit the growth of our business and that of our business partners and customers. Any decreased generalized demand for our services or the loss of, or decrease, in business by a key partner due to regulation or the expense of compliance with any regulation, could either increase the costs associated with our business or affect revenue, either of which could harm our financial condition or operating results. Certain of our service offerings include operations subject to the Digital Millenium Copyright Act of 1998. The Company has expended resources and implemented

processes and controls in order to remain in compliance with DMCA but there can be no assurance that our efforts will be sufficient and/or new legislation and case law will not affect the operation of certain services.

In addition, the applicability of laws and regulations directly applicable to the businesses of our customers, particularly customers in the fields of banking and health care, will continue to affect us. The security of information about our customers’ end-users continues to be an area where a variety of laws and regulations with respect to privacy and confidentiality are enacted. As our customers implement the protections and prohibitions with respect to the transmission of end user data, our customers will look to us to assist them in remaining in compliance with this evolving area of regulation. In particular the Gramm-Leach-Blilely Act contains restrictions with respect to the use and protection of banking records for end-users whose information may pass through our system.

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.

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. In some instances, we may be subject to criminal liability in connection with Internet content transmission.

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 might 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.

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 a combination of trademark, copyright and trade secret laws, contractual restrictions, such as confidentiality agreements and licenses, and patents to establish and protect our proprietary rights, which we view as critical to our success. 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 that impose certain restrictions on the licensee’s ability to utilize the software. 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, which could harm our competitive position and market share. 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. In addition, we have several patents pending in the United States and may seek additional patents in the future. However, 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 do not know if our patent applications or any of our future patent applications will be issued with the scope of the claims sought, if at all, or whether any patents we have received or will receive will be challenged or invalidated.


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

	•	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; and

	•	end user license provisions in our contracts that protect us against unauthorized use, copying, transfer and disclosure of the licensed program may be unenforceable.

In addition, the laws of some foreign countries may 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 no claims of alleged patent infringement are currently pending, 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.

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 do not properly identify the feature preferences of prospective customers, or if we fail to deliver email features that 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 entails significant technical and business risks and requires 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 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, some 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 our 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 derived 52% of our revenues from international sales in the quarter ended March 31, 2002 and 30% of our revenues from international sales in the first quarter of 2001. 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 or operate 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;

	•	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.

During 2000 and 2001 California experienced a serious energy crisis that could have and may in the future 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 of 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 their operations, could harm their business, and ultimately could also harm our business if they were to terminate or fail to renew contracts. We do not carry sufficient business interruption insurance to compensate us for losses that may occur as a result of blackouts, 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 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 alternative measurement financial information presents Critical Path’s condensed consolidated results of operations during the three-month periods of 2001 and 2002, excluding the impact of certain special charges consisting of (i) amortization of intangible assets associated with purchase business combinations and financing transactions, (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 restructuring initiatives, (v) write-down of investments, (vi) gain on adjustment to market of the preferred stock instrument, and (vii) accretion on redeemable convertible preferred shares. 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.


(1)	Earnings before interest, taxes, depreciation and amortization, equity in net loss of joint venture and one-time charges identified in the following table. EBITDA is calculated by adding depreciation, approximately $7.8 million, back into loss from operations.

The following table reconciles the alternative measurement financial data presented above to the consolidated operating results prepared and presented in accordance with generally accepted accounting principles (“GAAP”).

As of March 31, 2002, our investment portfolio consisted of available-for-sale securities, excluding those classified as cash equivalents, of $17.5 million. These securities consist of $6.2 million of strategic equity investments in corporate partners, certain of which are publicly traded and marketable and certain of which are privately held and $11.3 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 $38.4 million of face value 5.75% Convertible Subordinated Notes due April 2005, and certain fixed rate capital leases. We do not plan 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 rate 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 disclosures 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 sheets of Critical Path, Inc. and its subsidiaries as of March 31, 2002 and the related condensed consolidated statement of operations for the three month period ended March 31, 2002 and the condensed consolidated statement of cash flow for the three month period ended March 31, 2002. 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, 2001, 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 February 5, 2002 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, 2001, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

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, and certain of our current and former officers and directors in the United States District Court for the Northern District of California. The complaints were filed as purported class actions by individuals who allege that they purchased the Company’s common stock during a purported class period and sought an unspecified amount in damages; the alleged class periods vary among the complaints. The complaints were consolidated into a single action which alleged 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. In addition, on September 24, 2001, certain former shareholders of PeerLogic, Inc. 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 sought an unspecified amount in damages. We subsequently removed the PeerLogic 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. In February 2002, the Court gave preliminary approval to the settlement of the class action litigation. The Court also set the hearing date for final approval of the settlement agreement for May 23, 2002.

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. The Company fully cooperated with the SEC in its investigation. The SEC’s investigation was concluded against the Company in January 2002 with no imposition of fines or penalties against the Company. The Company consented without admitting or denying liability, to an administrative order that the Company violated certain non-fraud provisions of the federal securities laws and to a cease and desist order. The investigation has thus far resulted with charges being filed against two former executive officers of the Company. The investigation of former executives officers and directors of the Company is continuing and while the Company is fully cooperating with such investigation we do not know the status of the investigation with respect to many of such former officers.

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.

Lease Dispute. In July 2000, PeerLogic, an acquired subsidiary of Critical Path, signed a lease for office space at 292 Ivy Street in San Francisco, CA. The landlord and PeerLogic had begun construction work to build out the space, when Critical Path acquired PeerLogic in December 2000. After reviewing its obligations under the lease, Critical Path noted that local zoning laws likely prohibited a business like Critical Path or PeerLogic from occupying the leased premises, and promptly sought a zoning determination from the San Francisco Zoning Administrator to resolve the matter. The preliminary zoning determination stated that Critical Path’s proposed use of the leased premises was not permitted. The landlord appealed this determination and prevailed before the San Francisco Board of Appeals. Critical Path appealed that determination but upon rehearing the Board of Appeals confirmed its decision. As anticipated, thereafter the landlord filed suit for back rent and breach of contract against Critical Path on April 30, 2002. The complaint seeks compensatory damages of approximately $7 million and unspecified punitive damages. The Company intends to vigorously defend its rights but there can be no assurance as to the outcome of this litigation.

The uncertainty associated with these and other unresolved or threatened lawsuits could seriously harm the Company’s business and financial condition. In particular, the lawsuits or the continued effects of 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 SEC investigation could also result in the diversion of management’s time and attention away from business operations, which could harm the Company’s business. Although some of the named lawsuits are in the final stages of settlement, there can be no assurance that the applicable courts will accept the final settlement as executed, or at all. Negative developments with respect to the settlements or the lawsuits 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 payments could seriously harm the Company’s financial condition.

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
	Executive Vice President,
	Chief Financial Officer
	(Duly Authorized Officer and Principal
	Financial and Accounting Officer)

36 EX-4.1 3 f81657ex4-1.txt EXHIBIT 4.1 EXHIBIT 4.1 THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. NETMOSPHERE, INC. WARRANT TO PURCHASE UP TO 194,863 SHARES OF COMMON STOCK Issue date: June ___, 2000 1. General. THIS CERTIFIES THAT, i2 Technologies, Inc. (the "HOLDER") is entitled to subscribe for and purchase up to One Hundred Ninety-Four Thousand Eight Hundred Sixty-Three (194,863) fully paid and nonassessable shares of common stock of Netmosphere, Inc., a California corporation (the "COMPANY"), at a price of $0.22 per share (the "EXERCISE PRICE"), vested as of March 14, 2000, subject to the provisions and upon the terms and conditions hereinafter set forth. This Warrant, together with a Warrant for the purchase of Seven Hundred Seventy-Nine Thousand Four Hundred Fifty (779,450) shares of Common Stock of Netmosphere, satisfies any requirement to issue Netmosphere securities pursuant to the letter agreement dated May 22, 2000 among the Company, Holder and Critical Path, Inc. 2. Exercise Period This Warrant may be exercised by the Holder at any time and from time to time (but no more than four (4) times) from the issue date above until March 14, 2003. 3. Method of Exercise; Payment a. Cash Exercise. The Holder may exercise this Warrant in whole or in part, by surrendering this Warrant (with the notice of exercise form attached hereto as Exhibit A duly executed) at the principal office of the Company and by the payment to the Company, by certified, cashier's or other check acceptable to the Company, of an amount equal to the aggregate purchase price of the shares of common stock being purchased. b. Stock Certificates. In the event the Holder exercises any of the rights represented by this Warrant to purchase shares of common stock, the Company shall deliver to the Holder certificates representing such shares within a reasonable time and, unless the Holder has fully exercised this Warrant or the Warrant has expired, a new warrant representing the remaining shares underlying this Warrant. 4. Reservation of Shares. The Company covenants and agrees that all shares of common stock which may be issued upon the exercise of this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, free from all preemptive rights of any stockholder and free from all taxes, liens and charges created by the Company with respect to the issue thereof. During the period within which the Holder may exercise this Warrant, the Company will at all times have authorized, and reserved for the purpose of issuance upon exercise of this Warrant, a sufficient number of shares of common stock to provide for the exercise of the rights represented by this Warrant. 5. Adjustment of Exercise Price and Number of Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the occurrence of certain events as follows: a. Reclassification or Merger. In case of any reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in par value or as a result of a subdivision or combination), or in case of any merger of the Company with or into another company (other than (i) a merger effected solely for the purpose of changing the Company's jurisdiction of incorporation or (ii) a merger with another company in which the Company is the acquiring and surviving corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), the Company, or such successor or purchasing company, as the case may be, shall duly execute and deliver to the Holder a new warrant, so that the Holder shall have the right to receive, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of common stock theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or merger by a holder of the number of shares of common stock under this Warrant. Such new warrant shall provide for adjustments as nearly equivalent as may be practicable to the adjustments provided for in this section. The provisions of this subparagraph (a) shall similarly apply to successive reclassifications, changes, mergers and consolidations. The Holder acknowledges that the Company has entered into an Agreement and Plan of Reorganization with Critical Path, Inc. and that the exchange ratio used for common stock of the Company is 0.0563, which shall result in this Warrant being exercisable for 10,971 shares of Critical Path common stock with an exercise price of $3.91 per share. b. Combination or Subdivision of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall combine its outstanding shares of common stock, the number of shares purchasable shall be proportionally decreased and the Exercise Price proportionally increased effective concurrently with such combination. In the case of a subdivision, the number of shares purchasable shall be proportionally increased and the Exercise Price proportionally decreased effective concurrently with such subdivision. c. Stock Dividends. If the Company at any time while this Warrant is outstanding and unexpired shall pay a dividend with respect to shares of common stock in shares of common stock, then the Exercise Price shall be adjusted, from and after the date of determination of stockholders entitled to receive such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of shares of common stock outstanding immediately prior to such dividend or distribution and (ii) the denominator of which shall be the total number of shares of common stock outstanding immediately after such dividend or distribution. 6. Fractional Shares. No fractional shares will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Exercise Price then in effect. 7. Compliance with Securities Law. The Holder, by acceptance hereof, agrees that the Holder is acquiring this Warrant, and the shares of common stock to be issued upon exercise hereof, for investment and will not offer, sell or otherwise dispose of this Warrant, or any shares of common stock to be issued upon exercise hereof, except under circumstances which will not result in a violation of the Securities Act of 1933 (the "SECURITIES ACT"). Upon exercise of this Warrant, unless the shares being acquired are registered under the Securities Act or an exemption from such registration is available, the Holder hereof shall confirm in writing, by executing the form attached as Schedule 1 to Exhibit A hereto, that the shares of common stock so acquired are being acquired for investment and not with a view towards distribution or resale. All shares of common stock issued upon exercise of this Warrant shall be stamped or imprinted with a legend in substantially the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED." 8. Transferability. This Warrant and all rights hereunder are not transferable without the prior written consent of the Company. In the event that the Company agrees to any such transfer, such transfer shall be effected, without charge to the Holder hereof (except for transfer taxes), upon surrender of this Warrant properly endorsed. 9. Rights as Stockholder. No Holder, solely as such, shall be entitled to vote or receive dividends or be deemed a stockholder of the Company. 10. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 11. Notices of Change. a. Promptly upon any adjustment in the number or class of shares subject to this Warrant and of the Exercise Price, the Company shall give written notice thereof to the Holder, setting forth in reasonable detail and certifying the calculation of such adjustment. b. The Company shall give written notice to the Holder at least ten (10) business days prior to the date on which the Company closes its books or takes a record for determining rights to receive any dividends or distributions. 12. Transfer Books. The Company will at no time close its transfer books against the transfer of this Warrant or of any shares of common stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. 13. Loss, Theft, Destruction, or Mutilation. The Company represents and warrants to the Holder that, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of this Warrant, the Company, at the Holder's expense, will make and deliver a new warrant of like tenor in lieu of the lost, stolen, destroyed or mutilated Warrant. 14. Notices. Any notice, request, communication or other document required or permitted to be given or delivered to the Holder or the Company shall be delivered via overnight courier by certified or registered mail, postage prepaid, to the Holder's address as shown on the books of the Company or to the Company at the address indicated on the signature page of this Warrant. 15. Binding Effect on Successors. Except as otherwise set forth herein, this Warrant shall be binding upon any company succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. Holder acknowledges that this warrant will be assigned to Critical Path, Inc. upon the closing of the proposed acquisition of the Company and that no consent to such assignment shall be required by the Holder. 16. Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 17. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California. 18. Acceptance. Receipt of this Warrant by the holder hereof shall constitute acceptance of and agreement to the foregoing terms and conditions. ------------------------------------- ------------------------------------- By: ---------------------------------- Name --------------------------------- Title: ------------------------------- Agreed and Accepted: Netmosphere, Inc. By: ---------------------------------- Name --------------------------------- Title: ------------------------------- EXHIBIT A NOTICE OF EXERCISE TO: Netmosphere, Inc. 1. The undersigned hereby elects to purchase __________ shares of common stock of Critical Path, Inc. pursuant to the terms of the attached Warrant. 2. The undersigned elects to exercise the attached Warrant by means of a cash payment, and tenders herewith payment in full for the purchase price of the shares being purchased, together with all applicable transfer taxes, if any. 3. Please issue a certificate or certificates representing said shares of common stock in the name of the undersigned as is specified below: ------------------------------------ (Name) ------------------------------------ ------------------------------------ ------------------------------------ (Address) 4. The undersigned hereby represents and warrants that the aforesaid shares of common stock are being acquired for the account of the undersigned for investment and not with a view to or for resale in connection with the distribution thereof, and that the undersigned has no present intention of distributing or reselling such shares. The undersigned hereby delivers an Investment Representation Statement in the form attached to the Warrant as Schedule 1 to Exhibit A. Date: By: ----------------------- ---------------------------------- Name --------------------------------- Title: ------------------------------- (if applicable) Schedule 1 INVESTMENT REPRESENTATION STATEMENT Purchaser: ------------------------------- Security: Shares of Common Stock Amount: ------------------------------- Date: ------------------------------- In connection with the purchase of the above-listed shares of common stock (the "SECURITIES"), the undersigned (the "PURCHASER") represents to Netmosphere, Inc. (the "COMPANY") as follows: (a) The Purchaser is aware of the Company's business affairs and financial condition, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. The Purchaser is purchasing the Securities for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "SECURITIES ACT"). (b) The Purchaser understands that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein. In this connection, the Purchaser understands that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if the Purchaser's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (c) The Purchaser further understands that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. Moreover, the Purchaser understands that the Company is under no obligation to register the Securities. In addition, the Purchaser understands that the certificate evidencing the Securities will be imprinted with the legend referred to in the Warrant under which the Securities are being purchased. (d) The Purchaser is aware of the provisions of Rule 144, promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, including, among other things: The availability of certain public information about the Company, the resale occurring not less than one year after the party has purchased and paid for the securities to be sold; the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934, as amended) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein. (e) The Purchaser further understands that at the time it wishes to sell the Securities there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144 and that, in such event, the Purchaser may be precluded from selling the Securities under Rule 144 even if the one-year minimum holding period had been satisfied. (f) The Purchaser further understands that in the event all of the requirements of Rule 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required, and that, notwithstanding the fact that Rule 144 is not exclusive, the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. PURCHASER By: ---------------------------------- Name --------------------------------- Title: ------------------------------- (if applicable) EX-4.2 4 f81657ex4-2.txt EXHIBIT 4.2 EXHIBIT 4.2 THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. NETMOSPHERE, INC. WARRANT TO PURCHASE UP TO 779,450 SHARES OF COMMON STOCK Issue date: June ___, 2000 1. General. THIS CERTIFIES THAT, i2 Technologies, Inc. (the "HOLDER") is entitled to subscribe for and purchase up to Seven Hundred Seventy-Nine Thousand Four Hundred Fifty (779,450) fully paid and nonassessable shares of common stock of Netmosphere, Inc., a California corporation (the "COMPANY"), at a price of $2.27 per share (the "EXERCISE PRICE"), vested as of the Issue Date, subject to the provisions and upon the terms and conditions hereinafter set forth. This Warrant, together with a Warrant for the purchase of One Hundred Ninety-Four Thousand Eight Hundred Sixty-Three (194,863) shares of Common Stock of Netmosphere, satisfies any requirement to issue Netmosphere securities pursuant to the letter agreement dated May 22, 2000 among the Company, Holder and Critical Path, Inc. 2. Exercise Period This Warrant may be exercised by the Holder at any time and from time to time (but no more than four (4) times) prior to the date that is three (3) years from the Issue Date. 3. Method of Exercise; Payment a. Cash Exercise. The Holder may exercise this Warrant in whole or in part, by surrendering this Warrant (with the notice of exercise form attached hereto as Exhibit A duly executed) at the principal office of the Company and by the payment to the Company, by certified, cashier's or other check acceptable to the Company, of an amount equal to the aggregate purchase price of the shares of common stock being purchased. b. Stock Certificates. In the event the Holder exercises any of the rights represented by this Warrant to purchase shares of common stock, the Company shall deliver to the Holder certificates representing such shares within a reasonable time and, unless the Holder has fully exercised this Warrant or the Warrant has expired, a new warrant representing the remaining shares underlying this Warrant. 4. Reservation of Shares. The Company covenants and agrees that all shares of common stock which may be issued upon the exercise of this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, free from all preemptive rights of any stockholder and free from all taxes, liens and charges created by the Company with respect to the issue thereof. During the period within which the Holder may exercise this Warrant, the Company will at all times have authorized, and reserved for the purpose of issuance upon exercise of this Warrant, a sufficient number of shares of common stock to provide for the exercise of the rights represented by this Warrant. 5. Adjustment of Exercise Price and Number of Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the occurrence of certain events as follows: a. Reclassification or Merger. In case of any reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in par value or as a result of a subdivision or combination), or in case of any merger of the Company with or into another company (other than (i) a merger effected solely for the purpose of changing the Company's jurisdiction of incorporation or (ii) a merger with another company in which the Company is the acquiring and surviving corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), the Company, or such successor or purchasing company, as the case may be, shall duly execute and deliver to the Holder a new warrant, so that the Holder shall have the right to receive, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of common stock theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or merger by a holder of the number of shares of common stock under this Warrant. Such new warrant shall provide for adjustments as nearly equivalent as may be practicable to the adjustments provided for in this section. The provisions of this subparagraph (a) shall similarly apply to successive reclassifications, changes, mergers and consolidations. The Holder acknowledges that the Company has entered into an Agreement and Plan of Reorganization with Critical Path, Inc. and that the exchange ratio used for common stock of the Company is 0.0563, which shall result in this Warrant being exerciseable for 43,883 shares of Critical Path common stock with an exercise price of $40.32 per share. b. Combination or Subdivision of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall combine its outstanding shares of common stock, the number of shares purchasable shall be proportionally decreased and the Exercise Price proportionally increased effective concurrently with such combination. In the case of a subdivision, the number of shares purchasable shall be proportionally increased and the Exercise Price proportionally decreased effective concurrently with such subdivision. c. Stock Dividends. If the Company at any time while this Warrant is outstanding and unexpired shall pay a dividend with respect to shares of common stock in shares of common stock, then the Exercise Price shall be adjusted, from and after the date of determination of stockholders entitled to receive such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of shares of common stock outstanding immediately prior to such dividend or distribution and (ii) the denominator of which shall be the total number of shares of common stock outstanding immediately after such dividend or distribution. 6. Fractional Shares. No fractional shares will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Exercise Price then in effect. 7. Compliance with Securities Law. The Holder, by acceptance hereof, agrees that the Holder is acquiring this Warrant, and the shares of common stock to be issued upon exercise hereof, for investment and will not offer, sell or otherwise dispose of this Warrant, or any shares of common stock to be issued upon exercise hereof, except under circumstances which will not result in a violation of the Securities Act of 1933 (the "SECURITIES ACT"). Upon exercise of this Warrant, unless the shares being acquired are registered under the Securities Act or an exemption from such registration is available, the Holder hereof shall confirm in writing, by executing the form attached as Schedule 1 to Exhibit A hereto, that the shares of common stock so acquired are being acquired for investment and not with a view towards distribution or resale. All shares of common stock issued upon exercise of this Warrant shall be stamped or imprinted with a legend in substantially the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED." 8. Transferability. This Warrant and all rights hereunder are not transferable without the prior written consent of the Company. In the event that the Company agrees to any such transfer, such transfer shall be effected, without charge to the Holder hereof (except for transfer taxes), upon surrender of this Warrant properly endorsed. 9. Rights as Stockholder. No Holder, solely as such, shall be entitled to vote or receive dividends or be deemed a stockholder of the Company. 10. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 11. Notices of Change. a. Promptly upon any adjustment in the number or class of shares subject to this Warrant and of the Exercise Price, the Company shall give written notice thereof to the Holder, setting forth in reasonable detail and certifying the calculation of such adjustment. b. The Company shall give written notice to the Holder at least ten (10) business days prior to the date on which the Company closes its books or takes a record for determining rights to receive any dividends or distributions. 12. Transfer Books. The Company will at no time close its transfer books against the transfer of this Warrant or of any shares of common stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. 13. Loss, Theft, Destruction, or Mutilation. The Company represents and warrants to the Holder that, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of this Warrant, the Company, at the Holder's expense, will make and deliver a new warrant of like tenor in lieu of the lost, stolen, destroyed or mutilated Warrant. 14. Notices. Any notice, request, communication or other document required or permitted to be given or delivered to the Holder or the Company shall be delivered via overnight courier by certified or registered mail, postage prepaid, to the Holder's address as shown on the books of the Company or to the Company at the address indicated on the signature page of this Warrant. 15. Binding Effect on Successors. Except as otherwise set forth herein, this Warrant shall be binding upon any company succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. Holder acknowledges that this warrant will be assigned to Critical Path, Inc. upon the closing of the proposed acquisition of the Company and that no consent to such assignment shall be required by the Holder. 16. Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 17. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California. 18. Acceptance. Receipt of this Warrant by the holder hereof shall constitute acceptance of and agreement to the foregoing terms and conditions. ---------------------------------- ---------------------------------- By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- Agreed and Accepted: Netmosphere, Inc. By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- EXHIBIT A NOTICE OF EXERCISE TO: Netmosphere, Inc. 1. The undersigned hereby elects to purchase __________ shares of common stock of Critical Path, Inc. pursuant to the terms of the attached Warrant. 2. The undersigned elects to exercise the attached Warrant by means of a cash payment, and tenders herewith payment in full for the purchase price of the shares being purchased, together with all applicable transfer taxes, if any. 3. Please issue a certificate or certificates representing said shares of common stock in the name of the undersigned as is specified below: ------------------------------- (Name) ------------------------------- ------------------------------- ------------------------------- (Address) 4. The undersigned hereby represents and warrants that the aforesaid shares of common stock are being acquired for the account of the undersigned for investment and not with a view to or for resale in connection with the distribution thereof, and that the undersigned has no present intention of distributing or reselling such shares. The undersigned hereby delivers an Investment Representation Statement in the form attached to the Warrant as Schedule 1 to Exhibit A. Date: By: ----------------------- ---------------------------------- Name: -------------------------------- Title: ------------------------------- (if applicable) Schedule 1 INVESTMENT REPRESENTATION STATEMENT Purchaser: ---------------------------------- Security: Shares of Common Stock Amount: ---------------------------------- Date: ---------------------------------- In connection with the purchase of the above-listed shares of common stock (the "SECURITIES"), the undersigned (the "PURCHASER") represents to Netmosphere, Inc. (the "COMPANY") as follows: (a) The Purchaser is aware of the Company's business affairs and financial condition, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. The Purchaser is purchasing the Securities for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "SECURITIES ACT"). (b) The Purchaser understands that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein. In this connection, the Purchaser understands that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if the Purchaser's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (c) The Purchaser further understands that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. Moreover, the Purchaser understands that the Company is under no obligation to register the Securities. In addition, the Purchaser understands that the certificate evidencing the Securities will be imprinted with the legend referred to in the Warrant under which the Securities are being purchased. (d) The Purchaser is aware of the provisions of Rule 144, promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, including, among other things: The availability of certain public information about the Company, the resale occurring not less than one year after the party has purchased and paid for the securities to be sold; the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934, as amended) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein. (e) The Purchaser further understands that at the time it wishes to sell the Securities there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144 and that, in such event, the Purchaser may be precluded from selling the Securities under Rule 144 even if the one-year minimum holding period had been satisfied. (f) The Purchaser further understands that in the event all of the requirements of Rule 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required, and that, notwithstanding the fact that Rule 144 is not exclusive, the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. PURCHASER By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- (if applicable) EX-4.3 5 f81657ex4-3.txt EXHIBIT 4.3 EXHIBIT 4.3 NEITHER THE SECURITY EVIDENCED BY THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE LAW, AND NO INTEREST HEREIN OR THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION INVOLVING SAID SECURITIES, (B) THE COMPANY RECEIVES OPINION OF LEGAL COUNSEL FOR THE HOLDER OF SAID SECURITIES (REASONABLY ACCEPTABLE TO THE COMPANY) STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, OR (C) THE COMPANY OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION. No. ____ ISSUED: October 20, 1999 CRITICAL PATH, INC. COMMON STOCK PURCHASE WARRANT THIS IS TO CERTIFY that, subject to the terms and conditions hereof, U.S. Telesource, Inc., a Delaware corporation (the "Holder"), or its assigns is entitled to subscribe for and purchase from Critical Path, Inc., a California corporation (the "Company"), at any time on or after the date hereof but not later than 5:00 p.m., San Francisco time, on October 19, 2007 (the "Exercise Period"), subject to the provisions hereof, up to a maximum of 3,543,539 shares (subject to adjustment as provided herein) (the "Warrant Shares" ) of fully paid and non-assessable shares of Common Stock, $.001 par value, of the Company (the "Common Stock"), at a price per share (the "Exercise Price") as set forth in Section 1.1 hereto. This Warrant is being issued pursuant to a certain Master Agreement dated as of October 20, 1999, between Qwest Communications Corporation, a Delaware corporation, and the Company (the "Master Agreement"). All capitalized terms used but not otherwise defined herein shall have the meaning ascribed to such terms in the Master Agreement. SECTION 1 EXERCISE 1.1 Warrant Shares Eligible to be Purchased (a) Subject to the provisions of Sections 1.2, 1.3, 1.4 and 12, the Holder's rights to purchase Warrant Shares during the Exercise Period shall vest and the Exercise Price for such Warrant Shares shall be determined as set forth in the table below. For the purposes of determining the vesting requirements, a "Qwest Service Email Box" shall mean an email box registered by Qwest utilizing Critical Path's Services, as provided in Article 3 of the Master Agreement, provided that all such Qwest Email Service Boxes shall be Critical Path sub-branded. For the purposes of determining the Exercise Price, the "Closing Price" shall mean the closing price of Company Common Stock, as -1- average of the closing bid and asked prices of the Common Stock as quoted in the Over-the-Counter Market Summary or the last reported sale price of the Common Stock or the closing price quoted on the Nasdaq national market system, on the last trading day National Market System or on any exchange on which the Common Stock is then listed, whichever is applicable, for the fifteen (15) trading days prior to the day in question.

(b) Notwithstanding anything herein to the contrary, if any portion of the Warrant Shares shall not have vested (in accordance with the table set forth in Section 1(a) above) within three years from the date of the Master Agreement, then the Holder's right to purchase such portion of the Warrant Shares shall terminate. (c) Notwithstanding the foregoing, any portion of the Warrant Shares that have vested (in accordance with the table set forth in Section 1(a) above) shall be exercisable for a period of five years commencing on the date such portion of the Warrant Shares vested, and thereafter any such rights to exercise such portion of the Warrant Shares shall terminate. 1.2 Procedure for Exercise Subject to the foregoing, this Warrant may be exercised by the Holder, as to those shares of Warrant Shares for which this Warrant is then exercisable as determined in accordance with Section 1.1, at any time during the Exercise Period in whole or part by delivering to the Company, at the address of the Company set forth in Section 17, (a) the form of Exercise Notice attached hereto duly completed and executed by the Holder, (b) this Warrant certificate, (c) cash or a bank cashier's check payable to the Company in the amount of the Exercise Price multiplied by the number of shares for which this Warrant is being exercised (the "Purchase Price"), and -2- (d), a certificate signed by an appropriate officer of the Holder setting forth the amount of all outstanding securities, including rights, options, or warrants to acquire securities of the Company, that are owned by the Holder, and any Subsidiary (as defined in Section 16) of the Holder, in order to assure compliance with Section 1.4 below. The Holder will be deemed to be the holder of record of the shares of Common Stock as to which the Warrant was exercised in accordance with this Warrant, effective at the close of business, San Francisco time, on the date such exercise is completed and all documents specified above are delivered to the Company. 1.3 Net Exercise Notwithstanding the payment provisions set forth above, the Holder may elect to exercise this Warrant by converting this Warrant into shares of Warrant Shares as provided in this Section 1.3, such election to be effected by surrender of this Warrant at the principal office of the Company, together with the Notice of Exercise indicating such election, in which case the Company shall issue to the Holder the number of shares of Warrant Shares determined as follows: X = Y (A-B) ------- A Where: X = the number of shares of Warrant Shares to be issued Y = the number of shares of Warrant Shares as to which the Warrant is being exercised A = the Fair Market Value (as defined below) of one (1) share of Warrant Shares B = the applicable Exercise Price For purposes of the above calculation, the Fair Market Value of a share of Warrant Shares shall be determined in good faith by the Board of Directors of the Company (the "Board"); provided, however, that if a public market for the common stock of Company (the "Common Stock") exists at the time of such exercise, then such Fair Market Value shall be the average of the closing bid and asked prices of the Common Stock as quoted in the Over-the-Counter Market Summary or the last reported sale price of the Common Stock or the closing price quoted on the Nasdaq National Market System or on any exchange on which the Common Stock is then listed, whichever is applicable, for the five (5) trading days prior to the date of exercise of this Warrant. The Board shall promptly respond in writing to an inquiry by the Holder as to the Fair Market Value of one share of Warrant Shares. 1.4 Restrictions on Exercise This Warrant shall not be exercisable as to any portion of the Warrant Shares that would cause, on the date of the vesting of each one-sixth of the Warrant Shares (as described in Section 1.1) (each a "Vesting Date"), the Holder and any Affiliate (as defined in the Master Agreement) thereof to own, in the aggregate, 10% or more of the Fully-Diluted Stock (as defined in Section 1.5 below) of the Company. Subject to the next two succeeding sentences, if on the Exercise Date such restriction is applicable, the Warrant shall be exercisable for a number of Warrant Shares equal to the remainder of (x) the number of shares equal to 9.9% of the Fully-Diluted Stock of the Company minus (y) the number of shares of Common Stock then owned in the aggregate by the Holder and any Affiliate (the "Maximum Number of Warrant Shares"). The Holder's right to purchase any vested Warrant Shares in excess of the Maximum Number of -3- Warrant Shares will terminate on the date that is six months after the most recent Vesting Date, except that with respect to the last Vesting Date, such right will terminate thereon. 1.5 Representation of Company Regarding the Equity Percentage of the Warrants The Company represents to Holder that, as of the date of the Master Agreement (the "Designated Date"), the Warrant Shares, if all issued as of the Designated Date, would constitute six percent (6%) of the number of shares of voting capital stock of the Company on the Designated Date after giving effect to the exercise, exchange or conversion of all outstanding securities, rights, options, warrants (including this Warrant), calls, commitments or agreements of any nature or character (whether debt or equity) that are, directly or indirectly, exercisable or exchangeable for, or convertible into or otherwise represent the right to purchase or otherwise receive, directly or indirectly, any such capital stock or other arrangement to acquire at any time or under any circumstance, voting capital stock of the Company or any such other outstanding securities and including all shares or other equity interests subject, as of the Designated Date to issued stock options or other rights to acquire equity of any nature to officers, directors, employees or consultants of the Company under all agreements, plans or arrangements theretofore approved by the Board of Directors of the Company, whether on not the right to exercise such outstanding options or other rights is currently effective or vested (collectively, the "Fully-Diluted Stock"). SECTION 2 DELIVERY OF STOCK CERTIFICATE Within 20 days after the exercise of this Warrant (in full or in part) and payment of the Purchase Price then due, the Company at its expense shall issue in the name of and deliver to the Holder (a) a certificate or certificates for the number of fully paid and nonassessable shares of Warrant Shares to which the Holder shall be entitled upon such exercise and (b) if applicable, a new Warrant of like tenor to purchase up to that number of shares of Warrant Shares, if any, as to which this Warrant shall not have been previously exercised by the Holder or repurchased by the Company. SECTION 3 COVENANTS AS TO WARRANT SHARES The Company covenants and agrees that the Company will at all times have authorized and reserved a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. The Company further covenants that all shares of Common Stock which may be issued upon the exercise of the rights represented by this Warrant, will, upon issuance, in accordance with the terms of this Warrant, be validly issued, fully paid and non-assessable and free from all taxes, liens and charges solely with respect to the issuance thereof. The Company further covenants and agrees that the Company will from time to time take all such action as may be requisite to assure that the stated or par value per share of the Common Stock is at all times equal to or less than the then effective Exercise Price per share of the Common Stock issuable upon exercise of this Warrant. If and so long as the Common Stock issuable upon exercise of the rights represented by this Warrant is listed on any national securities exchange, the Company will, if permitted by the rules of such exchange, use its best efforts to list and keep listed on such exchange, upon official notice of issuance, all Warrant Shares. -4- SECTION 4 EFFECTS OF REORGANIZATION In the event of a merger or consolidation of the Company with another entity or the acquisition of all or substantially all of the assets or stock of the Company by another entity (collectively such events being a "Reorganization"), the following provisions will apply: (a) The Holder will be provided with notice of such Reorganization at the same time as notice is provided to the Company's shareholders. In addition, the Holder will be provided copies of any notice sent to shareholders of the Company in connection with such Reorganization (including notice of any shareholder's meetings and shareholder's consents), simultaneously with such notice being provided to any shareholder. (b) In the event the shareholders of the Company receive cash, stock or other property or contractual rights in respect of their stock in the Company (including upon any Reorganization where the Company is not the surviving entity), this Warrant will be exchanged for a warrant to purchase such kind and number of shares of capital stock or other securities or property or rights of the Company or the surviving entity to which the Holder would have been entitled if it had held the Common Stock issuable upon the exercise hereof immediately prior to such Reorganization, which warrant shall have the same terms and conditions hereof; provided, however, that if the Holder does not receive such warrant in exchange for this Warrant, then the Warrant will vest and become fully exercisable with respect to the maximum number of Warrant Shares upon completion of the Reorganization and the Holder will be entitled to exercise such Warrant Shares effective concurrently with completion of the Reorganization (but immediately prior thereto). Despite the foregoing, if the sole consideration received by shareholders in any such Reorganization is cash, then Company shall not be required to issue an exchange warrant if it pays to the Holder, immediately upon closing, cash based on the amount that the Holder would have received in such Reorganization upon full exercise of the Warrant for all Warrant Shares then vested; it being understood that the net amount payable will be the net exercise price therefor calculated in the manner specified in Section 1.3 above. SECTION 5 ADJUSTMENTS FOR STOCK SPLITS AND SIMILAR MATTERS 5.1 Stock Splits and Reverse Stock Splits If the Company shall issue any shares of Common Stock as a stock dividend or subdivide the number of outstanding shares of Common Stock into a greater number of shares, then, in either such case, then the Exercise Price in effect before such dividend or subdivision shall be proportionately reduced and the number of shares of Warrant Shares at that time purchasable pursuant to this Warrant shall be proportionately increased; and, conversely, if the Company shall reduce the number of outstanding shares of Common Stock by combining such shares into a smaller number of shares, then the Exercise Price in effect before such combination shall be proportionately increased and the number of shares of Warrant Shares at that time purchasable pursuant to this Warrant shall be proportionately decreased. Upon each adjustment in the Exercise Price pursuant to this Section 5, the number of shares of Warrant Shares purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying such number of shares purchasable immediately prior to such adjustment in the Exercise Price by a fraction, the numerator of which shall be the Exercise Price immediately prior to such -5- adjustment and the denominator of which shall be the Exercise Price immediately thereafter. The Holder shall be entitled to the same notice and information regarding such dividend or subdivision as is furnished to holders of Common Stock, which notice shall be sent to the Holder no later than the date such notice is sent to all holders of Common Stock. The foregoing is intended to protect Holder against dilution due to stock dividends and stock splits. 5.2 Other Dividends and Distributions In case the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercise of this Warrant) for the purpose of entitling them to receive any dividend or other distribution other than as described in Section 5.1, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, then the Company will mail or cause to be mailed to the Holder a notice specifying the date on which a record is to be taken for the purpose of such dividend, distribution or right (the "Record Date"), and stating the amount and character of such dividend, distribution or right. Such notice shall be mailed at least 15 days prior to the Record Date therein specified. SECTION 6 CHANGE OF CONTROL Upon a Change of Control (as defined below) of the Company, the restrictions on exercise as described in Section 1.4 will terminate. For the purposes of this Warrant, "Change of Control" of the Company means: (i) an acquisition of Common Stock and any other securities issued by the Company having the ordinary power to vote in the election of directors of the Company (other than securities having such power only upon the happening of a contingency) (the "Voting Stock") by any person, individual, corporation, partnership, trust or other non-governmental entity or any governmental agency, court, authority or other body (whether foreign, federal, state, local or otherwise) (collectively, "Person") or a Group (as that term has the meaning comprehended by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "Exchange Act")) (other than the Company or its affiliates) in a purchase or transaction or series of related purchases or transactions if immediately thereafter such Person or Group has Beneficial Ownership (as such term has the meaning comprehended by Section 13(d)(3) of the Exchange Act) of more than fifty percent (50%) of the combined voting power of the Company's then outstanding Voting Stock; (ii) the execution of an agreement providing for a tender offer, merger, consolidation or reorganization, or series of such related transactions involving the Company, unless the stockholders of the Company, immediately after such transaction or transactions are Beneficial Owners of at least fifty percent (50%) of the Voting Stock; (iii) a change or changes in the membership of the Company's board of directors that represents a change of a majority or more of such membership during any twelve month period (unless such change or changes in membership are caused by actions of the then existing board of directors and do not occur within twelve months of the commencement, threat or proposal of an Election Contest (as such term is defined in Rule 14a-11 of Regulation 14A under the Exchange Act), tender offer or other transaction that would constitute a Change of Control under (i) or (ii) of this paragraph; or (iv) to the extent not covered by (i), (ii) or (iii) of this paragraph, any event constituting a Reorganization under Section 4. -6- SECTION 7 FRACTIONAL SHARES No fractional shares shall be issued upon the exercise of this Warrant. In lieu of fractional shares, the Company shall pay the Holder a sum in cash equal to the fair market value of the fractional shares on the date of exercise. SECTION 8 RESTRICTIONS ON TRANSFER Neither the Security evidenced by this Warrant nor the securities issuable upon exercise of this Warrant may be transferred unless (a) there is an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws covering any such transaction involving said securities, (b) the Company receives opinion of legal counsel for the holder of said securities (reasonably acceptable to the Company) stating that such transaction is exempt from registration; provided, however, that no such opinion of counsel shall be necessary for a transfer of Warrant Shares pursuant to Rule 144(k) promulgated under the Securities Act or any successor rule thereto ("Rule 144(k)"), or (c) the Company otherwise satisfies itself that such transaction is exempt from registration. The Holder and Company agree that all Warrant Shares shall have the same registration rights and be subject to the same terms and conditions with respect to the registration and sale of such stock as provided for in the Amended and Restated Investors' Rights Agreement dated September 11, 1998 among the Company and the individuals and entities listed on the signature pages thereto, as amended by the Amendment to Amended and Restated Investors' Rights Agreement dated January 13, 1999 among the Company and the individuals and entities listed on the signature pages thereto (together, the "Rights Agreement"), and as possessed by the individuals and entities listed on the signature pages to the Rights Agreement. SECTION 9 LEGEND A legend setting forth or referring to the foregoing restrictions shall be placed on this Warrant, any replacement hereof and any certificate representing a security issued pursuant to the exercise hereof, and a stop transfer restriction or order shall be placed on the books of the Company and with any transfer agent until such securities may be legally sold or otherwise transferred; provided, however, that such legend shall not be required and a stop transfer restriction order shall not be placed if (a) in the opinion of counsel to the Holder (reasonably acceptable to the Company) registration of any future transfer is not required by the applicable provisions of the Securities Act, (b) the Company shall have waived the requirements of such legends, or (c) the transfer of Warrant Shares shall be made in compliance with the requirements of Rule 144(k) or the Company otherwise satisfies itself that such transaction is exempt from registration. SECTION 10 HOLDER AS OWNER The Company may deem and treat the Holder of this Warrant as the absolute owner hereof for all purposes regardless of any notice to the contrary. -7- SECTION 11 WARRANT HOLDER RIGHTS This Warrant shall not entitle the Holder to any voting rights or any other rights as a shareholder of the Company or to any other rights whatsoever except the rights stated herein; and except as otherwise provided herein, no dividend or interest shall be payable or shall accrue in respect of this Warrant or the Warrant Shares purchasable hereunder unless, until and to the extent that this Warrant shall be exercised. SECTION 12 CONSTRUCTION The validity and interpretation of the terms and provisions of this Warrant shall be governed by the laws of the State of California without respect to the conflicts of laws principles thereof. The descriptive headings of the several sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions thereof. SECTION 13 EXPIRATION Subject to the last sentence of Section1.4, any portion of the Warrant Shares which shall not have become exercisable (in Accordance with the table set forth in Section 1.1 (a) above) within three years from the date of the Master Agreement shall be cancelled. Notwithstanding the above, any portion of the Warrant Shares that have become exercisable (in accordance with the table set forth in Section 1(a) above) shall be exercisable for a period of five years commencing on the date such portion of the Warrant Shares became exercisable. All restrictions set forth herein on the shares of capital stock issued upon exercise of any rights hereunder shall survive such exercise and expiration of the rights granted hereunder. SECTION 14 EXCHANGE OF WARRANT This Warrant is exchangeable upon the surrender hereof by the Holder at the office of the Company for new Warrants of like tenor representing in the aggregate the rights to subscribe for and purchase the number of shares which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by the Holder at the time of such surrender. SECTION 15 LOST WARRANT CERTIFICATE If this Warrant is lost, stolen, mutilated or destroyed, the Company shall, upon request in writing from the Holder and subject to compliance by Holder with the following sentence, issue a new Warrant of like denomination, tenor and date as this Warrant, subject to the Company's right to require the Holder to give the Company a bond or other satisfactory security sufficient to indemnify the Company against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft, mutilation or destruction of this Warrant or the issuance of such new Warrant. The Holder shall reimburse the Company for any and all expenses and costs incurred by the Company in connection with issuing a new Warrant under this Section. -8- SECTION 16 WAIVERS AND AMENDMENTS This Warrant or any provision hereof may be changed, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. SECTION 17 SUCCESSORS AND ASSIGNS This Warrant shall be binding upon the Company and inure to the benefit of the Holder and its successors and assigns; provided, however, that the Warrant shall only be assignable by the Holder to its Affiliates (as defined in the Master Agreement). SECTION 18 NOTICES All notices or other communications required or permitted hereunder shall be in writing and shall be delivered by personal delivery, reputable overnight courier service, telecopier or mailed by United States mail, first-class postage prepaid, or by registered or certified mail with return receipt requested, addressed as follows: If to the Holder: U.S. Telesource, Inc. 555 Seventeenth Street Denver, Colorado 80202 Fax: 303-992-1724 Attention: Legal Counsel If to the Company: Critical Path, Inc. 320 First Street San Francisco, California 94105 Fax: 415-808-8777 Attention: General Counsel Each of the foregoing parties shall be entitled to specify a different address by giving five days' advance written notice as aforesaid to the other parties. All such notices and communications shall be deemed to have been received (i) in the case of personal delivery, on the date of such delivery and (ii) in the case of mailing, on the third business day following the date of such mailing. SECTION 19 INVESTMENT INTENT By accepting this Warrant, the Holder represents that it is acquiring this Warrant for investment and not with a view to, or for sale in connection with, any distribution thereof. -9- IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above. CRITICAL PATH, INC. By: ----------------------- Brett Roberston Vice President of Strategic Development and General Counsel ACCEPTED AND AGREED: U.S. TELESOURCE, INC. By: ------------------------------- Name: Marc B. Weisberg ---------------------------- Title: President and CEO --------------------------- Date: 10/29/99 ---------------------------- -10- NOTICE OF EXERCISE TO CRITICAL PATH, INC. The undersigned hereby irrevocably elects to exercise the Warrant delivered herewith pursuant to Section 1.2 thereof as to __________ shares of Common Stock and requests that certificates for such shares be issued in the name of and delivered to the undersigned at the address stated below, and, if additional shares remain available for purchase pursuant to the Warrant, the new Warrant evidencing the right to purchase the balance of such shares shall be registered in the name of, and delivered to, the undersigned at the address stated below. The undersigned hereby agrees with and represents to the Company that said shares of common stock are acquired for investment and not with a view to, or for sale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended, and agrees that the exercise of the Warrant and the issuance and transfer of the common stock to be purchased are subject to Sections 7 and 8 of the Warrant. Payment is enclosed in the amount of $ -------------------- Dated: -------------------------- - -------------------------------- By: ---------------------------- Its: ---------------------------- Address: - -------------------------------- - -------------------------------- - -------------------------------- - -------------------------------- -11- EX-4.4 6 f81657ex4-4.txt EXHIBIT 4.4 EXHIBIT 4.4 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. WARRANT TO PURCHASE SHARES OF THE COMMON STOCK OF CRITICAL PATH, INC. DATE: MAY 9, 2001 This certifies Michael A. LaHorgue and Elizabeth T. LaHorgue, Trustees of the LAHORGUE FAMILY TRUST dated September 18, 2001 (c/o Seaview Ventures, 60 W. Seaview Avenue, San Rafael, CA 94901) (the "HOLDER"), for value received, shall be entitled to purchase from Critical Path, Inc., a California corporation (the "COMPANY"), having its principal place of business at 532 Folsom Street, San Francisco, California, a maximum of Thirty-Three Thousand Three Hundred and Thirty Three (33,333) shares of fully paid and assessable shares of the Company's Common Stock ("COMMON STOCK") for cash, at a purchase price equal to U.S. Two Dollars and Zero Cents ($2.00) per share (the "EXERCISE PRICE") at any time, or from time to time, up to and including 5:00 p.m. (local time) on the third anniversary from the date of this Warrant (the "EXPIRATION DATE"), upon the surrender to the Company at its principal place of business (or at such other location as the Company may advise the Holder in writing) of this Warrant properly endorsed a Form of Subscription in substantially the form attached hereto duly filled in and signed and upon payment in cash or by check of the aggregate Exercise Price for the number of shares for which this Warrant is being exercised determined in accordance with the provisions hereof. The Exercise Price and the number of shares of Common Stock purchasable hereunder are subject to adjustment as provided in Section 3 of this Warrant. This Warrant is subject to the following terms and conditions: 1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES. This Warrant is exercisable at the option of the holder of record hereof at any time or from time, to time, up to the Expiration Date for all or any part of the shares of Common Stock (but not for a fraction of a share) which may be purchased hereunder, provided however, that Holder must exercise this Warrant for not less than one hundred (100) shares in each instance. The Company agrees that the shares of Common Stock purchased under this Warrant shall be and are deemed to be issued to the Holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered, properly endorsed, the completed, executed Form of Subscription delivered and payment made for such shares. Certificates for the shares of Common Stock so purchased, together with any other securities or property to which the Holder is entitled upon such exercise, shall be delivered to the Holder by the Company at the Company's 1. expense within a reasonable time after the rights represented by this Warrant have been so exercised, and in any event, within fifteen (15) days of such exercise. In case of a purchase of less than all the shares that may be purchased under this Warrant, the Company shall cancel this Warrant and execute and deliver a new Warrant or Warrants of like tenor for the balance of the shares purchasable under the Warrant surrendered upon such purchase to the Holder hereof within a reasonable time. Each stock certificate so delivered shall be in such denominations of Common Stock as may be requested by the Holder hereof, but in no event for less than one hundred (100) shares and shall be registered in the name designated by such Holder. 2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all preemptive rights of any stockholder.. The Company further covenants and agrees that, during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved, for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of authorized but unissued Common Stock, or other securities and property, when and as required to provide for the exercise of the rights represented by this Warrant. The Company will take all such action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any domestic securities exchange upon which the Common Stock may be listed; provided, however, that the Company shall not be required to effect a registration under federal or state securities laws with respect to such exercise. The Company will not take any action that would result in any adjustment of the Exercise Price (as set forth in Section 3 hereof) if the total number of shares of Common Stock issuable after such action upon exercise of all outstanding warrants, together with all shares of Common Stock then outstanding and all shares of Common Stock then issuable upon exercise of all options and upon the conversion of all convertible securities then outstanding, would exceed the total number of shares of Common Stock then authorized by the Company's Articles of Incorporation. 3. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The Exercise Price and the number of shares purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the occurrence of certain events described in this Section 3. Upon each adjustment of the Exercise Price, the Holder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment, and dividing the product thereof by the Exercise Price resulting from such adjustment. 3.1 SUBDIVISION OR COMBINATION OF STOCK. In case the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased. 2. 3.2 DIVIDENDS IN COMMON STOCK, OTHER STOCK, PROPERTY, RECLASSIFICATION. If at any time or from time to time the Holders of Common Stock (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received or become entitled to receive, without payment therefor, (a) Common Stock or any shares of stock or other securities which are at any time directly or indirectly convertible into or exchangeable for Common Stock, or any rights or options to subscribe for, purchase or otherwise acquire any of the foregoing by way of dividend or other distribution, (b) any cash paid or payable otherwise than as a cash dividend, or (c) Common Stock or additional stock or other securities or property (including cash) by way of spinoff, split-up, reclassification, combination of shares or similar corporate rearrangement, (other than shares of Common Stock issued as a stock split or adjustments in respect of which shall be covered by the terms of Section 3.1 above), then and in each such case, the Holder hereof shall, upon the exercise of this Warrant, be entitled to receive, in addition to the number of shares of Common Stock receivable thereupon, and without payment of any additional consideration therefor, the amount of stock and other securities and property (including cash in the cases referred to in clause (b) above and this clause (c)) which such Holder would hold on the date of such exercise had he been the holder of record of such Common Stock as of the date on which holders of Common Stock received or became entitled to receive such shares or all other additional stock and other securities and property. 3.3 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. If any recapitalization, reclassification or reorganization of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets or other transaction shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, or other assets or property (an "ORGANIC CHANGE"), then, as a condition of such Organic Change, lawful and adequate provisions shall be made by the Company whereby the Holder hereof shall thereafter have the right to purchase and receive (in lieu of the shares of the Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented by this Warrant) such shares of stock, securities or other assets or property as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented by this Warrant. In the event of any Organic Change, appropriate provision shall be made by the Company with respect to the rights and interests of the Holder of this Warrant to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Exercise Price and of the number of shares purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company will not effect any such consolidation, merger or sale unless, prior to the consummation thereof, the successor corporation (if other than the Company) resulting from such consolidation or the corporation purchasing such assets shall assume by written instrument reasonably satisfactory in form and substance to the Holders executed and mailed or delivered to the registered Holder hereof at the last address of such Holder appearing on the books of the 3. Company, the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase. 3.4 NOTICES OF CHANGE. Immediately upon any adjustment in the number or class of shares subject to this Warrant and of the Exercise Price, the Company shall give written notice thereof to the Holder, setting forth in reasonable detail and certifying the calculation of such adjustment. 4. ISSUE TAX. The issuance of certificates for shares of Common Stock upon the exercise of the Warrant shall be made without charge to the Holder of the Warrant for any issue tax (other than any applicable income taxes) in respect thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the then Holder. 5. CLOSING OF BOOKS. The Company will at no time close its transfer books against the transfer of any warrant or of any shares of Common Stock issued or issuable upon the exercise of any warrant in any manner which interferes with the timely exercise of this Warrant. 6. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive notice as a stockholder of the Company or any other matters or any rights whatsoever as a stockholder of the Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the shares purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised. No provisions hereof, in the absence of affirmative action by the holder to purchase shares of Common Stock, and no mere enumeration herein of the rights or privileges of the holder hereof, shall give rise to any liability of such Holder for the Exercise Price or as a stockholder of the Company, whether such liability is asserted by the Company or by its creditors. 7. WARRANTS NON-TRANSFERABLE. This Warrant shall not be transferable by the Holder without the prior written consent of the Company. 8. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and obligations of the Company, of the holder of this Warrant and of the holder of shares of Common Stock issued upon exercise of this Warrant, shall survive the exercise of this Warrant. 9. REPRESENTATIONS AND COVENANTS OF THE HOLDER. This Warrant has been issued by the Company in reliance upon the following representations and covenants of the Holder: (a) INVESTMENT PURPOSE. The Warrant or the Common Stock issuable upon exercise of the Warrant (collectively, the "Securities") will be acquired for investment and not with a view to the sale or distribution of any part thereof, and the Holder has no present intention of selling or engaging in any public distribution of the Securities except pursuant to a registration or exemption. 4. (b) PRIVATE ISSUE. The Holder understands (i) that the Warrant and the Common Stock issuable upon exercise of this Warrant is not registered under the Securities Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Warrant will be exempt from the registration and qualifications requirements thereof, and (ii) that the Company's reliance on such exemption is predicated on the representations set forth in this Section 9. (c) DISPOSITION OF SECURITIES. In no event will the Holder make a disposition of the Warrant or the Common Stock issuable upon exercise of the Warrant unless and until (i) it shall have notified the Company of the proposed disposition, and (ii) if requested by the Company, it shall have furnished the Company with an opinion of counsel (which counsel may either be inside or outside counsel to the Holder) satisfactory to the Company and its counsel to the effect that (A) appropriate action necessary for compliance with the Securities Act has been taken, or (B) an exemption from the registration requirements of the Securities Act is available. Notwithstanding the foregoing, the restrictions imposed upon the transferability of any of its rights to acquire Common Stock or Common Stock issuable on the exercise of such rights do not apply to transfers from the beneficial owner of any of the aforementioned securities to its nominee or from such nominee to its beneficial owner, and shall terminate as to any particular share of Common Stock when (1) such security shall have been effectively registered under the Securities Act and sold by the holder thereof in accordance with such registration or (2) such security shall have been sold without registration in compliance with Rule 144 under the Securities Act, or (3) a letter shall have been issued to the Holder at its request by the staff of the Securities and Exchange Commission or a ruling shall have been issued to the Holder at its request by such Commission stating that no action shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred without registration under the Securities Act in accordance with the conditions set forth in such letter or ruling and such letter or ruling specifies that no subsequent restrictions on transfer are required. Whenever the restrictions imposed hereunder shall terminate, as hereinabove provided, the Holder or holder of a share of Common Stock then outstanding as to which such restrictions have terminated shall be entitled to receive from the Company, without expense to such holder, one or more new certificates for the Warrant or for such shares of Common Stock not bearing any restrictive legend. (d) FINANCIAL RISK. The Holder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment, and has the ability to bear the economic risks of its investment. (e) RISK OF NO REGISTRATION. The Holder understands that if a registration statement covering the Securities under the Securities Act is not in effect when it desires to sell the Warrant or the Common Stock issuable upon exercise of the Warrant, it may be required to hold such securities for an indefinite period. The Holder also understands that any sale of the Warrant or the Common Stock issuable upon exercise of the Warrant that might be made by it in reliance upon Rule 144 under the Securities Act may be made only in accordance with the terms and conditions of that Rule. 10. "MARKET STAND-OFF" AGREEMENT. The Holder hereby agrees that the Holder shall not sell or otherwise transfer or dispose of any Common Stock (or other securities) of the 5. Company held the Holder (other than those included in the registration) for a period specified by the representative of the underwriters of Common Stock (or other securities) of the Company not to exceed one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act. The Holder further agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter which are consistent with the foregoing or which are necessary to give further effect thereto. In addition, if requested by the Company or the representative of the underwriters of Common Stock (or other securities) of the Company, each the Holder shall provide, within ten (10) days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company's securities pursuant to a registration statement filed under the Securities Act. The obligations described in this Section 11 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of said one-hundred-eighty (180)-day period. 11. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 12. NOTICES. Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered or shall be sent by certified mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor in the first paragraph of this Warrant or such other address as either may from time to time provide to the other. 13. BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. All of the obligations of the Company relating to the Common Stock issuable upon the exercise of this Warrant shall survive the exercise and termination of this Warrant. All of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. 14. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California. 15. LOST WARRANTS. The Company represents and warrants to the Holder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant, the Company, at its expense, will 6. make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. 16. FRACTIONAL SHARES. No fractional shares shall be issued upon exercise of this Warrant. The Company shall, in lieu of issuing any fractional share, pay the holder entitled to such fraction a sum in cash equal to such fraction multiplied by the then effective Exercise Price. [THIS SPACE INTENTIONALLY LEFT BLANK] 7. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its officers, thereunto duly authorized this __ day of ____________, 2001. CRITICAL PATH, INC. a California corporation By: ------------------------------------ Print Name: Title: Senior Vice President, General Counsel and Secretary 8. EXHIBIT A SUBSCRIPTION FORM Date: -------------------- Critical Path, Inc. 532 Folsom Street San Francisco, CA 94105 Attn: Chief Financial Officer Ladies and Gentlemen: The undersigned hereby elects to exercise the warrant issued to it by Critical Path, Inc. (the "COMPANY") and dated ___________________ (the "WARRANT"), and to purchase thereunder __________________________________ shares of the Common Stock of the Company (the "SHARES") at a purchase price of Two Dollars ($2.00) per Share or an aggregate purchase price of __________________________________ Dollars ($__________) (the "EXERCISE PRICE"). Pursuant to the terms of the Warrant the undersigned has delivered the Exercise Price herewith in full in cash or by certified check or wire transfer. Very truly yours, ------------------------------------- Company Name By: ---------------------------------- Print Name --------------------------- Title: ------------------------------- EX-4.5 7 f81657ex4-5.txt EXHIBIT 4.5 EXHIBIT 4.5 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. WARRANT TO PURCHASE SHARES OF THE COMMON STOCK OF CRITICAL PATH, INC. DATE: MAY 9, 2001 This certifies Rajiv Surendra Patel, an individual (c/o Spear Street Capital, Spear Tower, 35th floor, San Francisco, CA 94105) (the "HOLDER"), for value received, shall be entitled to purchase from Critical Path, Inc., a California corporation (the "COMPANY"), having its principal place of business at 532 Folsom Street, San Francisco, California, a maximum of Sixteen Thousand and Six Hundred Sixty-Seven (16,667) shares of fully paid and assessable shares of the Company's Common Stock ("COMMON STOCK") for cash, at a purchase price equal to U.S. Two Dollars and Zero Cents ($2.00) per share (the "EXERCISE PRICE") at any time, or from time to time, up to and including 5:00 p.m. (local time) on the third anniversary from the date of this Warrant (the "EXPIRATION DATE"), upon the surrender to the Company at its principal place of business (or at such other location as the Company may advise the Holder in writing) of this Warrant properly endorsed a Form of Subscription in substantially the form attached hereto duly filled in and signed and upon payment in cash or by check of the aggregate Exercise Price for the number of shares for which this Warrant is being exercised determined in accordance with the provisions hereof. The Exercise Price and the number of shares of Common Stock purchasable hereunder are subject to adjustment as provided in Section 3 of this Warrant. This Warrant is subject to the following terms and conditions: 1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES. This Warrant is exercisable at the option of the holder of record hereof at any time or from time, to time, up to the Expiration Date for all or any part of the shares of Common Stock (but not for a fraction of a share) which may be purchased hereunder, provided however, that Holder must exercise this Warrant for not less than one hundred (100) shares in each instance. The Company agrees that the shares of Common Stock purchased under this Warrant shall be and are deemed to be issued to the Holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered, properly endorsed, the completed, executed Form of Subscription delivered and payment made for such shares. Certificates for the shares of Common Stock so purchased, together with any other securities or property to which the Holder is entitled upon such exercise, shall be delivered to the Holder by the Company at the Company's expense within a reasonable time after the rights represented by this Warrant have been so 1. exercised, and in any event, within fifteen (15) days of such exercise. In case of a purchase of less than all the shares that may be purchased under this Warrant, the Company shall cancel this Warrant and execute and deliver a new Warrant or Warrants of like tenor for the balance of the shares purchasable under the Warrant surrendered upon such purchase to the Holder hereof within a reasonable time. Each stock certificate so delivered shall be in such denominations of Common Stock as may be requested by the Holder hereof, but in no event for less than one hundred (100) shares and shall be registered in the name designated by such Holder. 2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all preemptive rights of any stockholder. The Company further covenants and agrees that, during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved, for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of authorized but unissued Common Stock, or other securities and property, when and as required to provide for the exercise of the rights represented by this Warrant. The Company will take all such action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any domestic securities exchange upon which the Common Stock may be listed; provided, however, that the Company shall not be required to effect a registration under federal or state securities laws with respect to such exercise. The Company will not take any action that would result in any adjustment of the Exercise Price (as set forth in Section 3 hereof) if the total number of shares of Common Stock issuable after such action upon exercise of all outstanding warrants, together with all shares of Common Stock then outstanding and all shares of Common Stock then issuable upon exercise of all options and upon the conversion of all convertible securities then outstanding, would exceed the total number of shares of Common Stock then authorized by the Company's Articles of Incorporation. 3. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The Exercise Price and the number of shares purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the occurrence of certain events described in this Section 3. Upon each adjustment of the Exercise Price, the Holder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment, and dividing the product thereof by the Exercise Price resulting from such adjustment. 3.1 SUBDIVISION OR COMBINATION OF STOCK. In case the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased. 3.2 DIVIDENDS IN COMMON STOCK, OTHER STOCK, PROPERTY, RECLASSIFICATION. If at any time or from time to time the Holders of Common Stock (or any shares of stock or other 2. securities at the time receivable upon the exercise of this Warrant) shall have received or become entitled to receive, without payment therefor, (a) Common Stock or any shares of stock or other securities which are at any time directly or indirectly convertible into or exchangeable for Common Stock, or any rights or options to subscribe for, purchase or otherwise acquire any of the foregoing by way of dividend or other distribution, (b) any cash paid or payable otherwise than as a cash dividend, or (c) Common Stock or additional stock or other securities or property (including cash) by way of spinoff, split-up, reclassification, combination of shares or similar corporate rearrangement, (other than shares of Common Stock issued as a stock split or adjustments in respect of which shall be covered by the terms of Section 3.1 above), then and in each such case, the Holder hereof shall, upon the exercise of this Warrant, be entitled to receive, in addition to the number of shares of Common Stock receivable thereupon, and without payment of any additional consideration therefor, the amount of stock and other securities and property (including cash in the cases referred to in clause (b) above and this clause (c)) which such Holder would hold on the date of such exercise had he been the holder of record of such Common Stock as of the date on which holders of Common Stock received or became entitled to receive such shares or all other additional stock and other securities and property. 3.3 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. If any recapitalization, reclassification or reorganization of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets or other transaction shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, or other assets or property (an "ORGANIC CHANGE"), then, as a condition of such Organic Change, lawful and adequate provisions shall be made by the Company whereby the Holder hereof shall thereafter have the right to purchase and receive (in lieu of the shares of the Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented by this Warrant) such shares of stock, securities or other assets or property as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented by this Warrant. In the event of any Organic Change, appropriate provision shall be made by the Company with respect to the rights and interests of the Holder of this Warrant to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Exercise Price and of the number of shares purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company will not effect any such consolidation, merger or sale unless, prior to the consummation thereof, the successor corporation (if other than the Company) resulting from such consolidation or the corporation purchasing such assets shall assume by written instrument reasonably satisfactory in form and substance to the Holders executed and mailed or delivered to the registered Holder hereof at the last address of such Holder appearing on the books of the Company, the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase. 3. 3.4 NOTICES OF CHANGE. Immediately upon any adjustment in the number or class of shares subject to this Warrant and of the Exercise Price, the Company shall give written notice thereof to the Holder, setting forth in reasonable detail and certifying the calculation of such adjustment. 4. ISSUE TAX. The issuance of certificates for shares of Common Stock upon the exercise of the Warrant shall be made without charge to the Holder of the Warrant for any issue tax (other than any applicable income taxes) in respect thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the then Holder. 5. CLOSING OF BOOKS. The Company will at no time close its transfer books against the transfer of any warrant or of any shares of Common Stock issued or issuable upon the exercise of any warrant in any manner which interferes with the timely exercise of this Warrant. 6. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive notice as a stockholder of the Company or any other matters or any rights whatsoever as a stockholder of the Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the shares purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised. No provisions hereof, in the absence of affirmative action by the holder to purchase shares of Common Stock, and no mere enumeration herein of the rights or privileges of the holder hereof, shall give rise to any liability of such Holder for the Exercise Price or as a stockholder of the Company, whether such liability is asserted by the Company or by its creditors. 7. WARRANTS NON-TRANSFERABLE. This Warrant shall not be transferable by the Holder without the prior written consent of the Company. 8. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and obligations of the Company, of the holder of this Warrant and of the holder of shares of Common Stock issued upon exercise of this Warrant, shall survive the exercise of this Warrant. 9. REPRESENTATIONS AND COVENANTS OF THE HOLDER. This Warrant has been issued by the Company in reliance upon the following representations and covenants of the Holder: (a) INVESTMENT PURPOSE. The Warrant or the Common Stock issuable upon exercise of the Warrant (collectively, the "Securities") will be acquired for investment and not with a view to the sale or distribution of any part thereof, and the Holder has no present intention of selling or engaging in any public distribution of the Securities except pursuant to a registration or exemption. (b) PRIVATE ISSUE. The Holder understands (i) that the Warrant and the Common Stock issuable upon exercise of this Warrant is not registered under the Securities Act or qualified under applicable state securities laws on the ground that the issuance contemplated 4. by this Warrant will be exempt from the registration and qualifications requirements thereof, and (ii) that the Company's reliance on such exemption is predicated on the representations set forth in this Section 9. (c) DISPOSITION OF SECURITIES. In no event will the Holder make a disposition of the Warrant or the Common Stock issuable upon exercise of the Warrant unless and until (i) it shall have notified the Company of the proposed disposition, and (ii) if requested by the Company, it shall have furnished the Company with an opinion of counsel (which counsel may either be inside or outside counsel to the Holder) satisfactory to the Company and its counsel to the effect that (A) appropriate action necessary for compliance with the Securities Act has been taken, or (B) an exemption from the registration requirements of the Securities Act is available. Notwithstanding the foregoing, the restrictions imposed upon the transferability of any of its rights to acquire Common Stock or Common Stock issuable on the exercise of such rights do not apply to transfers from the beneficial owner of any of the aforementioned securities to its nominee or from such nominee to its beneficial owner, and shall terminate as to any particular share of Common Stock when (1) such security shall have been effectively registered under the Securities Act and sold by the holder thereof in accordance with such registration or (2) such security shall have been sold without registration in compliance with Rule 144 under the Securities Act, or (3) a letter shall have been issued to the Holder at its request by the staff of the Securities and Exchange Commission or a ruling shall have been issued to the Holder at its request by such Commission stating that no action shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred without registration under the Securities Act in accordance with the conditions set forth in such letter or ruling and such letter or ruling specifies that no subsequent restrictions on transfer are required. Whenever the restrictions imposed hereunder shall terminate, as hereinabove provided, the Holder or holder of a share of Common Stock then outstanding as to which such restrictions have terminated shall be entitled to receive from the Company, without expense to such holder, one or more new certificates for the Warrant or for such shares of Common Stock not bearing any restrictive legend. (d) FINANCIAL RISK. The Holder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment, and has the ability to bear the economic risks of its investment. (e) RISK OF NO REGISTRATION. The Holder understands that if a registration statement covering the Securities under the Securities Act is not in effect when it desires to sell the Warrant or the Common Stock issuable upon exercise of the Warrant, it may be required to hold such securities for an indefinite period. The Holder also understands that any sale of the Warrant or the Common Stock issuable upon exercise of the Warrant that might be made by it in reliance upon Rule 144 under the Securities Act may be made only in accordance with the terms and conditions of that Rule. 10. "MARKET STAND-OFF" AGREEMENT. The Holder hereby agrees that the Holder shall not sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held the Holder (other than those included in the registration) for a period specified by the representative of the underwriters of Common Stock (or other securities) of the Company not 5. to exceed one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act. The Holder further agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter which are consistent with the foregoing or which are necessary to give further effect thereto. In addition, if requested by the Company or the representative of the underwriters of Common Stock (or other securities) of the Company, each the Holder shall provide, within ten (10) days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company's securities pursuant to a registration statement filed under the Securities Act. The obligations described in this Section 11 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of said one-hundred-eighty (180)-day period. 11. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 12. NOTICES. Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered or shall be sent by certified mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor in the first paragraph of this Warrant or such other address as either may from time to time provide to the other. 13. BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. All of the obligations of the Company relating to the Common Stock issuable upon the exercise of this Warrant shall survive the exercise and termination of this Warrant. All of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. 14. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California. 15. LOST WARRANTS. The Company represents and warrants to the Holder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant, the Company, at its expense, will make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. 6. 16. FRACTIONAL SHARES. No fractional shares shall be issued upon exercise of this Warrant. The Company shall, in lieu of issuing any fractional share, pay the holder entitled to such fraction a sum in cash equal to such fraction multiplied by the then effective Exercise Price. [THIS SPACE INTENTIONALLY LEFT BLANK] 7. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its officers, thereunto duly authorized this __ day of _____________, 2001. CRITICAL PATH, INC. a California corporation By: ------------------------------------ Print Name: Title: Senior Vice President, General Counsel and Secretary 8. EXHIBIT A SUBSCRIPTION FORM Date: -------------------- Critical Path, Inc. 532 Folsom Street San Francisco, CA 94105 Attn: Chief Financial Officer Ladies and Gentlemen: The undersigned hereby elects to exercise the warrant issued to it by Critical Path, Inc. (the "COMPANY") and dated ___________________ (the "WARRANT"), and to purchase thereunder __________________________________ shares of the Common Stock of the Company (the "SHARES") at a purchase price of Two Dollars ($2.00) per Share or an aggregate purchase price of __________________________________ Dollars ($__________) (the "EXERCISE PRICE"). Pursuant to the terms of the Warrant the undersigned has delivered the Exercise Price herewith in full in cash or by certified check or wire transfer. Very truly yours, ------------------------------------- Company Name By: ---------------------------------- Print Name --------------------------- Title: ------------------------------- EX-10.1 8 f81657ex10-1.txt EXHIBIT 10.1 EXHIBIT 10.1 FIRST AMENDMENT TO EMAIL SERVICES AGREEMENT The following amendment (the "Amendment") is entered into by and between Critical Path, Inc. and ICQ, Inc. (together the "Parties) as of this 7th day of May, 1999. WHEREAS, the Parties have entered into that certain Email Services Agreement dated as of January 29, 1999. WHEREAS, the Parties now desire to amend the Agreement as provided in this Amendment below. WHEREAS, the Parties now desire to amend the Agreement as provided in this Amendment below. NOW THEREFORE, for good and valuable consideration the sufficiency of which is hereby acknowledged by the Parties, the Parties agree as follows: 1. Definitions. Any capitalized term not otherwise defined herein shall have the meanings assigned to them in the Agreement. 2. Amendment. The Agreement shall be amended so that the existing Section 9 shall be deleted in its entirety and replaced with the following: 9. EXCLUSIVITY Except as provided in this Section 9, the parties agree that the relationship created by this Agreement shall be non-exclusive, and each of the parties may enter into the same or a similar relationship with one or more third parties. Without limiting the generality of the foregoing, ICQ shall be free to enter into agreements with third parties for the use of integration of other web-based email software and services with the ICQ Service, and CP shall be free to enter into agreements with third parties pursuant to which it provides email products and services to such third parties. However, notwithstanding the foregoing, CP agrees that, during the term of this Agreement, it shall not integrate any email or email related service it provides to any entity with any instant messaging, or similar or related online, real time messaging product ("Instant Messaging Product") of that entity (or of an affiliate of that entity), nor shall CP integrate any Instant Messaging Program other than ICQ instant messaging product into any email service provided by CP to end users directly or to more than one particular customer of CP on a case-by-case basis (with any such integration for the latter still being subject to the next following sentence). Further, CP agrees that it will not assist any of its customers or partners in integrating Instant Messaging Products other than ICQ instant messaging products into any email product or service provided by CP or its affiliates, unless such customer or partners insists upon such assistance after CP has used commercially reasonably efforts to persuade such customer or partner to instead use ICQ instant messaging products and services. During the term of this Agreement, CP will promote ICQ as CP's preferred integrated instant messaging service and product. 3. No Other Changes. Except as expressly amended herein, the provisions of the Agreement shall remain in full force and effect and nothing in this Amendment shall be constructed as a waiver of any of the rights and obligations of the Parties under the Agreement. 4. Governing Law. This Amendment shall be interpreted, constructed and enforced in all respects in accordance with the laws of the Commonwealth of Virginia except for it conflicts of laws principles. 5. Counterparts. This Amendment may be executed in the counterparts, each of which will constitute an original but all of which when taken together will constitute one instrument. In witness whereof, the Parties have executed this Amendment on the date first written above. ICQ, INC. CRITICAL PATH, INC. By: /s/ By: /s/ ---------------------------------- ---------------------------------- Name: Name: -------------------------------- -------------------------------- Title: Title: ------------------------------- ------------------------------- EX-10.2 9 f81657ex10-2.txt EXHIBIT 10.2 EXHIBIT 10.2 As of February 12, 2002 David C. Hayden 2510 Jackson Street San Francisco, California 94115 Dear David: This letter agreement (the "Amendment") hereby supplements and amends the terms and conditions of your employment agreement with Critical Path, Inc., a California corporation (the "Company") dated August 1, 2001 (the "Agreement") and related performance loan and stock option documentation (collectively, the "Agreements"). The purpose of this Amendment is to document changes to the performance component of your employment, including the modifications to your performance loan, in order to reflect the change in the focus of your job responsibilities. Except as amended herein, the provisions contained in the Agreements remain in effect. This Amendment has an effective date of February 12, 2002. Capitalized terms, unless otherwise defined herein, shall have the meaning set forth in the Agreement. In consideration of the mutual covenants and promises made in this Amendment, you and the Company agree as follows: 1. Amendments. (a) Performance Loan. On August 13, 2001, the Company loaned you $1,500,000 (the "Prior Performance Loan"). Interest on the Prior Performance Loan has accrued at the rate of 6.75% per annum through February 11, 2002 and such interest is due and payable on August 13, 2002 (the "Accrued Interest"). As of February 12, 2002, the Prior Performance Loan was amended and restated in its entirety and replaced with a new performance loan (the "Performance Loan") as evidenced by this Amendment and the Amended and Restated Promissory Note that is attached hereto as Exhibit A. The Performance Loan has an increased total loan principal amount of $1,950,000, plus Accrued Interest, and is a full recourse loan with a stated term that ends on August 13, 2004 except as otherwise provided in the Amended and Restated Promissory Note. Beginning on February 12, 2002, the date that the additional loan amount of $450,000 from the Company was provided to you, the Performance Loan will accrue at the rate of 6.75% per year and interest is due and payable on August 13th of each year commencing on August 13, 2002. As security for the timely performance of your obligations under this Amendment and the Amended and Restated Promissory Note, you hereby pledge and grant to the Company a first priority perfected security interest in all of your right, title and interest, whether now owned or hereafter acquired, in and to (i) your stock options to purchase Company shares, (ii) the shares of the Company's common stock acquired pursuant to such option exercises and (iii) the proceeds thereof. Such common shares shall be held by the Company as secured party until full repayment of all principal and interest arising under the Performance Loan. You further acknowledge and agree that the common shares underlying such stock options are subject to the security interest granted under this paragraph. The Company shall have the right at any time to either (a) effectuate a cashless exercise/same day sale of such options (provided that the then-fair market value of a Company common share is greater than the per share exercise price of your options) with the sales proceeds of such shares being first applied to satisfy required tax withholding and to repay the Performance Loan or (b) cancel your stock options and apply the difference between the then-fair market value of the underlying shares and the aggregate option exercise price to satisfy required tax withholding and to repay the Performance Loan. You hereby grant the Company an irrevocable Power of Attorney, by executing the Power of Attorney form attached hereto as Exhibit B, to effectuate the foregoing. In the event that you fail to perform any term of the Amendment or fail to make any payment when due under the Performance Loan Note, the Company shall have all of the rights and remedies of a creditor and secured party at law and in equity, including (without limitation) the rights and remedies provided under the Uniform Commercial Code. You hereby agree that any disposition of any or all of the common shares you acquired by way of a private placement or other method which in the opinion of the Company is required or advisable under Federal and state securities laws is commercially reasonable. At any public sale, the Company may (if it is the highest bidder) purchase all or any part of the common shares at such price as the Company deems proper. Out of the proceeds of any sale, the Company may retain an amount sufficient to pay all amounts then due under the Note, together with the expenses of the sale and reasonable attorneys' fees. The Company shall pay the balance of such proceeds, if any, to you. You shall be liable for any deficiency that remains after the Company has exercised its rights under this Amendment. You also agree to execute any documents necessary for the Company to perfect its security interest. (b) Performance Loan Forgiveness. Provided that you are employed by the Company on the date the negotiations or communications began (as determined by the Company's Board of Directors in good faith) which lead to a Change in Control of the Company and in which the Change in Control consideration received by Company common shareholders is at least $10.00 per share (with such share price adjusted for any future stock splits, stock dividends, recapitalization, or similar events) (a "Corporate Transaction") and provided further that the Compensation Committee certifies in writing that the Corporate Transaction has been successfully achieved, the outstanding amount of principal (up to $1,950,000) of your Performance Loan shall be forgiven ("Performance Loan Forgiveness"). You must however timely and fully satisfy the withholding obligations on the Performance Loan Forgiveness by paying to the Company the required withholding amount in cash. To the extent that you do not satisfy the withholding requirements on the Performance Loan Forgiveness, then the amount of actual Performance Loan Forgiveness shall be reduced by such unsatisfied withholding amount and the amount of such reduction shall instead be treated as a cash bonus ("Withholding Bonus"). The Withholding Bonus, however, shall be immediately applied to satisfy the required withholding on the sum of the reduced Performance Loan Forgiveness amount and the Withholding Bonus. Purely for illustrating how this Performance Loan Forgiveness reduction provision operates, if there was a Corporate Transaction in which you were eligible to receive Performance Loan Forgiveness and if the required withholding amount on $1,950,000 of Performance Loan Forgiveness is $450,000 and if you did not timely satisfy this withholding amount, then the actual amount of Performance Loan Forgiveness would be reduced to $1,500,000 and the Withholding Bonus amount would be $450,000 and such Withholding Bonus would be immediately applied by the Company to satisfy the total withholding obligation. Any unpaid principal and interest on the Performance Loan remains a full recourse obligation for you and may be repaid by you during or at the end of the Performance Loan term. Any contrary provisions in the Agreement, including but not limited to the change of control loan forgiveness provision are superseded by this Amendment. (c) Cash Bonuses and Change in Control. The Cash Performance Bonus and Change in Control loan forgiveness provisions previously provided for in your Agreement are hereby replaced by the Performance Loan Forgiveness provision in Section 1(b) of this Amendment and such former provisions shall no longer be applicable upon the execution of this Amendment. If the terms of this Amendment are acceptable to you, please execute the enclosed copy of this letter and return it to the undersigned. Very truly yours, CRITICAL PATH, INC. /s/ Michael Zukerman By: _________________________________ Its: ________________________________ AGREED TO AND ACCEPTED BY: /s/ David C. Hayden ____________________________________ David C. Hayden ____________________________________ Date Signed EXHIBIT A FULL RECOURSE AMENDED AND RESTATED PROMISSORY NOTE $1,950,000 San Francisco, California As of February 12, 2002 For value received, the undersigned promises to pay Critical Path, Inc., a California corporation (the "Company"), at its principal office the principal sum of $1,950,000 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 (and the interest due by August 13, 2002 shall include interest that has accrued (through the date immediately before the date of this Note) at the rate of 6.75% per annum on the $1,500,000 that the Company loaned to the undersigned pursuant to the promissory note, dated August 13, 2001, by and between the Company and the undersigned) (such promissory note, the "Original Note"). Such due date of August 13, 2004 shall be extended by two years if the 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, dated August 1, 2001, as amended on February 12, 2002). Notwithstanding the foregoing, the Company may at any time in its sole and absolute discretion upon written notice to the undersigned demand that all or any portion of the amounts evidenced by this Note shall immediately become due and payable whereupon such amounts shall be due and payable in full. 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 secured by a first priority perfected security interest in (i) the undersigned's stock options to purchase Company common shares, (ii) the shares of Company common stock acquired pursuant to such option exercises and (iii) the proceeds thereof. Such shares shall be held by the Company as secured party until full repayment of all principal and interest due under this Note, pursuant to an Amendment, of even date herewith, to the undersigned's employment agreement, which is on file with the Secretary of the Company. The undersigned agrees that the common shares underlying such stock options are subject to the foregoing security interest. This Note amends and restates in its entirety the Original Note. /s/ David C. Hayden _______________________________ David C. Hayden EXHIBIT B POWER OF ATTORNEY This Power of Attorney is executed and delivered by David C. Hayden ("Grantor") to Critical Path, Inc., a California corporation (hereinafter referred to as "Attorney"), under an amendment to Grantor's employment agreement, dated February 12, 2002, and other related documents (the "Loan Documents"). No person to whom this Power of Attorney is presented, as authority for Attorney to take any action or actions contemplated hereby, shall be required to inquire into or seek confirmation from Grantor as to the authority of Attorney to take any action described below, or as to the existence of or fulfillment of any condition to this Power of Attorney, which is intended to grant to Attorney unconditionally the authority to take and perform the actions contemplated herein, and Grantor irrevocable waives any right to commence any suit or action, in law or equity, against any person or entity which acts in reliance upon or acknowledges the authority granted under this Power of Attorney. The Power of Attorney granted hereby is coupled with an interest, and may not be revoked or canceled by Grantor without Attorney' s written consent. Grantor hereby irrevocably constitutes and appoints Attorney (and all officers, employees or agents designated by Attorney), with full power of substitution, as Grantor's true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Grantor and in the name of Grantor or in its own name, from time to time in Attorney's discretion, to take any and all appropriate action and to execute and deliver any and all documents and instruments which may be necessary or desirable to accomplish the purposes of the Loan Documents and, without limiting the generality of the foregoing, Grantor hereby grants to Attorney the power and right, on behalf of Grantor, without notice to or assent by Grantor, and at any time, to do the following: (a) exercise any portion or all of Grantor's options (including any options that may be awarded to Grantor in the future) to purchase shares of Attorney's common stock and to hold, retire, collect, sell or dispose of the shares (or the proceeds of such shares) acquired pursuant to such option exercises to satisfy any liability Grantor may owe to Attorney (even if such liability is not then currently due); (b) pay or discharge any taxes, liens, security interests, or other encumbrances levied or placed on or threatened against Grantor or its property; (c) defend any suit, action or proceeding brought against Grantor if Grantor does not defend such suit, action or proceeding or if Attorney believes that Grantor is not pursuing such defense in a manner that will maximize the recovery to Attorney, and settle, compromise or adjust any suit, action, or proceeding described above and, in connection therewith, give such discharges or releases as Attorney may deem appropriate; (d) file or prosecute any claim, litigation, suit or proceeding in any court of competent jurisdiction or before any arbitrator, or take any other action otherwise deemed appropriate by Attorney for the purpose of collecting any and all such moneys due to Grantor whenever payable and to enforce any other right in respect of Grantor's property; (e) communicate in its own name with any party to any contract with regard to the assignment of the right, title and interest of Grantor in and under the contracts and other matters relating thereto; (f) to file such financing statements with respect to any security agreement, with or without Grantor's signature, or to file a photocopy of any security agreement in substitution for a financing statement, as Attorney may deem appropriate and to execute in Grantor's name such financing statements and amendments thereto and continuation statements which may require Grantor's signature; and (g) execute, in connection with any sale provided for in any Loan Document, any endorsements, assignments or other instruments of conveyance or transfer with respect to the collateral and to otherwise direct such sale or resale, all as though Attorney were the absolute owner of the property of Grantor for all purposes, and to do, at Attorney's option and Grantor's expense, at any time or from time to time, all acts and other things that Attorney reasonably deems necessary to perfect, preserve, or realize upon Grantor's property or assets and Attorney's liens thereon, all as fully and effectively as Grantor might do. Grantor hereby ratifies, to the extent permitted by law, all that said Attorney shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney is executed by Grantor this _____________ day of _____________________. "GRANTOR" DAVID C. HAYDEN /s/ David Hayden __________________________________ EX-15.1 10 f81657ex15-1.txt EXHIBIT 15.1 EXHIBIT 15.1 May 14, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Commissioners: We are aware that our report dated May 8, 2002 on our review of interim financial information of Critical Path, Inc. (the "Company") as of and for the period ended March 31, 2002 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 March 31, 2002

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 BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	SUPPLEMENTAL ALTERNATIVE MEASUREMENT FINANCIAL DATA
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART 2 -- OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
INDEX TO EXHIBITS
Exhibit 4.1
Exhibit 4.2
Exhibit 4.3
Exhibit 4.4
Exhibit 4.5
Exhibit 10.1
Exhibit 10.2
Exhibit 15.1


		Page

PART I
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets		2
	Condensed Consolidated Statements of Operations		3
	Condensed Consolidated Statements of Cash Flows		4
	Notes to Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
	Supplemental Alternative Measurement Financial Data (Unaudited)		29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30
PART II
Item 1.	Legal Proceedings		32
Item 6.	Exhibits and Reports on Form 8-K		33


				December 31,			March 31,
				2001			2002


				(Unaudited)
ASSETS
Current assets
	Cash and cash equivalents			$	59,463		$	52,257
	Short-term investments				9,702			11,272
	Accounts receivable, net				26,692			27,114
	Other current assets				5,367			8,588

			Total current assets		101,224			99,231
Investments					7,215			6,247
Property and equipment, net					36,285			29,584
Intangible assets, net					48,641			37,879
Restricted cash					2,674			2,670
Other assets					3,913			3,671

			Total assets	$	199,952		$	179,282

LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
Current liabilities
	Accounts payable			$	25,955		$	31,318
	Accrued expenses				6,232			6,251
	Deferred revenue				10,297			8,809
	Capital lease and other obligations, current				3,431			661

			Total current liabilities		45,915			47,039
Convertible subordinated notes payable					38,360			38,360
Capital lease and other obligations, long-term					1,149			865

			Total liabilities		85,424			86,264

Commitments and contingencies
Mandatorily redeemable preferred stock					5,373			8,442
Shareholders’ equity
	Common Stock and paid-in-capital, $0.001 par value
		Shares authorized: 500,000
		Shares issued and outstanding: 76,581 and 77,507, respectively			2,176,370			2,173,496
	Common stock warrants				5,250			5,250
	Notes receivable from shareholders				(1,222	)		—
	Unearned compensation				(7,050	)		(3,130	)
	Accumulated deficit, including other comprehensive income				(2,064,193	)		(2,091,040	)

			Total shareholders’ equity		109,155			84,576

			Total liabilities, mandatorily redeemable preferred stock and shareholders’ equity	$	199,952		$	179,282



			Three Months Ended

			March 31,			March 31,
			2001			2002


			(Unaudited)
Net revenues
	Software license		$	5,550		$	10,911
	Hosted messaging			14,440			6,964
	Professional services			3,416			1,937
	Maintenance and support			3,737			3,877

		Total net revenues		27,143			23,689

Cost of net revenues
	Software license			291			287
	Hosted messaging			17,938			7,817
	Professional services			2,966			2,443
	Maintenance and support			2,586			2,103
	Amortization of purchased technology			5,672			4,630
	Stock-based expense — Hosted messaging			1,303			185
	Stock-based expense — Professional services			—			81
	Stock-based expense — Maintenance and support			—			151

		Total cost of net revenues		30,756			17,697

Gross profit (loss)				(3,613	)		5,992

Operating expenses
	Sales and marketing			18,712			10,943
	Research and development			9,934			5,002
	General and administrative			13,293			6,678
	Amortization of intangible assets			8,966			6,131
	Acquisition-related retention bonuses			170			10
	Stock-based expense — Sales and marketing			1,767			2,536
	Stock-based expense — Research and development			1,097			422
	Stock-based expense — General and administrative			8,733			297

		Total operating expenses		62,672			32,019

Loss from operations				(66,285	)		(26,027	)
Interest and other income (expense), net				2,425			629
Interest expense				(5,067	)		(783	)
Equity in net loss of joint venture				(776	)		(403	)

Loss before income taxes				(69,703	)		(26,584	)
Benefit from (provision for) income taxes				(343	)		573

Net loss				(70,046	)		(26,011	)
Accretion on redeemable convertible preferred shares				—			(3,206	)

Net loss attributable to common shares			$	(70,046	)	$	(29,217	)

Net loss per share — basic and diluted			$	(0.97	)	$	(0.34	)

Net loss per share attributable to common — basic and diluted			$	(0.97	)	$	(0.38	)

Weighted average shares — basic and diluted				72,137			76,514

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Table of Contents

Table of Contents


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


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


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


	*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.*


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


	*If we fail to improve our sales and marketing results, we may be unable to grow our business which would negatively impact our operating results.*


	*A limited number of customers account for a high percentage of our revenues and if we lose a major customer or are unable to attract new customers, revenues could decline.*


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


	*Our sales cycle is lengthy and our results could be harmed by delays or cancellations in orders.*


	*The Company*


	*Basis of Presentation*


	*Segment and Geographic Information*


	*Reclassifications*


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


	*Pending litigation could harm relationships with existing or potential strategic partners and customers, and divert management’s attention, either of which could harm our business.*


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


	*Although concluded without penalty to the Company, lingering effects of the recent SEC investigation could harm our business.*


	*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.*


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


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


	*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.*


	*Our failure to carefully manage expenses and growth could cause our operating results to suffer.*


	*If we are not successful in implementing our strategic plan, including the exit of certain non-core products and services, our business could be negatively impacted.*


	*We may face continued technical, operational and strategic challenges preventing us from successfully continuing the integration or divestiture of acquired businesses.*


	*We currently license many third-party technologies and may need to license further technologies and we face risks in doing so that could cause our operating results to suffer.*


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


	*Changes in the regulatory environment for the operation of our business or those of our customers could pose risks.*


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


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


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


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


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


	*Our reserves may be insufficient to cover bills we are unable to collect.*