HOLZER & HOLZER
COREY D. HOLZER
6135 Barfield Road, Suite 102
Atlanta, GA 30328
Telephone: 404/847-0085
404/847-0036 (fax)

SPECTOR, ROSEMAN & KODROFF, P.C.
JEFFREY L. KODROFF
1818 Market Street, Suite 2500
Philadelphia, PA 19103
Telephone: 215/496-0300
215/496-6611 (fax)

Attorneys for Plaintiff
 

1. This is a securities fraud class action on behalf of persons who purchased Critical Path, Inc. ("Critical Path" or the "Company") common stock between November 2, 2000 and February 1, 2001 (the "Class Period"), against Critical Path and its top officers for violations of the federal securities laws arising out of defendants' dissemination of false and misleading statements concerning the Company's business and its prospects for 2000 and beyond.

2. Critical Path provides e-mail hosting services to a variety of organizations, including Internet service providers ("ISPs"), Web hosting companies, Web portals, and corporations. Many of these types of companies were new and were suffering from a downturn in Internet-related funding which began in the spring of 2000. By September 2000 at the latest, the problems many of these companies were having raising money had reached crisis levels. Defendants had also known for months that new accounting regulations would negate the Company's ability to continue to recognize up front license fees in Q4 2000. Defendants knew this would severely impair Critical Path's future revenue growth and impair their ability to make future stock sales and extract future bonuses which were tied to the Company's performance. Thus, defendants continued to make positive but false statements about Critical Path's business and future revenues during Q4 2000. As a result, Critical Path's stock traded as high as $48.

3. On February 2, 2001, Critical Path issued a press release which stated in part:

Critical Path, Inc. announced today that the Board of Directors has formed a special committee of the Board to conduct an investigation into the Company's revenue recognition practices. The Company has discovered a number of transactions that put into question the Company's financial results.

On January 18, 2001, the Company announced Fourth Quarter revenue of $52 million in revenue [sic] and net loss, excluding special charges, of $11.5 million. The Company now believes that these results may be materially misstated. The Company cautioned that the investigation has just begun.

Effective immediately, the Board of Directors has placed on administrative leave David Thatcher, the Company's president, and William Rinehart, the vice president of worldwide sales.

The special committee and the Company are working with its independent auditors, PricewaterhouseCoopers, and outside counsel, Wilson Sonsini Goodrich & Rosati.

4. This disclosure shocked the market, causing Critical Path's stock to decline to less than $4 per share in pre-market trading, inflicting hundreds of millions of dollars of damage on plaintiff and the Class. Defendants' misconduct has wiped out over $2 billion in market capitalization as Critical Path stock has fallen 90% from its Class Period high of over $48 per share as the truth about Critical Path, its operations and prospects began to reach the market.

5. In response, analysts blasted the Company for its improper conduct. "This sounds like it's out right fraud," said Charles Trafton, an Adams, Harkness and Hill analyst. "It sounds like there was a concerted effort to cook the books."

6. The claims asserted herein arise under §§10(b) and 20(a) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5. Jurisdiction is conferred by §27 of the 1934 Act, 15 U.S.C. §78aa.

7. Venue is proper here pursuant to §27 of the 1934 Act. Critical path is located in San Francisco, CA and the acts and transactions giving rise to the violations of law complained of occurred here.

8. Plaintiff Evan Rapoport purchased shares of Critical Path common stock as detailed in the attached certification and was damaged thereby.

9. Defendant Critical Path provides the Internet messaging infrastructure upon which the new economy is built. The Company is a single resource that powers the flow of mission-critical information through an integrated portfolio of secure messaging, directory, data integration and collaboration solutions. Critical Path's technology strengthens all aspects of the eBusiness value chain by providing the messaging infrastructure that fuels customers' new and existing eBusiness initiatives. Critical Path is headquartered in San Francisco, with offices worldwide.

10. (a) Defendant William H. Rinehart ("Rinehart") was, during the Class Period, Vice President of Worldwide Sales of the Company.

(b) Defendant David A. Thatcher ("Thatcher") was, during the Class Period, President of the Company.

11. The parties listed in ¶10(a)-(b) are referred to as the "Individual Defendants." They are liable for the false statements pleaded herein at ¶¶17-18, 20, as those statements were each "group-published" information for which they were collectively responsible. The Individual Defendants, by reason of their stock ownership and positions with Critical Path, were controlling persons of Critical Path. Critical Path controlled each of the Individual Defendants. These controlling persons are liable under §20(a) of the 1934 Act.

12. The Individual Defendants are Critical Path's top executives. They ran Critical Path as "hands-on" managers, dealing with important issues facing Critical Path's business, i.e., its customer base, the ISPs (some of whom were having difficulty surviving), Critical Path's market share position, and its ability to achieve growth in its business in fiscal 2000 in light of the dramatic adverse developments which had been affecting Critical Path's core customers' ISPs since the spring of 2000.

13. Critical Path was founded in February 1992 and went public in March 1999. The Initial Public Offering was a hot offering and the stock price went up dramatically in connection with the markets' appetite for Internet-related companies. In mid-April 2000, the NASDAQ suffered a significant decline. Critical Path's stock recovered by June 2000 as it successfully convinced the market that its business was strong and revenues and earnings would continue to grow rapidly.

14. By September 2000, the problems the ISPs were having raising money had reached crisis proportions. In late September 2000, many of Critical Path's customers had suffered large stock declines and were going further into debt. Other Critical Path customers were also having trouble raising money. The defendants knew, from their frequent conversations with customers and other Critical Path employees, that many of these customers were cutting capital expenditures which would cause Critical Path's future revenues to decline. Moreover, defendants also had known for almost a year that new accounting rules would prevent defendants from recognizing revenue from transactions defendants made merely on an up-front licensure basis and could only be recognized on a "sell through" basis. Defendants actually knew this would directly impact the Company's Q4.

15. Thus, at the time Critical Path reported its Q4 2000 results it faced increasingly bleak short-term and long-term prospects. Nevertheless, defendants sought to conceal the problems. Thus, defendants disseminated false information about Critical Path's business and prospects concealing the fact that new accounting regulations would materially impact its Q4, and its customers were cutting back on capital expenditures which would hurt future results.

16. Each of the defendants was personally familiar with Critical Path's Q4 2000 revenues as they monitored Critical Path's sales, closely monitoring the performance of Critical Path's operations via reports from Critical Path's Finance and Sales Departments which were generated and provided to management on a regular basis. The reports summarized orders, dollar volume and product type. As a result of the Individual Defendants' monitoring, each of the Individual Defendants was aware that Critical Path would be unable to meet its projected results, as its ISP business was slowing and its customers were unable to continue the capital expenditure programs at the levels previously conveyed to defendants in light of the dramatic adverse developments of 2000. Moreover, defendants actually knew that the Company's ability to recognize future revenue was contingent upon its ability to consummate a "sell through" transaction. However, because the "appearance" of future growth was so critical to defendants' plan to inflate the price of Critical Path shares, defendants continued to maintain throughout the Class Period that Critical Path would post Q4 2000 revenue and EPS of at least $55 million and $.01, respectively, when, in reality, defendants knew that Critical Path could not possibly achieve such performance.

17. On November 2, 2000, Critical Path issued a press release entitled, "Critical Path Provides Financial Guidance for Anticipated Fourth Quarter 2000 and Full Year 2001; Company Capitalizes on Infrastructure Opportunity to Drive to Profitability and Join Elite Group of Profitable New Economy Companies." The press release went on to state:

Critical Path, Inc. today provided financial guidance for the fourth quarter 2000 and the full year 2001, incorporating the expected contribution from the recent acquisition of PeerLogic. This guidance, which was provided in New York City in a meeting with over 100 investors and analysts, is intended to provide all investors with information the Company believes is important in evaluating Critical Path's business.

Citing the broad market opportunity, the Company expects revenue for the fourth quarter ending December 31, 2000 of between $54 million and $56 million, which represents growth of approximately 22 percent over the third quarter of 2000. The Company expects pro forma earnings per share for the period to improve from a loss of $0.14 to a gain of approximately $0.01 per share. For the year 2001, revenue is expected to grow approximately 95 percent over 2000, to between $300 million and $310 million, with pro forma earnings per share growing to a level ranging between $0.39 and $0.41. These pro forma per share estimates exclude special charges related to the amortization of goodwill and purchased technology, acquisition-related retention bonuses and stock-based charges.

"The fourth quarter of 2000 is a pivotal one for Critical Path, one in which we join an elite group of profitable 'new economy' companies. Critical Path is executing across all product segments and target markets, said Doug Hickey, Critical Path's CEO. "We anticipate continued high demand for our product and service offerings, and leverage in our operations to deliver initial profitability in Q4 2000 and increase in our profitability in 2001."

Critical Path, Inc., the dominant global provider of business-to-business Internet messaging infrastructure solutions, today announced that Lawrence P. Reinhold will join the company as Executive Vice President and Chief Financial Officer. Mark Rubash, the company's former CFO, has resigned for personal reasons following a leave of absence due to family illness.

Reinhold brings almost 20 years of experience with technology companies' finance operations to Critical Path from PricewaterhouseCoopers. With extensive experience in accounting practices, public and private offerings, merger and acquisitions, and managing company growth, Reinhold will add to Critical Path's leadership bandwidth. Reinhold is the Managing Partner of PwC's Midwest Region Technology, Information/ Communications and Entertainment (TICE) practice. He also serves on the leadership team for the entire U.S. TICE practice.

"We are extremely excited to have Larry join the Critical Path leadership team. We selected Larry for three important criteria: experience managing growth and expanding margins, hands on leadership, and fit within the CP team and the dynamic market opportunity," said Doug Hickey, CEO of Critical Path. "In addition to our executive team, we have a deep bench of experience in our finance group and we're all committed to working with Larry through this pivotal quarter of profitability and beyond. We continue to be very bullish on both our short and long term prospects."

"Critical Path is defining the market for Internet messaging infrastructure solutions. It has an exciting and highly leverageable business model, a great leadership position, and its accomplishments to date speak for the team's quality of execution,'' said Larry Reinhold. "Critical Path's messaging infrastructure products and services continue to find high demand across geographies and customer segments,'' continued Hickey. "Our business model and financial controls are working, and we continue to eagerly anticipate Critical Path's turning the corner to profitability in the fourth quarter." For specific financial guidance, the company continues to refer investors to the previously stated guidance in a press release of November 2, 2000.

"Mark has been a valuable asset to Critical Path during this year of growth," continued Hickey. "As we emerge into the profitable phase, we will build on the fruits of Mark's tenure. He contributed to the creation of a company infrastructure that will scale to the next level of success. We thank him, and wish him the best in his future endeavors."

o The Company would report a profitable Q4 of at least $0.01 and revenue of $55 million - its first profitable quarter ever;

o The Company's CFO was resigning for personal reasons - not associated with any accounting problems with the Company;

o The Company's Q4 and fiscal 2001 prospects were extremely bullish;

o There would be no additional management changes in the near future; and

o The Company was not being impacted by foreign exchange fluctuation - nor would it be - as the Company had a natural hedge against such risk as its Euro-denominated expenses offset any Euro-denominated revenue hits.

Critical Path, Inc., the dominant global provider of business-to-business Internet messaging infrastructure solutions, today announced record financial results for the quarter and year ended December 31, 2000.

Revenue for the quarter reached $52.0 million, a 16 percent sequential increase over revenue of $45.0 million in the third quarter of 2000, and a 534 percent increase over revenue of $8.2 million in the fourth quarter of 1999. The net loss for the quarter, excluding special charges, was $11.5 million, or $0.16 per share, compared with a net loss, excluding special charges, of $8.7 million, or $0.14 per share, in the third quarter of 2000, and a net loss of $11.0 million, or $0.26 per share, in the fourth quarter of 1999. The Company also reported gross profit, excluding special charges, of $29.1 million, a 15 percent increase over gross profit of $25.3 million in the third quarter of 2000.

The reported revenues for the quarter do not include $7.0 million related to a large enterprise license agreement that was executed during the quarter. Due to complex and evolving rules governing revenue recognition for software license arrangements, the Company, in consultation with its outside auditors, determined that the revenue from this transaction required deferral as of December 31, 2000. The Company anticipates recognizing the revenue from this transaction on a "sell-through" basis in the future rather than as an up-front license fee in the fourth quarter of 2000, as anticipated.

"Despite a difficult economic environment, Critical Path achieved solid revenue growth and improved gross margins, while adding over 200 new customers and further solidifying our category leadership position," said Doug Hickey, Critical Path's CEO.

According to Chief Financial Officer Larry Reinhold, other factors in addition to the deferred revenue mentioned previously had an impact on results in the fourth quarter of 2000. These factors included a non-operating foreign exchange loss due primarily to currency fluctuations in U.S. dollar-denominated European revenues, higher than expected operating expenses in the recently acquired PeerLogic business as full synergies have not yet been achieved, and the provision of a significant allowance for doubtful accounts.

"While we are disappointed with the bottom-line impact of these charges, we are evaluating and will be taking concrete steps to control the underlying factors impacting these areas," said Reinhold.

Hickey stated, "Taking into account economic indicators that seem to be affecting the technology sector across the board, we are also reevaluating our guidance for 2001 and taking a very conservative stance toward the Company's financial expectations. The Company expects revenue for the first quarter 2001 of between $54 million and $56 million, and a loss per share, excluding special charges, estimated between $0.15 and $0.16. For the full year 2001, revenue is expected between $255 million and $260 million, with the Company becoming profitable in the third quarter.

"It's disappointing to lower the expectations for Critical Path, but macroeconomic forecasts and reports from leaders in the technology space lead us to believe it is prudent to be conservative at this time,'' said Hickey. "It is our strategy to make this move now and position the Company to execute effectively throughout the year."

Hickey went on to discuss the positive indications for the quarter and the year. "Regardless of near term uncertainty, I continue to be excited at the size and potential of the Internet messaging solutions market, and my confidence is bolstered by our success in addressing that market. We have the best and broadest suite of messaging solutions, the most flexible delivery capability and the unique ability to scale to meet the demands of the largest customers," he said.

Enterprise Customers

The Company has stated that penetrating the enterprise market is a major goal. During the quarter, Critical Path signed long-term contracts with more than 200 customers and partners. According to Hickey, approximately 62 percent of those contracts were with corporate enterprises, including Applied Materials, Wells Fargo, Farmers Insurance and Concentra Health.

"As enterprises continue to maximize the value of their IT resources and reduce costs, they are turning to Critical Path as the single organization uniquely positioned to help them reap value from their assets. Choosing our Internet messaging infrastructure solution solves a number of problems relating to cost, security and reliability, particularly for enterprises with widely distributed operations and offices," he said.

Messaging Reach and Scale

Critical Path has stated as its goal to "touch every user" on the Internet, with a messaging infrastructure that, through the Company's directory and meta-directory capabilities, scales to magnitudes unequaled in the industry. At the close of the quarter, Critical Path powered a total of approximately 178 million mailboxes and wireless devices, including approximately 125 million licensed boxes, 27 million outsourced email boxes, and 26 million wireless devices worldwide.

"Our messaging infrastructure, including the directory products from PeerLogic, delivers mega-scalability not only to large service providers and enterprises, but also to major Internet business exchanges and many of the postal services worldwide,'' said Hickey. "These customers are building their eBusiness offering on our ability to manage tens of millions of messages and transactions simultaneously in a secure environment. We are the only provider who can do that, and only we are prepared to scale our customers to even greater capacity in the future."

Wireless Partners and Services

Critical Path continued to make progress and achieve significant customer wins in the emerging wireless sector. During the quarter, the Company announced relationships with Logica for 2-way short messaging services, with Verizon to host email for its paging customers, and with SK Telecom, Korea's largest wireless provider.

"Our strategy of offering a variety of services that support any wireless protocol on any type of device presents us with a greater market opportunity than is available to other providers," said Hickey.

International Business

Enabling international enterprises and service providers with Internet messaging infrastructure solutions is intrinsic to Critical Path's strategy to "touch every user" on the Internet. Hickey noted that approximately 33 percent of the revenue in the fourth quarter came from international customers. "Because Europe, Latin America and Asia are at an earlier stage of Internet adoption than the U.S., there are tremendous opportunities to penetrate new markets,'' said Hickey.

During the quarter, Critical Path announced contracts with ZipMail and Diveo in Latin America, and BT CellNet in Europe.

Full Year Results

The Company reported revenue for 2000 of $155.0 million, compared with revenue of $16.2 million in 1999. The net loss for the year, excluding special charges, was $57.2 million, or $0.95 per share, compared with a net loss, excluding special charges, of $29.4 million, or $0.99 per share, in 1999.

"Our balance sheet remains very strong and our financial resources are a strategic advantage by which we can continue to pursue profitable business and investment opportunities," said Hickey. The Company reported that as of December 31, 2000, its cash and cash equivalents totaled $216.5 million. During the fourth quarter of 2000, the Company used $25.9 million in cash.

Hickey: ... In the fourth quarter, Critical Path saw strength across all lines of business and we continued to see the validation of our strategy from all major target markets, and those include Internet-centered wireless telephone and enterprise market space. I will tell you that the CP sales force executed well, bringing a major talent versus multiple services, and our products continue to demonstrate their ability to achieve impressive ROIs very quickly. Revenue reached about $52 million, up 16 percent sequentially from Q3. We are continually and repeatedly demonstrating our products as the most complete and effective Internet messaging infrastructure solutions available today and our customer list is evident of that. This quarter we added some customers like Wells Fargo, Applied Materials, Farmers Insurance, as well as a whole series of other customers. We continued to see traction in our wireless relationships with Verizon, Logica, with which we signed partnerships, and our customers who we are partnered with is one that I think you'll agree is one of the best in the category. Our gross profit, which includes a $29.1 million, a 15 percent over gross profit in the third quarter of 2000. Now despite the fact that net profitability has been pushed out, we continue to show meaningful progress in that direction and the goal is within sight. Now on our balance sheet we continue to remain very strong and our financial resources are a strategic advantage but we shall continue to pursue profitable business and investment opportunities. At the end of the quarter, cash and cash equivalents equated to about $216.5 million. Our operating results clearly demonstrate, despite some unexpected events at Critical Path as well as a tumultuous period for Internet-related industries, is trying to conquer Internet messaging infrastructure solutions and customers across our four broadly horizontal target markets are realizing the value they can reap from turning to seeking solutions. Our results also solidify our confidence that as our target customers seek solutions, we really stand apart from the pack as a clear leader in the category with the best [inaudible] of products and, by the way, the most flexible delivery mechanisms. So, when you look at all that, you have to sit back and say, "What really happened this quarter?" Suffice it to say, nothing we ever want to see again. But let me first address the top line. As we begin to close the book on the fourth quarter, to the best of our knowledge revenues sit at about $50 million. Late yesterday, our TWC team informed us of a nuance they are reading into sales that indicated a $7 million large enterprise contract we executed during the quarter required deferral as of December 31, 2000. We anticipate recognizing this revenue from the transaction on a sale-free basis in the future rather than as if from a licensee in the fourth quarter of 2000. This number increases our level of deferred revenue but is of little comfort to any of us. We don't see this ruling as an indication that CP's revenue model needs to be changed, nor have we seen any lengthening in our sales cycle or a slow down in demand. We have every reason to believe that this is a one-time occurrence and you can believe we are working closely with TWC and our team to eliminate the element of surprises going forward in this matter. Next, what happened to keep us from achieving profitability? There are really a couple of key factors there that held us back in this quarter. Number one was a foreign exchange loss due to currency fluctuations in dollar-denominated European revenues, and Larry will get into that in detail. Secondly, there is a significant allowance in doubtful accounts related to dot.com industry weakness which we took in the quarter. The third factor affecting our profitability for the fourth quarter and affecting our outlook for '01 is related to the ownership operating expenses at Peer Logic which we acquired at the end of Q3, frankly, tells me we should have been more conservative as we announced this highly strategic and advantageous acquisition and assumed that the quality associated with it would offset profitability out of the box. The other continues to drive profitability in the long run as our lock on the megafield messaging market was assured. After a quarter of integration efforts, our long-term outlook on Peer Logic's contribution to our model is as strong as ever, and we stand out as the only player in our category able to scale our functionalities with the largest customers who are growing larger and larger every day. For the time being, the synergies have not been fully realized but I can tell you, you can be assured we'll have our stake in reducing operating expenses in the future. These factors are not welcome, and I think that goes without saying, in the quarter. In factual level we find totally unacceptable and we single-mindedly focus on reversing this trend immediately. Larry will talk to you about those efforts in a moment, but in the meantime, I want to review up front changes to our financial guidance that we decided to make in an effort to responsibly negate the risk to shareholders as soon as we learned of changes in the operating environment. As such, we are reducing expectations for revenue in Q1 of 2001 to between $54 and $56 million, and a loss this year, excluding special charges, between 15 and 16 cents. For the full year 2001, revenue is expected between $255 and $260 million, with the Company becoming profitable in the third quarter of 2001. ...

Larry: Okay, thank you Doug, and I would like to thank each of you for joining us today. As Doug stated, we are pleased with certain aspects of this quarter's financial results and disappointed in others. Our opportunities for the continued success we're having strategic focus. To avoid any confusion, all of my comments today on our financial results exclude the effect of special charges which are disclosed in our press release issued earlier today. We are continuing to see strong demand for our licensed and our hosted e-mail offerings, a greater degree of interest in our value added services, and increased penetration into the corporate enterprise market. Consistent with prior quarters, I would like to begin my remarks by reviewing the quarterly operating results and our financial position and our comments on the financial trends we are experiencing. As stated earlier, net revenues for the quarter were $52 million, up 16 percent sequentially over the prior quarter, and that's an excess of 500 percent over revenues of $8.2 million in the fourth quarter of 1999. As outlined in the press release and as mentioned previously, in addition to the $52 million of revenue that we recorded, we also have entered into a $7 million software license arrangement during the quarter that we had anticipated would be counted as revenue. However, due to very complex revenue recognition rules that surround software transactions, we ended up concluding that deferring all revenue from this transaction was appropriate.

Critical Path, Inc. announced today that the Board of Directors has formed a special committee of the Board to conduct an investigation into the Company's revenue recognition practices. The Company has discovered a number of transactions that put into question the Company's financial results.

On January 18, 2001, the Company announced Fourth Quarter revenue of $52 million in revenue [sic] and net loss, excluding special charges, of $11.5 million. The Company now believes that these results may be materially misstated. The Company cautioned that the investigation has just begun.

Effective immediately, the Board of Directors has placed on administrative leave David Thatcher, the Company's president, and William Rinehart, the vice president of worldwide sales.

The special committee and the Company are working with its independent auditors, PricewaterhouseCoopers, and outside counsel, Wilson Sonsini Goodrich & Rosati.

24. Each of the statements made by defendants between November 2, 2000 and February 1, 2001 were false or misleading when issued. The true facts, which were known to defendants, were:

(a) Critical Path's revenue and EPS would fall materially short of meeting its forecasted results as a result of newly implemented accounting regulations, which defendants had known were going into affect and would impact its Q4 and would prevent it from recording not only the projected $55 in revenue but also the reported $52 million of Q4;

(b) Critical Path's reported Q4 results were materially false and misleading;

(c) Critical Path's ability to meet even the projected results, including profitability, was contingent upon its ability to improperly recognize revenue;

(d) Demand for Critical Path's products was not nearly as healthy as represented due to the inability of much of Critical Path's customer base to pay for products; and

(e) As a result of (a)-(d) above, it was impossible for defendants to achieve Q4 revenue and EPS of $55 million and $0.01, respectively.

25. In order to inflate the price of Critical Path's stock, defendants caused the Company to falsely report its results for at least Q4 2000 through improper revenue recognition. Ultimately, Critical Path revealed that its results for the Q4 2000 might be materially misstated, and that it was placing on leave its President and its Vice President of Worldwide Sales.

26. Critical Path reported the following results for the Q3 and Q4 2000:

                  9/30/00      12/31/00

Total Revenue      $45.0 M      $52.0 M

Total Net Loss*    $ 8.7 M      $11.5 M

Loss per Share*    $0.14        $0.16

* Excluding special charges

27. These Q3 results were included in a Form 10-Q filed with the SEC. The Q3 and Q4 2000 results were included in press releases disseminated to the public.

28. Critical Path has now admitted that at least as to its Q4 2000 results, the financial results may have been materially misstated such that they were not a fair presentation of Critical Path's results and were presented in violation of Generally Accepted Accounting Principles ("GAAP") and SEC rules.

29. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. SEC Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate, despite footnote or other disclosure. Regulation S-X requires that interim financial statements must also comply with GAAP, with the exception that interim financial statements need not include disclosure which would be duplicative of disclosures accompanying annual financial statements. 17 C.F.R. §210.10-01(a).

30. Critical Path falsified its reported financial results through its improper revenue recognition.

31. In Critical Path's 1999 Form 10-K, it represented the following with respect to its revenue recognition on licenses:

Revenues for software licenses for which collection of the resulting receivable is deemed probable are recognized upon delivery of the product provided there is persuasive evidence of an arrangement, the fee is fixed and determinable, and the agreement does not require significant customization of the software. Revenues from software maintenance are recognized ratably over the maintenance term. Revenues from the Company's enhanced facsimile, long distance and other services are recognized as the services are performed. Amounts billed or received in advance of service delivery are recorded as deferred revenue.

33. During the Class Period, Critical Path improperly recognized revenue even though these conditions did not exist.

34. Unfortunately for investors, these results, and the representations concerning them, were false. Absent the Company's improper revenue recognition, Critical Path would have reported materially lower revenues and higher losses in at least Q4 2000.

35. Ultimately, on February 2, 2001, Critical Path announced that its Q4 2000 results "may be materially misstated" due to improper revenue recognition on a "number of transactions."

36. Due to these accounting improprieties, the Company presented its financial results and statements in a manner which violated GAAP, including the following fundamental accounting principles:

(a) The principle that interim financial reporting should be based upon the same accounting principles and practices used to prepare annual financial statements was violated (APB No. 28, ¶10);

(b) The principle that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions was violated (FASB Statement of Concepts No. 1, ¶34);

(c) The principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and effects of transactions, events and circumstances that change resources and claims to those resources was violated (FASB Statement of Concepts No. 1, ¶40);

(d) The principle that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it was violated. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general (FASB Statement of Concepts No. 1, ¶50);

(e) The principle that financial reporting should provide information about an enterprise's financial performance during a period was violated. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance (FASB Statement of Concepts No. 1, ¶42);

(f) The principle that financial reporting should be reliable in that it represents what it purports to represent was violated. That information should be reliable as well as relevant is a notion that is central to accounting (FASB Statement of Concepts No. 2, ¶¶58-59);

(g) The principle of completeness, which means that nothing is left out of the information that may be necessary to insure that it validly represents underlying events and conditions was violated (FASB Statement of Concepts No. 2, ¶79); and

(h) The principle that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered was violated. The best way to avoid injury to investors is to try to ensure that what is reported represents what it purports to represent (FASB Statement of Concepts No. 2, ¶¶95, 97).

37. Further, the undisclosed adverse information concealed by defendants during the Class Period is the type of information which, because of SEC regulations, regulations of the national stock exchanges and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed.

38. This is a class action on behalf of purchasers of Critical Path common stock between November 2, 2000 and February 1, 2001, excluding defendants (the "Class"). Excluded from the Class are officers and directors of the Company, as well as their families and the families of the defendants. Class members are so numerous that joinder of them is impracticable.

39. Common questions of law and fact predominate and include whether defendants: (i) violated the 1934 Act; (ii) omitted and/or misrepresented material facts; (iii) knew or recklessly disregarded that their statements were false; and (iv) artificially inflated Critical Path's stock price and the extent of and appropriate measure of damages.

40. Plaintiff's claims are typical of those of the Class. Prosecution of individual actions would create a risk of inconsistent adjudications. Plaintiff will adequately protect the interests of the Class. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.

41. Defendants violated §10(b) and Rule 10b-5 by:

(a) Employing devices, schemes and artifices to defraud;

(b) Making untrue statements of material facts and omitting to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and

(c) Engaging in acts, practices and a course of business that operated as a fraud or deceit upon the Class in connection with their purchases of Critical Path stock.

42. Class members were damaged as they paid artificially inflated prices for Critical Path common stock in reliance on the integrity of the market.

WHEREFORE, plaintiff, on behalf of himself and the Class, prays for judgment as follows:

A. Declaring this action to be a class action properly maintained pursuant to Rule 23 of the Federal Rules of Civil Procedure;

B. Awarding plaintiff and other members of the Class damages together with interest thereon;

C. Awarding plaintiff and other members of the Class costs and expenses of this litigation, including reasonable attorneys' fees, accountants' fees and experts' fees and other costs and disbursements; and

D. Awarding plaintiff and other members of the Class such equitable/injunctive or other and further relief as may be just and proper under the circumstances.

Plaintiff demands a trial by jury.
 

DATED: February 6, 2001

MILBERG WEISS BERSHAD  HYNES & LERACH LLP RANDI D. BANDMAN JOHN K. GRANT       __________________________ RANDI D. BANDMAN 100 Pine Street, Suite 2600 San Francisco, CA 94111 Telephone: 415/288-4545 415/288-4534 (fax) MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax) HOLZER & HOLZER COREY D. HOLZER 6135 Barfield Road, Suite 102 Atlanta, GA 30328 Telephone: 404/847-0085 404/847-0036 (fax) SPECTOR, ROSEMAN & KODROFF, P.C. JEFFREY L. KODROFF 1818 Market Street, Suite 2500 Philadelphia, PA 19103 Telephone: 215/496-0300 215/496-6611 (fax) Attorneys for Plaintiff

Pursuant to Civil L.R. 3-16, the undersigned certifies that as of this date, other than the named parties, there is no such interest to report.
 

______________________________
ATTORNEY OF RECORD FOR
PLAINTIFF EVAN RAPOPORT