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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the transition period from                     to                     .

Commission File Number: 000-25331

CRITICAL PATH, INC.

Registrant’s telephone number, including area code: (415) 541-2500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, Series C

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x     No o

      Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $185,776,193 as of March 25, 2002, based on the closing price of the Common Stock as reported on the Nasdaq National Market for that date. There were 77,406,747 shares of the Registrant’s Common Stock issued and outstanding on March 25, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

      Items 10 (as to Section 16(a) Beneficial Ownership Reporting Compliance), 11, 12 and 13 of Part III incorporate by reference information from Critical Path, Inc.’s definitive Proxy Statement, to be filed with the Securities and Exchange Commission, in connection with the solicitation of proxies for the 2002 Annual Meeting of Shareholders scheduled to be held on June 5, 2002.

CRITICAL PATH, INC.

INDEX

PART I

Item 1. Business

      This Annual Report and the following disclosure contain 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, 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 SEC investigation, 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 Annual Report on Form 10-K includes numerous trademarks and registered trademarks of Critical Path. Products or service names of other companies mentioned in this Annual Report on Form 10-K may be trademarks or registered trademarks of their respective owners.

Company Overview

      Critical Path, 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. The standards-based Critical Path Communications Platform^TM, built to perform reliably at the scale of public networks, delivers the industry’s lowest total cost of ownership for messaging solutions, as noted by industry experts, and lays a solid foundation for next-generation communications services. As of December 31, 2001, our customers include more than 700 enterprises, 180 carriers and service providers, eight

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      We were incorporated as a California corporation in 1997. Our principal executive offices are located at 350, The Embarcadero, San Francisco, California 94105-1204. Our telephone number is (415) 541-2500 and our website is located at www.cp.net. The information contained in our website does not form any part of this Annual Report on Form 10-K.

Recent Developments

      Financing Transaction. In November 2001, the Company announced that it had entered into a financing transaction with a group of investors that resulted in gross cash proceeds to the Company of approximately $30 million as well as the retirement of $65 million in face value of our 5 3/4% Convertible Subordinated Notes. In connection with this transaction, the Company issued and sold four million shares of convertible preferred stock (convertible into approximately 52.4 million shares of our common stock) and warrants to purchase 2.5 million shares of our common stock. The financing transaction was led by General Atlantic Partners LLC and its affiliates, and also included Cheung Kong Limited and affiliates, Hutchison Whampoa Limited and affiliates, and Vectis Group LLC and affiliates. In connection with this financing, a representative of General Atlantic Partners, as well as an additional independent director, also joined the Board of Directors.

      Management Changes. Throughout 2001, we underwent several series of changes in our management, including the replacement of virtually all of the senior management of the Company in the first half of 2001. In May 2001, after joining the Board, William E. McGlashan, Jr. was appointed Interim President and Chief Operating Officer. In August 2001, Mr. McGlashan was named Interim Chief Executive Officer and later in the year he accepted the appointment as Chief Executive Officer and Vice Chairman of the Board. The Company also added a number of senior executive officers between April and September 2001 replacing the executives who departed during that period. Specifically, Laureen DeBuono joined the Company as Interim Chief Financial Officer in September 2001 and Pierre Van Beneden joined the Company as President in October 2001. In January 2002, Ms. DeBuono was named Executive Vice President and Chief Financial Officer.

      Strategic and Operational Restructuring. In April 2001, the Company announced a broad strategic restructuring initiative that involved organizing the Company’s product and service offerings around a group of core communication solutions and an operational restructuring effort related to its business infrastructure and overhead. The Company implemented an aggressive expense management program designed to further reduce operating costs, including the divestiture of many non-core products, a significant reduction in headcount, the closing of numerous facilities around the world and the termination of consulting and other service contracts. The Company incurred significant charges related to the restructuring including employee severance and benefits payments associated with terminations and costs associated with the buy out of existing property and equipment leases. As a result of those strategic and operational initiatives, the Company expects to reduce future quarterly costs, excluding special charges, by nearly $30.0 million as compared to the first quarter of 2001.

      Class Action and Shareholder Derivative Litigation. Beginning on February 2, 2001, a number of securities class action complaints were filed against us, certain of our current and former officers and directors, in the United States District Court for the Northern District of California. Additionally, beginning on February 5, 2001, we were named as a nominal defendant in a number of derivative actions, purportedly brought on our behalf, filed in the Superior Court of the State of California. In November 2001, the Company 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 final hearing date for approval of the Court of the settlement agreement for May 23, 2002.

      SEC Investigation. In February 2001, the Securities and Exchange Commission issued a formal order of investigation of our company and certain unidentified individuals associated with us with respect to non-specified accounting matters, financial reports, other public disclosures and trading activity in our securities. The Company fully cooperated with the SEC in its investigation. The SEC investigation was concluded as

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Critical Path’s Business

Market Overview

      The growth and pervasiveness of global public networks (the Internet and wireless networks) has fueled dramatic growth in electronic communications. Experts predict that soon more people will access the Internet with a wireless device than with wireline personal computers. Already, industry experts believe that 400 million people use cellular phones and 300 million people are online. Those same experts estimate that in 2002, more than one third of the global document delivery market will be moved electronically. As a result, today’s corporations and service providers face an increasing number of technological challenges, as well as new business imperatives, that demand a new breed of communications solutions.

      In today’s market, communications solutions for corporations and service providers must serve a much larger user base than in the past. In the corporate environment, employees are receiving company communications in electronic form, and Internet messaging services are increasingly used to streamline communications with customers, partners and suppliers. Furthermore, service providers are expanding beyond consumer markets as an increasing number of small- to medium-sized businesses turn to Internet Service Providers (ISPs), telecommunications companies and mobile operators for turn-key communications solutions. Today’s communications solutions must not only meet the varying needs of different types of users, they must also provide efficient ways for organizations to manage growing and diverse user populations.

      In the evolving area of Internet communication, corporations and service providers must provide richer communications applications. As the complexity of digital media expands, users need not only basic email, but services such as secure messaging for online business transactions, wireless messaging for mobile commerce, and multimedia messaging for new media content and entertainment. Communications solutions must support a wide array of content from text messages to encrypted and digitally signed documents, to audio, video and other multimedia.

      Today’s users demand ubiquitous access to communications services. Users expect to access email and other communications services through multiple devices — from laptops and cellular phones to wireless handhelds, palm devices and pagers. As a result, communications services must support a growing range of devices, protocols and technologies.

      Along with today’s technological challenges, corporations and service providers also face new business imperatives. To stay competitive, mobile operators, telecommunications companies and other service providers must expand and differentiate their service offerings, moving beyond basic connectivity services and email to offer value-added services that increase average revenue per user and reduce churn. Furthermore, corporations must support a growing number of e-business initiatives and deploy innovative Web services that make information and communications readily accessible to employees, partners and customers around the globe. Our solutions allow corporations and service providers to provide these communications services to their employees, customers and partners.

Critical Path’s Solutions

      Critical Path’s Communications Platform provides a complete range of solutions that help corporations and service providers tackle technological challenges and respond to new business imperatives and opportunities. Through the Critical Path Communications Platform, corporations and service providers can deliver a broad spectrum of wireless and wireline communications services — from mobile, secure and unified messaging to basic email and personal information management. In addition, Critical Path’s platform provides

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      Our platform allows us to provide Messaging and Collaboration solutions, as well as Identity Management solutions.

          Messaging and Collaboration Solutions

          Core Messaging

With more than 145 million licensed electronic mailboxes as of December 31, 2001, our Core Messaging solution provides highly reliable email services that users can access via the Web, with standards-based email clients and with wireless devices. For corporations, the Core Messaging solution presents a cost-effective alternative to groupware, providing only the functionality that typical users need. For service providers, Core Messaging provides essential email services at the industry rated lowest cost of ownership and very large scalability.

          Personal Information Management (PIM)

	Critical Path’s PIM solution provides users with a personal calendar, personal address book, task lists and notes. Users can access these services via the Web and wireless devices and also use them offline with Personal Digital Assistant and PIM clients. With Critical Path’s PIM solution, service providers can easily offer value-added services in addition to email.

          Business Communications Suite

Most users today need messaging and collaborative applications without the added functionality and expense of full groupware solutions. Critical Path’s Business Communications Suite combines our Core Messaging and PIM solutions to provide users with business email, calendaring, personal address books and secure online file storage in one suite. Built-in features enhance collaboration and allow users to share schedules, personal contacts and files with other users. In addition, the Business Communications Suite supports Web, wireless, voice and client-based access. The Suite integrates easily with third-party applications and existing infrastructure and helps minimize corporations’ costs by eliminating costly groupware where those features are not required. The Suite is also ideal for service providers seeking to penetrate the lucrative small- to medium-sized business market with a cost-effective service offering.

          Secure Messaging

Critical Path’s Secure Messaging solution provides a secure way to send and receive messages and files through the Internet. It enables secure and auditable delivery, online file collaboration and Public Key Infrastructure (PKI)-enabled messaging that allows users to digitally sign documents and conduct legally binding online transactions. For corporations, Secure Messaging provides a cost-effective and efficient alternative to physical mail, courier services and paper contracts, and for service providers, it offers yet another way to offer value-added services that generate more revenue per user.

          Mobile Messaging

Our Mobile Messaging enables Short Message Services (SMS) for more than 44 telecommunications carriers around the globe. Our Mobile Messaging solution, with an interface that bridges the gap between SMS and Internet email, enables users to send and receive simple text messages via any SMS-enabled device. Additionally, our Mobile Messaging solution supports the emerging multimedia messaging market. Critical Path provides message album and smart message filtering to protect, store, access and route complex file types, combined with strategic partners’ solutions that provide [MMSC]s and media converter technology to provide a complete multimedia messaging solution that enables users to send and receive rich, integrated content (including digital video, audio, color images and animations) over wireless devices.

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          Unified Communications

	Critical Path helps service providers capitalize on this very large market with a Unified Communications solution that offers centralized access to voice, fax and email messages. Our Core Messaging solution provides the central message store, while partner technologies are readily integrated to enable voice and fax capabilities.

          Identity Management Solutions

          Core Directory

Critical Path’s Core Directory solution provides a central repository for user profile data. Consisting of a standard Lightweight Directory Access Protocol, or LDAP, directory with superior fault tolerance and business continuity assurance, Critical Path’s Core Directory solution provides single-point user management, simplifying user authentication and administration and laying a solid foundation for extranet, e-commerce and distributed application services.

          Unified User Management

Critical Path’s Unified User Management solution enables organizations to unify user profiles across distributed applications, realizing an immediate return on investment through the elimination of manual, redundant and scattered user administration tasks. Accurate and consistent user profiles are shared by heterogeneous systems, strengthening information security, improving information access and streamlining services provisioning. The Unified User Management solution eliminates information silos and is essential for next-generation, directory-enabled services, such as Web services, single sign-on and access management.

          Single Sign-On

	Critical Path’s directory and meta-directory technology is combined with strategic partner solutions to provide centralized access management, Web single sign-on, policy-based delegated administration and user self-service.

          Public Key Infrastructure (PKI)

Critical Path’s PKI solution facilitates successful PKI deployments by leveraging the reliability, scalability and high performance of Critical Path’s directory and meta-directory technology. The CPTM Directory Server stores user digital certificates, enabling fast search access and supporting user authentication, while the CPTM Meta-Directory Server keeps user profiles up-to-date and ensures the data consistency and accuracy necessary for secure communications.

The Critical Path Communications Platform

	•	Support for 24 hour, 7 day a week high-availability environments.
	•	Scalability designed to adjust from just a few thousand users to tens of millions of users.
	•	Standards-based technology, enabling rapid deployment of communications services.
	•	The industry rated lowest total cost of ownership.

      With its foundation centered on our messaging and directory technology, the Critical Path Communications Platform consists of three product layers: Access, Services and Management.

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      The Access Layer. The Access layer provides universal wireless/ wireline access to communications services, making services accessible from PCs, telephones and mobile devices, on Web browsers and standard clients. The Access layer includes:

          CP^TM Presentation Server

The CP Presentation Server is a standards-based, carrier-class application server that enables the delivery of tightly integrated collaborative applications into a highly customized and personalized workspace. The CP Presentation Server provides single sign-on, an integrated user interface, Web, wireless and voice access, and out-of-the-box integration with Critical Path servers. Additionally, the CP Presentation Server enables the integration of third-party applications, providing a common interface to virtually any communications service that can be presented on a Web (HTML) or wireless (WML) device.

                    CP^TM SMS Access Server

	The CP SMS Access Server provides a network-independent, feature-rich gateway between SMS (Short Message Service) and the Internet mail protocol, SMTP (Simple Mail Transfer Protocol), bridging the gap between numerous applications and wireless technologies.

                    CP^TM Digital Certification Services

	CPTM Digital Certification Services provide the added security and functionality of client-side digital signatures, encryption and digital receipts to messages and documents transferred through the CP Messaging Server and CP Registered Mail Server.

      The Services Layer. The Services layer powers a broad range of communications services, including email, personal information management, mobile messaging, multimedia messaging, secure messaging and unified communications.

                    CP^TM Messaging Server

	At the core of the Services layer is the CP Messaging Server — a scalable and robust messaging solution, enabling standards-based email (Web, SMTP, POP3 and IMAP4). The CP Messaging Server offers high levels of performance, reliability and scalability.

                    CP^TM Calendar Server

	The CP Calendar Server is a powerful Web-based solution that fully integrates personal and group calendaring. Ease of use and a diverse range of features make the CP Calendar Server a valuable solution for both corporations and service providers who want to offer value-added calendaring services to generate more revenue per user.

                    CP^TM Personal Address Book Server

The CPTM Personal Address Book Server stores contact information in a central location, giving end users always available access to personal address books from any device or application. A standards-based, Web- and wireless-accessible product, the CP Personal Address Book Server allows end users to easily access important phone numbers or email addresses from a Web browser, PC client or mobile phone.

                    CP^TM Registered Mail Server

	The CP Registered Mail Server enables users to efficiently send and receive documents through the Internet without compromising security. End-to-end encryption and real-time tracking information protect messages and file deliveries.

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      The Management Layer. The Management layer unifies user profiles, simplifying user management, enabling customization at the user level and increasing security across communications services.

                    CP^TM Directory Server

	The CP Directory Server provides a central repository for user profile information and other data shared by multiple systems and applications. This state-of-the-art LDAP directory is currently deployed in primarily mission-critical environments, including corporate intranets/ extranets, online banking services, Internet postal services and government services.

                    CP^TM Meta-Directory Server

The CP Meta-Directory Server enables more effective communication and streamlines business processes by ensuring that user profiles throughout an organization are both consistent and current, and by allowing administrators to maintain strict access controls for sensitive information. The CP Meta-Directory Server automatically propagates data from one application, database or directory to others across the entire enterprise, and it automates the tedious tasks of transferring data from one system to another. The CP Meta-Directory Server technology integrates multiple data sources into an LDAP directory, such as the CP Directory Server, and a powerful set of connectors exchange the information between the CP Meta-Directory Server and various data stores.

Target Markets, Customers and Strategic Partners

     Customers and Target Markets

      Our customers and target customers are corporate enterprises, wireless and telecommunications providers, broadband and service providers, governments and postal authority markets.

	•	Corporate Enterprises. Communications infrastructure products and services are an increasingly important concern for businesses. Enterprises need to control costs of messaging in the face of tightening budgets and expanding message volume. With the globalization of the workforce, enterprises have become increasingly reliant upon digital communication. With such globalization, critical business information is leveraged across an enterprise in eBusiness applications and the need for reliable messaging and security access controls expands significantly. Additionally, such enterprises require identity management solutions to ensure security and to enable portals, extranets and Web-based services.
	•	Wireless and Telecommunications Providers. Wireless users require access to the Internet and the ability to send and receive messages through chosen platforms and devices. Wireless and telecommunications providers are challenged with meeting ever evolving customer needs, decreasing voice revenues and heightened global competition. We provide the necessary access and messaging capability to provide wireless service providers with a low total cost of ownership, increased scalability, improved reliability and an open, easily integrated standards based platform. Additionally, to increase the value of their own service, and to grow the value of and retain their customers, telecommunications providers often add our advanced Internet messaging solutions to their connectivity and data management offerings.
	•	Broadband and Service Providers. Broadband providers, such as cable, ISDN and DSL operators, face increasing messaging and identity management complexity as their businesses grow and evolve. Large bandwidth providers offer increased multimedia capabilities and services. These services require highly scalable and reliable infrastructure to handle the increasing user numbers and message volume for both individual message size and message quantity. Critical Path provides reliable and scalable messaging infrastructure to handle this growth. Additionally, broadband service providers’ (XSPs) basic connection services have become increasingly commoditized. XSPs are aggressively expanding value-added services, including wireless messaging, unified messaging and mobile commerce. Application service providers (ASPs) offer application hosting services and custom application development for corporate customers. Many ASPs offer email messaging as one of their core applications and can

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		take advantage of our outsourced offering and “brand-behind-the-brand” strategy to reduce costs and provide high-quality service.
	•	Governments and Postal Authorities. Governments and postal authorities are increasingly entering into digital services. Their challenges are to provide services at a national level that can support large volume, very large scale and complex applications. Postal authorities worldwide use our email solutions to provide country-wide “email for life” and our directory and meta-directory products to serve as central repositories of user profile information that provide security and access control over trusted third party services for hundreds of millions of postal customers. Government agencies use our directories to help identify users and the services they should be allowed to access. By leveraging our highly scalable directory products, countries are able to build eBusiness infrastructures that enable such authorities to reduce business costs, create new revenue streams, and deliver the trackability, security, and reliability needed for information exchange with national agencies.

     Strategic Partners

      A key element of Critical Path’s sales strategy is to expand distribution channels through strategic reseller or joint sales relationships. Our current strategic partners fall into two primary categories: i) telecommunications, Internet and wireless infrastructure service providers, and ii) Internet security and privilege management infrastructure partners. The following are examples of existing strategic relationships that we believe will position us to increase market presence and penetration:

	•	Telecommunications, Internet and Wireless Infrastructure Service Providers. Our technology supports one-way and two-way messaging services to millions of wireless devices and we are one of only a few companies able to provide end-users with the means to send and receive messages to and from mobile phones, pagers and other wireless devices. We have relationships with leading telecommunications and Internet infrastructure providers as a means to develop the growing market for messaging. We believe these relationships provide vital, value-added services that enable our strategic partners to retain customers, grow into new business areas, and increase revenue from their installed customer bases. Strategic partners include: Mediagate, Nokia Networks OY and Logica UK Limited, among others.
	•	Internet Security and Privilege Management Infrastructure Partners. Critical Path has established relationships with major public key infrastructure and Internet security vendors. Our InJoin Directory Server is included in several of our customers’ security solutions. Additionally, our InJoin Meta-Directory plays a growing role in large corporations’ efforts to develop comprehensive privilege management systems. By working with leading public key infrastructure, secure relationship management, and provisioning vendors as well as systems integrators that specialize in this area, we are expanding our channel of large corporations and enterprises. Strategic partners include Netegrity, Inc., EDS and Entrust Technologies Limited, among others.

      Information regarding customers and sales by geographic area is included in Note 19 of Notes to the Consolidated Financial Statements — Product and Geographic Information.

Sales and Marketing

     Sales Strategies

      Direct Sales. In addition to our channel relationships, we maintain our own direct sales force to introduce prospective customers and partners to our products and services and to work in tandem with our business partners. Our worldwide direct sales team is organized in each of our key geographic regions around our target markets. Currently, we have sales staff located in domestic offices in San Francisco, Los Angeles, Austin, Chicago, Milwaukee, Boston, Pensacola, New York and other cities throughout the United States. Internationally we have members of our sales organization located in Australia, Brazil, Canada, France, Germany, Hong Kong, India, Ireland, Italy, Malaysia, Netherlands, Spain, Switzerland and the United Kingdom.

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      Channel Partner Sales. The Company embraces and integrates partners and alternative channels with the goal of gaining market presence and share in its target markets. Our flexible solutions are well suited for partner and channel execution. Critical Path teams with Global System Integrators (GSIs), Independent Software Vendors (ISVs), Original Equipment Manufacturers (OEMs) and Hardware vendors that have strong industry backgrounds and market presence in their respective markets and geographic regions. These partners include Nokia Networks OY, Logica UK Limited, Hewlett-Packard, Bull, Entrust Technologies Limited, EDS and Ernst & Young Cap Gemini. In addition, Critical Path maintains partner relationships to resell its products and services throughout most of Asia and Latin America.

     Marketing Strategies

      We are focused on industry marketing, media relations and public relations to educate our key markets about the business value of Internet communications, and to reinforce Critical Path’s reputation as a leading solutions provider. The Company intends to continue to focus on industry events, trade-show participation and solutions seminars to promote our brand presence and acquire customers. Additionally, joint programs with strategic partners promote focused offerings for specific market segments.

Competition

      Because we have numerous Internet communications solutions and services, we are not aware of a single company that competes across all of our products and services. However, we encounter different competitors at each level of our solutions. For customers seeking messaging solutions, we compete with Sun Microsystems’ iPlanet division, OpenWave Systems, Inc., Mirapoint Inc., Oracle Corporation, Microsoft Corporation and IBM Corporation’s Lotus division. For secure delivery services, competitors include Tumbleweed Communications Corp., Slam Dunk Networks, Atabok Inc. and Zix it Corporation. In the identity management market, we encounter primarily Sun Microsystems’ iPlanet division, Microsoft and Novell Corporation in the enterprise/eBusiness directory category; and Sun Microsystems’ iPlanet division, Microsoft, Novell and Siemens Corporation are among our competitors in the meta-directory market. In the market for outsourced hosted email services, we compete with such corporations as EasyLink Services Corporation (formerly Mail.com), CommTouch Corporation, USA.net and other smaller application service providers offering hosted exchange services.

      While these competitors and others exist in each of our individual product markets, we believe our complete solution of products and services serves as a competitive advantage, because our customers can easily integrate their infrastructure with our broad product line, selecting multiple products and services from Critical Path as their requirements demand.

      We believe that competitive factors affecting the market for our Internet communications solutions include:

	•	Breadth of platform features and functionality;
	•	Ease of integration into customers’ existing systems;
	•	Scalability, reliability, 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.

      The relative importance of each of these factors depends upon the specific customer environment. Although we believe that our products and services currently compete favorably with respect to such factors, we may not be able to maintain our competitive position against current and potential competitors.

      We believe competition will increase as current competitors increase the sophistication of their offerings and as new participants enter the market. Many current and potential competitors have longer operating

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Technology

      CP Communications Platform

      Our core expertise is in messaging and directory technology. This allows us to deliver highly scalable digital communications software, services and solutions with our Critical Path Communications Platform.

      The CP Communications Platform is divided into three layers: Access, Services and Management. Each layer contains a number of server software components that together can provide a broad range of digital communications solutions like email, mobile messaging, personal information management, unified messaging, multimedia messaging and the integration necessary to enable and provision communications solutions to large populations of users in the corporate enterprise and the service provider.

      All CP Communications Platform components are designed to support mission critical environments. Our high performance, scalable and reliable servers operate in installations ranging from hundreds of thousands to tens of millions of users. Our components are all designed to deliver custom solutions and thus include a range of tools including software development kits (SDKs). They can be used alone or together, in many combinations. They are often used with third party components and therefore are developed to support interoperability with many best of breed technologies. All of our Communications Platform components operate on Sun Microsystems’ Solaris and Microsoft’s Windows NT/2000 operating systems and a subset of our components also operate on Hewlett Packard HPUX, IBM AIX and Linux operating systems.

          Access Layer

      Our Access Layer is anchored by our CP Presentation Server, a powerful application framework that is integrated with all CP Platform components. The CP Presentation Server allows for the creation of customized, personalized application user interfaces to Communications Platform components and third party technologies using a powerful SDK. It enables mixed mode communications, so that services can be accessed from a multitude of devices ranging from the desktop, laptop, PDA, mobile handset or telephone using text, voice, and video. The CP Presentation Server is based on Java 2 Enterprise Edition (J2EE) and Java Server Pages (JSP) technologies, and supports Hypertext Markup Language (HTML), Wireless Markup Language (WML), VoiceXML and a range of other interface markup languages.

      Alongside our CP Presentation Server is our CP Short Message Service Access Server, a powerful application framework that enables the development of applications which send Short Message Service (SMS) messages. CP SMS Access Server includes an application development SDK (SMASI) that applications can use to drive SMS traffic to a number of SMS-C’s. To date, support is provided for a number of SMS-Cs through protocols like SMPP. The CP SMS Access Server also includes WAP-Push support to enable next generation wireless applications like Multimedia Messaging Service (MMS).

     Services Layer

      Our Services Layer is anchored by our CP Messaging Server, a highly scalable, standards-based, messaging server. The CP Messaging Server enables services from Core Email to Unified Messaging and next generation Multimedia Messaging Services through its powerful native IMAP mail store and SMTP relay. It has a scalable architecture, allowing single or multiple domains to be split over multiple servers, geographically distributed and setup as clusters. It also has support for security features including secure-socket-layer (SSL), anti-virus and anti-spam.

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      Alongside our CP Messaging Server, our CP Personal Address Book Server, CP Calendar Server, CP File Storage Server and CP Registered Mail Server provide access to personal and group information such as contacts, calendars, files and secure, trackable messages. These servers can be combined to provide a Personal Information Management Suite, a Business Messaging Suite, an Electronic Bill Presentment Service, a Multimedia Messaging Service and many other solutions, reliably and on a large scale.

          Management Layer

      Our Management Layer is anchored by our CP Meta Directory Server and CP Directory Server. Our CP Meta Directory software enables user/ resource provisioning, keeping information consistent between disparate messaging and business systems, and is designed to improve security, data integrity and reduce overall administration cost. At the core of our technology is the join engine, with plug-ins that connect to various business systems, including CP Platform components. CP Meta Directory includes wide support for connected systems including SQL Server, Sybase, Oracle, Microsoft Exchange, Lotus Notes, Peoplesoft, Siebel and mainframe applications. It also includes wide interoperability with directory software including CP Directory Server, Microsoft Active Directory, Novell eDirectory and iPlanet Directory Server. The CP Meta Directory includes a powerful SDK that enables the development of custom connectors using Perl, Java and XML.

      The CP Directory Server is useful in providing a common store of user or resource information that can be accessed via standard LDAP and X.500 protocols. The CP Directory Server can be used to store user profiles, digital certificates from PKI, PKI software and eBusiness information. The CP Directory Server is a distributed database, meaning that it can be partitioned both logically and physically, in order to provide improved performance and ease of replication and updates. Both CP Directory Server and CP Meta Directory Server incorporate security technology like SSL for secure transport and authentication.

      Alongside CP Directory and CP Meta Directory, our CP System Console provides systems management functionality to the CP Platform. This includes system start/stop, systems monitoring, and configuration. CP Systems Console uses Sun JDMK technology and is designed to be interoperable with SNMP standards-based systems like Hewlett Packard OpenView.

     Hosted Messaging

      We also provide a hosted messaging service that offers standards-based email service for Internet service providers, telecommunications providers, Web hosting companies, Web portals and corporate enterprises providing accounts to their end-users for activities such as trading securities, shopping or participating in online communities. We have developed proprietary load-balancing and messaging software that uses Oracle databases for account provisioning and management. Our hosted messaging service is comprised of multiple groups of servers and routers acting as a single, virtual point of contact to customers for messaging services. Our hosted messaging service hardware and software consists of Sun Microsystems servers running Solaris, Cisco routers, EMC redundant storage arrays, Veritas software and rack-mounted Intel processor-based servers. All aspects of our hosted messaging service are deployed in a redundant configuration with the goal that if any process or system goes down, another will be available to handle customer traffic seamlessly. This behavior is called “transparent failover” and is designed to increase the availability of messaging services to the customer. Our hosted messaging service also includes a dynamic load-balancing system that acts as proxy servers for firewall safety. The load balancers are configured in parallel so that if one goes down, the load is transferred to the remaining systems. We have created a proprietary account provisioning protocol for account creation and maintenance. This enables account transitioning from other services or legacy systems to be bulk-loaded, tested, replicated and deployed on our service automatically. This protocol addresses a critical time to market issue by enabling organizations to quickly transition to the new standards-based email service with minimal down-time and degradation to their existing internal systems. In addition, it can be used by customers and partners to facilitate automatic account sign-ups from web sites, typically in less than three minutes.

      Data Centers. Our hardware for operating production services currently is located throughout in two data centers. With multiple high-speed connections to diverse backbone providers and a robust network

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      Security. We have a diverse set of firewall solutions that are specifically tailored for each of our hosted services, reducing the likelihood of security breaches. To enhance security for our network, our staff members monitor the network hardware 24 hours a day, seven days a week. Suspicious activity is reported and investigated immediately.

      Spam and Viruses. Our messaging services include Spam Blocking to guard against unsolicited commercial email and Virus Scanning to prevent the spread of Internet viruses and worms. Our message filtering technology has been enhanced with partnerships with Brightmail and Symantec, allowing our hosted messaging customers to benefit from new spam and virus filters as they are created in response to attacks worldwide.

Research and Development

      Our products and services are mostly based on systems which were internally developed or acquired through acquisitions. We must continually improve these systems to accommodate the level of use of our products and services. In addition, we may add new features and functionality to our products and services that could result in the need to develop, license or integrate additional technologies. Our inability to add additional software and hardware or to upgrade our technology or network infrastructure could have adverse consequences, which include service interruptions, impaired quality of the users’ experience and the diversion of development resources. Our failure to provide new features or functionality to our products and services also could result in these consequences. We may not be able to effectively upgrade and expand our systems in a timely manner or to integrate smoothly any newly developed or purchased technologies with our existing systems. These difficulties could harm or limit our ability to improve our business.

      We invested $7.7 million in research and development in 1999, $31.0 million in 2000 and $30.7 million in 2001. Additionally, we incurred $3.7 million of in-process research and development expense in 2000 related to technologies acquired through two of our acquisitions. We anticipate that we will continue to devote significant resources to product development in the future as we add new features and functionality to our products and services. The market in which we compete is characterized by rapidly changing technology, evolving industry standards, frequent new service and product announcements, introductions and enhancements and changing customer demands. Accordingly, our future success will depend on our ability to adapt to rapidly changing technologies, to adapt our services to evolving industry standards and to continually improve the performance, features and reliability of our products and services. The failure to adapt to such changes would harm our business. In addition, the widespread adoption of new Internet, networking or telecommunications technologies or other technological changes could require us to undertake substantial expenditures to modify or adapt our services or infrastructure.

Intellectual Property

      We regard the protection of our trade secrets, patents, patent applications, copyrights and trademarks as critical to our success. We rely on a combination of statute, common law and contractual restrictions to establish and protect our proprietary rights and developed intellectual property in our product and service offerings. We have entered into proprietary information and invention assignment agreements with our employees, contractors and consultants, and nondisclosure agreements with customers, partners and third parties to whom we disclose confidential and proprietary information. Despite our efforts in this regard, former employees or third parties may infringe or misappropriate our proprietary rights which could harm our business. The validity, enforceability and scope of protection of our intellectual property can be tested and in some areas is still evolving.

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      We have registered and/or used as a trademark “Critical Path” in the United States. We have also registered and used “Critical Path” in a variety of foreign countries where we have operations or do business. We plan to continue to enforce that mark and other trademarks in both the United States and internationally, although protection of the marks cannot be assured.

      We license our software and proprietary service offerings and despite all efforts to protect that property and ensure the quality of our brand and patented or copyrighted products or processes, current or future licensees could take actions that might harm the value of our intellectual property portfolio, our brand or reputation.

      We have been involved in claims by third parties of patent, copyright and trademark infringement against us in the past. Any claim like this, regardless of the merits, could be time consuming to defend, result in costly and distracting litigation, cause delays in rollouts of services, products or updates or require us to enter into licensing agreements with third parties. Such licensing agreements may include payment of large royalties or may not be available to us on commercially reasonable terms. Additionally, enforcing our intellectual property rights could entail significant expense, with such costs also potentially harming our results of operations.

Employees

      At December 31, 2001, we had 562 employees, including 192 in operations, 131 in sales and marketing, 148 in research and development and 91 in general corporate and administration. Our future success depends, in significant part, upon the continued service of our key technical and senior management personnel and our continuing ability to attract and retain highly qualified and experienced technical, sales and managerial personnel. Competition for such personnel is intense, and we cannot guarantee that we can retain our key technical and managerial employees or that we will be able to attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.

Government Regulation

      Although there are currently a limited number of laws and regulations directly applicable to the Internet and the operation of commercial messaging services, it is probable that laws and regulations will continue to be adopted with respect to the Internet or commercial email services covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust and characteristics and quality of products and services. Further, the growth and development of the market for online email may prompt calls for more stringent consumer and copyright protection and privacy laws that may impose additional burdens on those companies conducting business online. The adoption of any additional laws or regulations may impair the growth of the Internet or commercial online services, which could, in turn, decrease the demand for our products and services and increase our cost of doing business, or otherwise harm our business, operating results and financial condition. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any such new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the Internet could harm our business, operating results and financial condition.

      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 and liability associated with a portion of our 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

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Item 2. Properties

      Our current corporate headquarters and primary operations and development facilities are located in two office buildings in San Francisco, California. We have several leases that relate to our San Francisco locations, including one that expires on March 31, 2002, another that expires on June 30, 2002 and the lease for our new office space that expires on March 25, 2012. The Company took occupancy of a total of 45,467 square feet of that new leased space on March 25, 2002. We are in the process of consolidating all of our San Francisco-based operations into our new headquarters. In addition to this principal location, we currently occupy a 24,300 square foot building in Dublin, Ireland under a lease expiring on July 14, 2014. We lease additional facilities in Brazil, Canada, France, Germany, Ireland, Italy, Malaysia, Spain, Sweden, Switzerland, the United Kingdom and several cities throughout the United States. We continually evaluate the adequacy of our existing facilities, and we believe that the current facilities will be suitable for our needs for at least the next 12 months, or that additional space will be available on commercially reasonable terms, if necessary.

Item 3. Legal

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

      Securities Class Actions 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.

      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.

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      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.

      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.

      Breach of Contract Action. On January 18, 2001, we entered into a non-exclusive licensing agreement with Comverse Network Systems, Inc. (“Comverse”) with respect to our CP Messaging and Directory software, with rights of distribution to Comverse’s customers. On October 9, 2001, we notified Comverse that we were terminating the Software License Agreement based on our belief that Comverse materially breached the contract. On or about October 15, 2001, Comverse filed a complaint in the United States District Court for the Southern District of New York against the Company, challenging the Company’s right to terminate the agreement. Comverse asserted causes of action for specific performance, requesting that the Company be required to perform and to recognize Comverse’s alleged rights under the Agreement, and injunctive relief, prohibiting the Company from taking action to suspend, terminate or interfere with Comverse’s alleged rights, remedies or privileges. Concurrently with the filing of the Complaint, Comverse also filed a Demand for Arbitration with the American Arbitration Association, seeking a determination that Critical Path did not have the right to terminate the agreement. Comverse does not seek money damages in either the Complaint or the Demand for Arbitration. In December 2001, the District Court issued a preliminary injunction prohibiting us from taking various actions relative to the termination, including demanding the return of the licensed software or publicly indicating that Comverse’s rights under the license agreement were terminated. The Company has appealed the preliminary injunction and has also succeeded in having the arbitration moved to San Francisco. No date has yet been set for the arbitration or hearing of the appeal. While it is difficult to determine what the eventual outcome of this matter will be, the Company intends to defend its rights vigorously.

      Securities Class Action in Northern District of California. Beginning on February 1, 2002, a number of securities class action complaints were filed against the Company, and certain of our former officers. The purported class action complaints allege that during a period from April 21, 2000 through September 25, 2000 and in same cases April 31 (sic), 2000 through October 19, 2000, the Company reported materially misleading financial statements and made materially misleading statements about the Company’s ability to collect on recognized revenue from our customers based on the current economic climate and uncertainty about continued viability of many Internet based businesses as well as in recognition of changes in accounting regulations. The suit further alleges that the Company knew these issues would severely impair future revenue growth and the ability to make future stock sales and extract future bonuses tied to the Company’s performance. The complaints seek an unspecified amount in damages. The Company believes that these allegations are without merit and intends to vigorously defend such suits.

      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.

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Item 4. Submission of Matters to a Vote of Security Holders

      None.

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PART II

      Our common stock has been quoted on the Nasdaq National Market under the symbol “CPTH” since March 29, 1999. The following table presents, for the periods indicated, the high and low sales prices per share of our common stock as reported on the Nasdaq National Market.

      As of March 25, 2002, there were approximately 1,461 holders of record of our common stock. Most shares of our common stock are held by brokers and other institutions on behalf of shareholders.

Dividend Policy

      We have never declared or paid any dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and the expansion of our business. Any future determination to pay cash dividends will be at the discretion of the board of directors and will depend upon our financial condition, operating results, capital requirements and other factors the board of directors deems relevant.

Recent Sales of Unregistered Securities

1.	On July 20, 2001 and December 7, 2001, respectively, we issued an aggregate of 9,000 shares and 15,000 shares of common stock in connection with the settlement of two separate lawsuits against the Company by former employees alleging wrongful termination. The shares of common stock were issued at fair market value, as determined by the closing price listed on the Nasdaq National Market, on the date of issuance which was the settlement date as indicated. These securities were issued in reliance on the exemption from the registration requirements of the Securities Act provided in Section 4(2) thereof.
2.	On November 8, 2001, we issued 4,000,000 shares of Series D Cumulative Redeemable Convertible Participating Preferred Stock and warrants to purchase common stock of the Company, to a group of investors that included General Atlantic Partners LLC and its affiliates, Cheung Kong Limited and affiliates, Hutchison Whampoa Limited and affiliates and Vectis Group LLC and its affiliated entities. The Preferred Stock will accrue and cumulate dividends at eight percent (8%) and is convertible into shares of the Company’s common stock at the option of the holder. The warrants are exercisable at any time from November 8, 2002 until November 8, 2006. The exercise price of the common stock underlying the warrants is $1.05. The securities were issued in reliance upon the exemption from registration requirements from the Securities Act provided in Section 4(2) thereof.

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Item 6. Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL INFORMATION

      The selected consolidated statement of operations data for the period from February 19, 1997 (our inception) to December 31, 1997, and during the years ended December 31, 1998, 1999, 2000 and 2001, and selected consolidated balance sheet data as of December 31, 1997, 1998, 1999, 2000 and 2001, have been derived from our Consolidated Financial Statements. The data set forth below should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this document.

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	relationships. See also Note 16 to the Notes to Consolidated Financial Statements — Impairment of Long-Lived Assets.
(2)	Operating expenses for the year ended December 31, 2001, include a $26.6 million charge related to impairment of certain long lived assets and an $18.3 million charge related to costs incurred as a result of our strategic restructuring. See also Note 4 to the Notes to Consolidated Financial Statements — Strategic Restructuring and Employee Severance and Note 16 to the Notes to Consolidated Financial Statements — Impairment of Long-Lived Assets.
(3)	Extraordinary gains of $179.3 million, net of applicable taxes and write downs of related debt issuance costs, were recorded for the year ended December 31, 2001 related to gains recognized on the retirement of $261.4 million of face value of Critical Path’s convertible subordinated notes. See also Note 10 to the Notes to Consolidated Financial Statements — Convertible Subordinated Notes.

      The following discussion 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 “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” and “estimate” and similar expressions are intended to identify forward-looking statements. These are statements, which include statements as to the Company’s future strategic, operational and financial plans, anticipated or projected revenues, sources of revenues, net losses, expenses and operational growth, future revenues derived from non-core product and services, investments in sales and marketing, operating losses, the need for additional financing, competition in and competitive factors affecting our markets, historical trends for revenue, expenses and personnel as indicative of future results, our critical accounting policies, changes in the price of our common stock, the impact of stock-based expenses, period-to-period comparisons of our operating results as an indicator of future performance, markets and potential customers for Critical Path products and services, plans related to sales strategies and global sales efforts, plans to reduce operating costs through continued expense reduction, anticipated effects of restructuring and retirement of debt, anticipated charges and cost savings as a result of these plans, our belief as to our ability to successfully emerge from the restructuring and refocusing of our operations and our intellectual property strategy 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 product and service, finalization of pending litigation and the settlement of the SEC investigation, 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, 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.

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(1) Non-material percentage.

Overview

      Critical Path, Inc. is a global leader in Internet communications that 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

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      Critical Path was founded in 1997 and is headquartered in San Francisco, California with offices throughout North America, Europe, Asia and Latin America. From inception through 1999, our primary source of revenue came from service fees related to hosted messaging. Through a series of acquisitions during 1999 and 2000, we expanded our product offerings to include a wide range of messaging and collaboration licensed software and solutions.

      During 2001 we evaluated our various products, services, facilities and the business plan under which we were operating. As part of this evaluation, we 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. In connection with this review, we implemented and completed a three part strategic restructuring plan that involved reorganizing Critical Path’s product and service offerings around a group of core communication solutions. The three primary elements of the plan included:

	•	Focusing on core communication solutions;
	•	Workforce reduction; and
	•	Facilities and operations consolidation.

      Additionally, we implemented an aggressive expense management plan to further reduce operating costs while maintaining strong customer service for our core solutions. As of December 31, 2001 we had divested all of our non-core products and services, reduced headcount by 44%, reduced facilities and operations by 65% and implemented other cost cutting measures, resulting in a significant reduction in overall operating expenses. The non-core products and services which were divested during 2001, comprised approximately 26% and 21% of total revenues in the years ended December 31, 2000 and 2001 and were insignificant in 1999. These products and services are expected to be an insignificant part of Critical Path’s revenue stream going forward. Additionally as of December 31, 2001, we had substantially completed an extensive assessment of our core hosted messaging services, which resulted in a $12.4 million impairment charge during the fourth quarter of 2001 associated with excess capacity and equipment. As a result of these strategic initiatives, we have significantly reduced our overall operating expenses and we expect to realize significant future annual cost savings, as our quarterly operating cost structure, excluding special charges, has been reduced by nearly $30 million since the first quarter of 2001.

      During the fourth quarter of 2001, we closed a financing transaction with a group of investors led by General Atlantic Partners LLC and its affiliates, and other investors including Hutchison Whampoa Limited and affiliates and Vectis Group LLC. Vectis Group had previously been retained by the Company to provide advice with respect to strategic alternatives and other management related services. Mr. McGlashan, our Chief Executive Officer, is a principal in the Vectis Group. The financing transaction consisted of approximately $30 million in gross cash proceeds and the retirement of $65 million in face value of our 5 3/4 Convertible Subordinated Notes. In connection with this transaction, we issued and sold four million shares of convertible preferred stock to several investors and warrants to purchase 2.5 million shares of common stock to General Atlantic and its affiliates. The related proceeds will be used for working capital and general corporate purposes.

      We have incurred significant losses since our inception, and as of December 31, 2001, we had an accumulated deficit of approximately $2.06 billion, inclusive of a $1.31 billion charge for impairment of long-lived assets recorded in the fourth quarter of 2000. We intend to continue to invest in sales and marketing, development of our technology and solution offerings, and related enhancements. We expect to continue to incur operating losses through the end of 2002, however we do not anticipate the need for additional financing prior to December 31, 2002.

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      In view of the rapidly evolving nature of our business, acquisitions, recent 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 December 31, 2001, we had 562 employees, in comparison with 1,041 employees at December 31, 2000 and 488 employees at December 31, 1999. We do not believe that our historical trends for revenues, expenses, or personnel are indicative of future results.

Critical Accounting Policies

      The following discussion and analysis of Critical Path’s financial condition and results of operations is based on its consolidated financial statements and results of operations, which have been prepared in accordance with accounting principles generally accepted in the United States. Critical Path believes the following are the most critical accounting policies underlying Critical Path’s presentation of its financial condition and related operating results:

	•	Revenue recognition
	•	Valuation and impairment of long-lived assets and identifiable intangible assets; and
	•	Estimating allowance for doubtful accounts and contingencies.

     Revenue recognition

      Revenues are recognized once the related products or services have been delivered and collection of all fees is considered probable. We recognize revenues related to the sale of our licensed software products, hosted messaging and communication services, professional services and post-contract customer support.

      Software license. We derive software license revenues from perpetual and term licenses for our messaging, collaboration and identity management solutions. Software license revenues are recognized when persuasive evidence of an arrangement exists, delivery of the licensed software to the customer has occurred and the collection of a fixed or determinable license fee is considered probable. Our revenue recognition policies require that revenues recognized from software arrangements be allocated to each element of the arrangement based on the fair values of the elements, such as software products, upgrades and enhancements, post contract customer support, installation, training or other services. License software sales that involve multiple elements, including software license and undelivered maintenance and support and professional services, are recognized such that we allocate revenues to each component of the arrangement using the residual value method based on evidence of the fair value of the undelivered elements. The vendor specific objective evidence of fair values for the ongoing maintenance obligations are based upon the prices paid for the separate renewal of these services by the customer or upon substantive renewal rates stated in the contractual arrangements. Vendor specific objective evidence of the fair value of other services, primarily professional services, is based upon substantive rates stated in the contractual arrangements or upon separate sales of these services at substantive rates.

      If a multiple element arrangement includes services that are deemed essential to the functionality of a delivered element, we recognize the entire arrangement fee using the percentage of completion method. Under this method, individual contract revenues are recorded based on the percentage relationship of the contract costs incurred as compared to management’s estimate of the total cost to complete the contract. If fair value cannot be determined for more than one individual element of a multiple element arrangement, revenues are recognized ratably over the term of the agreement.

      We also receive license fees from resellers under arrangements that do not provide product return or exchange rights. Revenues from reseller agreements may include a nonrefundable, advance royalty which is payable upon the signing of the contract and license fees based on the contracted value of our products purchased by the reseller. Guaranteed license fees from resellers, where no right of return exists, are recognized when persuasive evidence of an arrangement exists, delivery of the licensed software has occurred and the collection of a fixed or determinable license fee is considered probable. Non-guaranteed per-copy

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      Hosted messaging services. We derive hosted messaging revenues related to fees for hosting services we offer related to our messaging and collaboration solutions. These are primarily based upon monthly contractual per unit rates for the services involved, which are recognized on a monthly basis over the term of the contract beginning with the month in which service delivery starts. Amounts billed or received in advance of service delivery, including but not limited to branding and set-up fees, are initially deferred and subsequently recognized on a ratable basis over the expected term of the relationship beginning with the month in which service delivery starts.

      Professional services. We derive professional service revenues from fees primarily related to training, installation and configuration services. The associated revenues are recognized in the period in which the services are performed.

      Maintenance and support. We derive maintenance and support service revenues from fees for post-contract customer support agreements associated with product licenses. Such services typically include rights to future update and upgrade product releases and dial-up phone services. Fees are deferred and recognized ratably over the term of the support contract, which is generally one year.

      We periodically evaluate the carrying value of long-lived assets and identifiable intangible assets for impairment, when events and circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized whenever the evaluation demonstrates that the carrying amount of a long-lived asset is not recoverable. In connection with the impairment analysis performed in the fourth quarter of 2000, the estimates of fair values were based upon the discounted estimated cash flows of Critical Path for the succeeding three years using a discount rate of 25% and an estimated terminal value. The assumptions supporting the estimated cash flows, including the discount rate and an estimated terminal value, reflect management’s best estimates. The discount rate was primarily based upon the weighted average cost of capital for comparable companies. During 2001 and in connection with our strategic restructuring effort, an additional assessment of impairment was performed on certain of our remaining long-lived assets. The restructuring plan identified and formulated a plan to exit certain products and services that were determined to be non-core to Critical Path’s business strategy. We reviewed the intangible assets related to these non-core products and services and, as a result of the assessment, recorded an impairment charge in the second quarter to these assets. Additionally during the fourth quarter of 2001, we performed an evaluation of long-lived assets within our core business. As a result of this assessment we recorded a further impairment charge. This charge resulted from an impairment of assets associated with our core business, primarily the hosted messaging services, as we determined that we had excess capacity and equipment related to certain core products and services.

      The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingencies at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. For this reason, actual results could differ from those estimates. Management must make estimates surrounding collectibility of our revenues and related accounts receivable. Management specifically analyzes accounts receivable, historical and current economic trends, previous bad debts, customer concentrations, credit worthiness of customers, and payment terms of customer accounts, when evaluating adequacy of the allowance for doubtful accounts.

      Management estimates liabilities and contingencies at the end of each period. The current financial statement presentation reflects management’s best estimates of liabilities and pending litigation which are probable and where the amount and range of loss can be estimated. We record the minimum liability related to those claims where there is a range of loss. Because of the uncertainties related to the probability of loss and

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Results of Operations

      The following table presents Critical Path’s net revenue and selected cost of net revenue data during 1999, 2000 and 2001 and the relative composition of net revenues and the selected cost of net revenue data as a percentage of net revenues during 1999, 2000 and 2001.